As part of a regular series, Real Estate Business talked to some of the country’s most influential real estate business brokers about the state of rent roll activity in their local markets, and where there are opportunities for astute buyers
Rent roll activity and multiples have been particularly strong in Melbourne’s inner city suburbs, according to Ross Hedditch, director of BDH Solutions.
Mr Hedditch, whose firm operates in Victoria and NSW, has received more enquiries from prospective rent roll buyers in the last three months – around 10 per week – than in the previous few years.
“It’s associated with agents who have had sales businesses in the boom, and when the sales have dropped off a little bit, or got a little bit more difficult to transact over the last 12 months, I think they’ve made a concerted effort to build a rent roll,” he says.
“It has its own dilemmas, because generally speaking, some of those agents don’t have infrastructure for a rent roll – they don’t have the systems and procedures. They’re capable of taking about 50 to 100 properties on; any more than that and they can’t contemplate it.
“It’s a really interesting dilemma, and of course going into the marketplace with a rent roll of up to 50, you’re not necessarily going to get market value for it.
“[To sell them], they’ve just got to price them correctly,” he continues. “There’s no point having it because it’s not making any money – when you sit there and they’re doing analysis of 50 properties, you’re just not making money out of it.”
Most buying activity is being driven by agencies looking to expand their presence, Mr Hedditch says.
“There is one agency in [Melbourne] that has actively gone out and sought inner city rent rolls, and has purchased in the inner east of the CBD and paid what I would consider to be a very healthy multiplier,” he says. “We’re talking [multiples of] $3.30 to $3.75.
“Those rent rolls that achieve good multipliers, they were up to 300 properties, and they were managed for 10 years by the one person. They were solid rent rolls, geographically isolated to the inner city, not spread out all over the city.
“But I think it would be folly for someone to say, ‘That’s now the value of inner city rent rolls’. It’s not. The circumstances were of a purchaser wanting to build a rent roll of up to 500-700 properties pretty quickly, and having the appetite and the cash to do it – and really targeting particular agencies within those areas.”
Going 10km to15km from the CBD, you’re coming back to normal multipliers of about $3.00, he adds, while further out, into the outer eastern and western suburbs, multipliers are closer to $2.50-$2.80. In regional cities, transactions hover between the $2.50 to $2.60 multiplier range.
Most sales have been off-market, he continues, with his making the initial approach on behalf of interested buyers. They’ve also included principals looking to kick start their succession plan.
“I sort of see that will be a [trend],” he says. “They’re principals who are edging up to the age of 60, so they’re starting to [see] that sort of generational change.
“I’ve had a couple of discussions over the past few months where people have said, ‘Look, I’m not old enough yet to retire but I’m looking at a merger opportunity. I’d sell my rent roll into a company, work for that company even if I continue to take equity so long as I’ve got a very, very tight exit plan. If I sell 50 per cent to the buyer, I don’t have the other 50 per cent sitting there in jeopardy’.
“It’s got to be guaranteed money coming out.”
Consistent with his comments in Real Estate Business’ February issue rent roll market update, Mr Hedditch says industry consolidation is continuing.
“The other thing that I do see over the next six months is that there will be more mergers,” he says.
“In general commentary with agents in the last three to four months, there a lot of agents that have had to tip in some capital to be cash flow positive. If there’s still the slowness of the sales market, they’re going to start to look at, ‘Do we merge our agency or do we hive off and sell part of our rent roll?’
According to The Rent Roll Agency, a Sydney-based brokerage that sells rent rolls throughout the country, there is strong demand for rent rolls in Sydney suburbs located within 20 km of the CBD.
“In areas including the Lower North Shore, Eastern Suburbs and Inner West, supply outstrips demands by a large factor,” says company director, Kenneth de Clive-Lowe.
“The lower levels of stock in these high income areas together with healthy fees averaging close to seven per cent or more help contribute to sale prices approaching $4 per dollar with a figure of $3.50 on the lower end. Whilst there will be variables in this prime 20km radius range, quality rolls should expect sale prices north of what was achieved a few years ago.
“Outside of this 20km Sydney radius, demand remains high in the Hills district and Parramatta area, with the west of Sydney seeing some consolidating of rolls,” he continues. “In these areas, we have seen the average prices of rolls that are delivering at least five per cent on fees in the range of $3.10 and $3.50.
