Reviewing our statistics of rent roll and agency valuations over the past 12 months, 56 per cent of the portfolios had less than 150 properties under management, with a further 18 per cent having between 150 and 200.
Subsequently, we were appointed to sell 67 per cent of the portfolios and/or provide consulting services as to how to structure merges with other businesses.
Most of these businesses felt the pinch of cash-flow strain and were in a state of duress, hence coming to market quite quickly.
The majority had been operating under these conditions for the previous 12–18 months. Sadly, too often, business owners tell us they can no longer cope with the emotional impact of operating the business. They are stressed, burnt out and financially strained.
This evidence supports our long-held view the majority of small portfolios are unsustainable in the long run.
Due to the inherent risks with small portfolios, most major lenders have reassessed the financial viability of supporting standalone smaller rent rolls. Consequently, they have increased the minimum size portfolio they will fund. As a guide only, depending on each bank requirements, these portfolio numbers range anywhere between 250 and 350 properties.
From our observations depending on where your marketplace sits, coupled with property management systems, personnel and annual property management income, operating efficiencies start between 250 and 300 properties under management and profitable between 300 and 450 properties.
So, what is causing this trend?
Very few small rent rolls cover all fixed costs. Most businesses don’t implement the fixed charge cost ratio principle or understand how it works.
This is really nothing more than a solvency ratio which quickly shows a business’s ability to meet all costs. When this is adopted two things occur: knowledge on how to ensure your business survives, and secondly contributes significantly to business prosperity.
Operating costs don’t diminish in fluctuating markets, and as most small portfolios don’t cover full operating costs, cash-flow stress becomes more apparent and remains that way for longer periods of time. Creditors get pushed out and the largest creditor we now see is the ATO who is fast becoming the catalyst for more businesses contacting us.
So, what can be done?
The first step is to know exactly where your business sits right now.
Work with your accountant, banking relationship manager, franchise support team (if you’re part of a group) or us to accurately assess where you’re at. If you’re committed to achieving scale and embracing how this benefits your business:
- Start with knowing what it costs to achieve your break-even points for both property management and sales as they currently sit as individual cost/profit centres.
- Ascertain the numbers of properties you need to achieve scale.
- What plan, strategy, funding and personnel are required for this to occur.
You will then see what scale this will bring to your business — the results will be quite amazing.
Our industry is in the middle of its greatest consolidation period, the likes we haven’t seen before. The number of agency rationalisations is staggering with this trend expected to continue.
So, for those businesses who have implemented a scaling-based growth strategy, they’re the ones truly reaping the rewards now and are future-proofing their businesses.
By Real Estimations managing director Mark Sinclair