John Mcgrath

While house values have rocketed over 2021, apartment values have too quietly shown steady growth over the year to date.

And as house prices continue to escalate and become affordable for many, apartments are becoming a much more attractive, and necessary, proposition, with further growth forecast when international borders open and investors come back in to the market.

Urban recently caught up with John McGrath, who founded McGrath back in 1988, to discuss how the apartment market went in 2021, and how it is shaping up for the next few years.

JC: How have you viewed the performance of the apartment market (established and or off the pl​an) in 2021, and what are the strongest positive and negative factors that will influence outcomes in 2022 and 2023?

JM: There’s no doubt that apartments, other than luxury, have missed much of the price surge that established houses have enjoyed. &nbsp;In many locations we’ve seen houses prices escalate by 35-40% and&nbsp;in those same areas we’ve seen a more modest 5-10% rise in apartment values.

There are a few reasons for this. Firstly, apartments have a larger investment buyer profile &amp; the strongest demand has been from owner occupiers. Also a large percentage of apartments that are not bought by investors sell to first home buyers who generally don’t have the same buying power or discretionary spending that is appearing higher up the price chain.

And finally, in many of the big cities apartments have been hit hard by the closure of international borders &amp; less inflow of migrants &amp; students which have increased vacancy &amp; reduced rental returns momentarily. But I think if anything this makes apartment buying represent better growth in many parts of the country as houses become less affordable and&nbsp;overseas borders open up in 2022.

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JC: What trend (short term or long term) has prompted your greatest enthusiasm for the apartment market, and what is the issue of most concern to you and or your clients?

JM: In general apartment living has replaced the traditional quarter acre aspiration for many Australians due primarily to housing affordability for younger buyers and&nbsp;also an ongoing desire to live in urban, inner city and&nbsp;beachside locations. And whilst COVID has driven many buyers to more remote lifestyle areas there’s no doubt that convenient, secure, low maintenance strata living will continue to be in great demand as we move through the immediate impacts of the pandemic. &nbsp;

And as COVID has changed the way many of us live, many developers have also pivoted &amp; are now designing and&nbsp;buil​ding apartments that cater to the needs of this changing environment. And finally I believe the ideal combination of many empty nesters moving forward will be a great inner city living space along with a getaway within two hours so apartment living will reinvent itself and&nbsp;deliver the population what it wants post-COVID.

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JC:&nbsp;Has urbanisation stalled or what will it look like over the decade ahead?

JM: As more employers and&nbsp;employees discovered that they no longer need to travel to a central location to effectively conduct their work I believe we will find a reduction of 25-35% of the workforces commuting daily to the CBD and&nbsp;commercial centres.

So this will have an impact on many jobs, employees and&nbsp;employers. Ans as many opt for home-based work this will undoubtedly have some impact on the shape of home and&nbsp;work environments &amp; locations.

Proximity to these commercial hubs for a percentage of the population will become less of a priority and&nbsp;lifestyle benefits such as proximity to family, beaches and&nbsp;parks will move up the checklist. But many people still want to be located within a reasonable commute of the many lifestyle benefits located in and around the CBD so I have no doubt that demand for these will continue to be in high demand.

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JC: How important do you view the push for sustainability practices in the apartment market/new housing estates, and what initiative has seized your interest or focus?&nbsp;

JM: With more &amp; more demand for environmental sustainability from all generations there’s no doubt that buildings that are both gentler on the environment and&nbsp;more self-sufficient will become increasingly popular, especially for the younger generations.

As yet we’ve seen some movement in this direction but I expect this to rapidly escalate moving forward due to increasing education and&nbsp;agitation towards a cleaner greener environment. I think we will see this manifest in more environmentally friendly building materials as well as buildings that are less taxing on the planet once built.

Even though much of the demand has been driven from Generation X &amp; Y we are also seeing older generations paying more attention of late which will increase the pressure on developers to build bu​ildings that fall in line with not only council expectations but more importantly the expectations of the community and&nbsp;residents.

"Apartment buying represents better growth in many parts of the country as houses become less affordable and overseas borders open up in 2022."

jchancellor-FAypfDUnLy

Apartment living to reinvent itself post COVID: Five minutes with John McGrath

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The McGrath estate agency was expected to generate earnings before interest and tax of about $20 million in fiscal 2016 and net profit of about $15 million, according to The Australian Financial Review which has again updated details on the prospect that John McGrath intends floating his estate agency around November.
The Street Talk column advised his plans to sell down a meaningful stake in his business as part of a mooted $200 million initial pubic offering.
"Street Talk understands the exact size of McGrath's sell down is contingent upon a number of factors including the sale route and whether the company undertakes a significant acquisition before any transaction," it said.
Increasing loose sources said Bell Potter and JPMorgan are in the box seat to secure the advisory roles.
Luminis Partners is advising the company.
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The sources said McGrath was eyeing a major acquisition that would boost earnings materially before the float. 
The Australian says McGrath Estate Agents is aiming to raise $100 million.
 
