Investment in Off-the-Plan Management Rights has always been a good proposition for experienced managers, whether in the short-term or permanent sector. From the early stage, investors have been purchasing MLR businesses and turning them around in a short period with aim to make quick profits. This has unfortunately changed over the past two decades and currently, buying an Off-the-Plan Management Rights business is a relatively long-term process and a longer investment proposition.
The question now posed by many operators is - "how will the current economic climate impact purchases of newly established Management Rights projects and will there be demand for such investment?".
Well to answer this, is it important to acknowledge that the presence of COVID-19 has created significant disruption on the Building & Construction industry in Queensland - resulting in lengthy delays on the construction of projects (both residential and commercial levels). Similarly, many property developers and builders share the same sentiment in suggesting that the "tap" has been 'turn-off' at the supply-chain level, impacting both access to materials and construction labour.
These combining factors has increased pressure on building operators to re-evaluate project risks and to look for strategies on how to mitigate the exposure of project failure, due to either cost risk, delay risk, and cash risk.
In discussion with several developers, there are many projects being approved in the Brisbane area for permanent MLR complexes - small and large, however the hesitancy on commencing the projects is relatively high. The status quo is so murky and unpredictable, therefore putting the project on hold is the only option as opposed to embarking on new developments. With this said, it is obvious that purchasing Off-the-Plan Management Rights will be a challenging process and most likely, an expensive investment proposition in the future.
With respect to development propositions in the short-term (holiday) sector, where the local economy heavily depends on the tourism industry, these types of investments have also been put on hold until the borders reopen, both for national and international travellers. Importantly, for the short-term holiday sector, location also holds a a heavy influence when looking at investment proposition strength. It could be suggested that purchasing a short-term complex on the Sunshine Coast (and similar areas) as an investment option could be favourable given the current growth, as holiday-makers focus on destinations in Queensland, as result of the inability to travel overseas. Whilst this may be the case now, other questions do arise such as "is the proposition sustainable once international travel returns?" and "does the Gold Coast hold a similar investment strength, given the current circumstance surrounding travel?".
What are the factors that will drive the price up on newly established Management Rights?
The recent Income Verifications on newly established Off-the-Plan Management Rights have certainly shown higher multipliers for the buyer, compared to pre-COVID-19 pandemic transactions. So, what is the main indicator for the increase in the business multiplier?
It is obvious that the shortage in supply of projects has driven the price up. As mentioned above, delays in the Building & Construction industry have shown that smaller, less resilient builders and developers have taken disproportionate amount of risk, and therefore have placed the "handbreak" on many projects. This, of course, was mainly due to the increase in the cost of developments and supply chain issues.
Another factor that has partly impacted the price on newly established projects is the increase in daily tariffs in the short-term and weekly rent in the permanent sector. The projected figures will certainly show an increase in Management Income due to the increase in charges to the consumers.
While rents in South-East Queensland are at a record high, this has not impacted the occupancy level at all. In fact, we are seeing very low vacancy rates and extreme demand for rental properties, where Brisbane has become one of the most popular destinations for interstate travellers. This is another indicator that strong rents and low occupancy will drive the price up for newly-established Management Rights.
What type of buyers will be interested in purchasing the units in new built complexes - owner/occupiers or investors?
According to RealEstate.com 'Property Insights', the investor type in Greater Brisbane has shown the focus to be on residential houses as opposed to the purchase of Units/Apartments in Strata-Title Complexes. This was evidenced by large number of transactions from buyers migrating from New South Wales & Victoria, and the overall migration of people to South-East Queensland.
The inflation in property prices during the pandemic has changed buyer sentiment, alongside increasing Interest Rates and the question is now "are we going to see demand in purchasing units in newly developed complexes by investors or owner/occupiers?"
The fact that investments in Units & Apartments have shown a decline in the past 12-months, this might continue for a while. In case the banks impose an increase in the Interest Rate, this will even further discourage investors from investing in Strata-Title Complexes.
So, who are the new entrants in the property market - First-Home Buyers or Investors? We might see the owner/occupier being more active in purchasing Units as opposed to investors, mainly due to the price affordability. Will this encourage operators to buy Off-the-Plan Management Rights as an investment, with a higher number of owner/occupier units? Probably not, but time will tell whether this will be true or not!
For More Information
Should you require any assistance through the year, please contact our dedicated Management Rights advisory team at Archer Gowland Redshaw on (07) 3002 2699 | info@agredshaw.com.au.