“Just outside this 20km radius in the St George area, we achieved a sale of $3.50 on a roll of 500 properties with average fees of just on five per cent. In the Northern Suburbs, Beaches and Sutherland Shire, we have also seen an increase in average prices. We just concluded a sale on a smaller 90 property roll business in Sydney’s northern suburbs that sold for $3.40. In areas where property values are not as high and maintenance costs may be higher, sub-$3.00 values may apply.
More stock was becoming available in regional areas, he adds.
“There is a higher level of available stock in regional areas where average values have remained steady at between $2.00 and $2.50, with prices for holiday lets trading at a discount on permanent rentals. Quality rolls in higher income regional areas will generate higher sales, as evidenced by a recent $3.00 sale of a South Coast rent roll of 370 properties.
“The primary reason for sale of rent rolls continues to be retirement, followed by a distant second of exigent circumstances of a financial nature. Most demand appears to be in the 200 to 500 range but quick sub-100 sales occur on a regular basis as ‘bolt-ons’ by buyers to their well-established rolls.
Looking ahead, Mr de Clive-Lowe says rent rolls are performing strongly when compared to other industry sectors.
“With respect to market direction, rent roll values have defied the general decline in multiples for general non-real estate businesses and high demand businesses such as food franchises. [They] remain a quality asset whilst they are well managed and consistently generate customer satisfaction. There are in fact few small businesses other than rent rolls that can consistently achieve sale prices on a multiple in excess of three.
“The key rule when selling is to select your buyer carefully as more buyers are insisting upon longer retention periods,” he continues.
“Barring a significant financial event, we would expect the market to remain steady and continue to be buoyant for the next six months.”
Paul Brooks of Brisbane-based Real Estate Dynamics, recently anointed Business Broker of the Year at the 2012 Real Estate Institute of Australia (REIA) Awards , says sales of rent roll listings continue to occur steadily for various reasons.
“These include reasons from the continued flow-on effect of the global financial crisis (GFC) where agencies have not coped well with a downturn in property sales, retirement, changes in health status or opportunities for a career change,” Mr Brooks says.
“The multiplier used to determine rent roll pricing has softened in some areas, whilst in other areas it remains steady. This, of course, is a reflection of the supply and demand in these areas.”
One change he has noted, however, is an increase in receiver-appointed rent roll sales.
“From our observation when appointed to conduct a due diligence on such rent rolls, it is disappointing to see the poor level in presentation of information that is provided to prospective buyers. Some receivers who are appointed to sell a rent roll are inexperienced with the complexities of the rent roll, and don’t understand the process required for a successful transfer.
“This inevitably affects the eventual sale outcome to the detriment of all parties involved.
“In my opinion, more work is needed to be done by rent roll financiers with their client before circumstances lead to the appointment of a receiver. A far better outcome can usually be achieved if the rent roll is sold via a specialist rent roll broker under normal sale conditions as opposed to a distressed sale under a receiver’s process which usually ends in greater losses than otherwise would have resulted.”
According to Mr Brooks, there are “good quality” rent rolls available for purchase both in South East Queensland and regional Queensland.
Buyer enquiry, however, is more focused on “cheap” rent rolls, without buyers really understanding why they might be selling at the lower end of the multiplier scale.
“The buyer education process is important,” he says. “All prospective buyers should make themselves available prior to buying, and talk to rent roll brokerage experts to find out about rent roll values and the entire process.”
The demand from the WA market for top performing rent roles remains strong and robust, with demand outstripping supply, says Mark Sinclair, CEO of Perth-based Realestimations.
“We receive enquiries on a weekly basis from various sectors of the market, both new and established players seeking to purchase rent roles. The demand for top performing portfolios is gaining momentum,” Mr Sinclair says.
“The strongest demand is from a radius of 10km around the CBD. However, it is not restricted to just this precinct. Most metropolitan areas are of interest, given the huge rise in rents over the past three to six months.
“The better performing portfolios are achieving between $2.75 and $2.90 [multipliers] per $1.00 of net management fees,” he adds. “We expect this price pressure to remain for the better rent roles and in some cases higher sales prices will occur.”
“A case in question is that of a small portfolio of high management fees in one of Perth’s best performing suburbs. An off-market sale of this portfolio at $3.00 per $1.00 has been achieved and there was no shortage of buyers.
“Other recent sales include the merging of three rent roles into one super office and the sale rates on the portfolios ranged from $2.60 to $2.80 per $1.00 and another portfolio of 300 managements sold at $2.80.
“Potential buyers are still punishing poor performing portfolios by offering low offers or in some cases nothing at all,” Mr Sinclair continues. “Many buyers offer discounted prices on portfolios with a gross management fee collection structure.
“Unless the charge is 16.5 per cent including GST, buyers offer proportionally low offers. A recent sale [based] on this structure was at $1.83 per $1.00 and another is being marketed at $2.10.
“We strongly recommend property managers and principals have a thorough understanding of the potential risks when trying to see a portfolio [based] on this arrangement.”
Meanwhile, Mr Sinclair sees the WA market improving, with stable conditions ahead and continuing strong demand.
Fellow Perth-based business consultant and rent roll broker Peter Sim, of Crossmatch, says the lack of portfolios or real estate businesses openly for sale in WA means he is regularly commissioned to approach local companies anonymously to see if they might be interested in selling or, for that matter, buying.
“In terms of value, a well-run residential portfolio with single ownership, geographically centric, above average rental value, with substantial ancillary fee income and a profitable history will sell between 2.6 and 3 times the annual management fees (influenced by arrangements to account for slippage),” Mr Sim says.
“The market in WA is strong because of the excellent returns that it can derive.
“Real estate business owners can expect 13 per cent to 14 per cent return on capital and 25 per cent to 30 per cent profit on revenue. Part of the reason for these superior returns is that the ancillary fees are generally some 10 per cent to 15 per cent higher than our interstate cousins, at around 30 per cent return on revenue.
“Compared to most other states, rent rolls are generally smaller in WA, at around 200 to 400 properties in size. However, with management fees at around 8.5 per cent plus GST – plus the ancillary fees – they are generally more profitable per property,” he continues.
“With the present challenging selling conditions, and the potential profit, property management portfolios are in strong demand.”
Mr Sim says that in terms of generating extra revenue from good will, a ‘sales’ business will only attract interest if it has a long history of stable employment and profit, together with written manuals for policy and procedure, and where the principals work ‘on’ the business and are not critical to sales volume.
“I regularly find that in the present challenging trading conditions, perfectly good businesses are being allowed to lose profitability and the owner, having lost focus and confidence, may feel the only way out is to sell,” he says.
Chris Goodway, CEO of The Rent Roll Broker, says demand for rent rolls across the country’s capital cities and suburbs remains strong. However, buyers are looking for those portfolios with strong fee income and solid rent levels.
“These better-than-average portfolios are achieving relatively quick sales and higher multipliers than those with mediocre to average fee income, so it is important for agents contemplating selling to plan ahead and get their rental department tidied up and spend time on fee maximisation before going to market,” he says.
Mr Goodway notes there has been little movement in the South Australian market in the past three months. Multiples in inner suburban Adelaide are running at between $2.60 and $3.00, while in the CBD, beachfront and eastern suburbs they are closer to between $2.90 and $3.20.
Adelaide’s outer suburban areas are seeing rent roll multiples of between $2.30 and $2.70, while country and regional areas are around $1.60 to $2.50.
“Regional and country areas still have the problem of a smaller base of purchasers and if you have the largest rent roll in town, there may be difficulties in finding a local agent with the ability to purchase,” he adds.
“One of the other areas that buyers are starting to look at more carefully is the spread of the portfolio as cost for travel becomes increasingly expensive. Properties that are not a reasonable distance from the office not only force staff to waste time and travel expenses, but also mean loss of production while the staff member is away from the office.
Finding the money to buy a rent roll may also be an issue, he says.
“Finance for smaller portfolios can also be a challenge if the buyer does not have extra security to offer their lender,” Mr Goodway says.
“Most lenders like to see 150 or more properties in a portfolio being sold to achieve an economy of scale, although if the figures stack up they may consider something smaller.”