 
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John McGrath nearing mooted $200 million IPO

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McGrath Limited has provided shareholders with a trading update in light of deteriorating market.
Impacted by the tougher real estate market across Australia, it noted auction clearance rates and the number of properties taken to auction were at levels well below the previous year.
It further noted there has been an increase in the level of overall stock currently on the market with lower buyer activity, along with homes taking longer to sell and price reductions across the sector.
After the announcement McGrath shares traded at 31 cents and closed at a record low of 32 cents.
Click here <a href="https://www.propertyobserver.com.au/images/2018/10/24/Mcgrath5.jpg" target="_blank">to enlarge.</a>
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It was December 2015 when, some two decades in the making, the real estate services company commenced trading on the stock market.
Its initial trading price was $1.94, slightly below the public offering price at $2.10.
Today it noted industrywide data that in the past year saw the number of settled sales in the Sydney having fallen 18.5%, in Melbourne by 15.8% and Brisbane by 11%.
"The NSW and Queensland property markets represent the majority of McGrath’s footprint, with 83% of company owned and franchised listings occurring in these two states," Geoff Lucas advised.
“Over the financial year to date, we have seen a noticeable slowdown in the market with a correction of residential property values experienced across the entire real estate sector.
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"While McGrath has also been affected by this downturn, we are encouraged by our number of new listings performing better than the market,” he noted.
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Lucas noted over Q1 FY19, McGrath NSW market new listings were down just 6.9% while Queensland listings were flat.
Click here <a href="https://www.propertyobserver.com.au/images/2018/10/24/mcgrath1.jpg" target="_blank">to enlarge.</a>
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Properties are taking longer to transact due to the softening market conditions with average days on market for McGrath company owned offices in being 42 days, compared with an average of 34 in the FY18 corresponding period.
Days on market for the McGrath network in Q1 was 54 compared with an average of 47 in the FY18 corresponding period.
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The impact of market conditions and McGrath’s performance detailed above resulted in an EBITDA loss of $1.9 million for the quarter ended 30 September 2018.
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The quarter ended 30 September is a historically slow quarter for the Company, the company expects a materially smaller loss in the second quarter of FY19.
It will provide a further update at the annual general meeting on 23 November.
Agent numbers within McGrath’s company owned offices have been increasing, reflecting the successful recruitment and retention initiatives put in place, with 154 agents at 31 March 2018, growing to 157 at 30 June 2018, and 168 at 30 September 2018.
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j.ballantyne1990-6AQqhLzZaK

McGrath shares trading at fresh 32 cent record lows

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Real estate agent John McGrath has says not to panic if you bought at peak times in Sydney and Melbourne last year.
"It won't take long for Sydney and Melbourne to rebound," McGrath said in his latest Switzer column, adding the worst was already over.
McGrath said if you bought at the peaks of the market, around mid-year 2017 for Sydney and late 2017 for Melbourne, not to despair.
"If you’re in this boat, I understand your disappointment in terms of timing but please don’t despair," McGrath said, suggesting no one can pick the top, even himself, the 35 year real estate veteran.
"Unfortunately, in boom markets, there will always be people who happen to exchange at the peak but try to remember you are one of many – thousands of people did the same thing.
"What’s important now is for you not to panic and to look at the situation objectively," McGrath advised.
He said it won't take long for Sydney and Melbourne to rebound.
"These are two major international cities with many unique factors keeping property prices strong," McGrath suggested, saying you shouldn't feel too compelled to get out.
"You just have to be patient while the magic of capital growth takes effect." 
He said you should stop worrying if you're an owner-occupier.
"You have a new home to enjoy for as long as you can afford your payments in what continues to be a low interest rate environment.
"If the capital value of your home has come back a bit, it doesn’t matter because you’re going to be there long term and prices will eventually rise again." 
He noted that if you're an investor and have bought for different reasons, you've got to hang in there, suggesting that all that has changed is the amount of time your asset needs to bear fruit.
"We’re in the winter period now but the sun will come out again.
"Whether you invest in shares, managed funds, property or any other asset class, there are always going to be highs and lows.
"Smart investors ride out the lows," McGrath said.
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jonathanchancellor-7SQnKwU6yx

Bought at the top? It won't take long for Sydney and Melbourne to rebound: John McGrath

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GUEST OBSERVATION
This is an email McGrath sent to his estate agents on Tuesday.
There was a piece on 60 Minutes that was particularly misleading in my opinion and unsurprisingly melodramatic in its depiction of a property market that could shortly spiral out of control.  It’s simply not the case.
In fact, barring any macro-economic disaster like we saw when the GFC took us all by surprise, I believe the property market has seen most of the value declines it is going to see this cycle (in many markets there has been a 5% to 10% decline in values this year and I think we may see another 5% to 7% in some areas) and at the end of that there will either be a steady state period of market stability or even a small positive rebound back by a few percent.  I say this having now experienced five property cycles in my 35 years real estate career and each time, often at around this stage of the cycle, hearing the same old headline grabbing commentary by one of two so-called experts saying something like “the Australian property market is in a bubble and when it bursts will fall by 40% etc.!” Which of course has never happened and unless we see a total financial catastrophe engulf the entire world is never going to happen.  Two questions that I get asked when I have this discussion.  “Why then do they say this and why do you think they are they wrong?” So the first one is the easiest one. Generally speaking the sponsors of such theories are seeking self-promotion.  They put their views forward in some form of press release aimed to grab media attention (the 60 Minutes story was called 'Bricks and Slaughter!') and inevitably are looking to promote a book or attract eyeballs to their website.  Steve Keen predicted a 40% drop in 2010, Johnathan Tepper predicted a 30% to 50% drop in 2016. Of course, none have even been close to accurate.  In fact, they have been ridiculously inaccurate on every occasion. And why are they going to be wrong again this time?  Well firstly you would have to interrogate what would have to happen for their theory would have any validity whatsoever. Firstly, two out of three Australians own their own home or are living in a home with the owner and one in three are in a rented place. Of the 66% who own their home, half of these homes are fully paid off with no loan whatsoever. Just park that fact for the moment but it should make you feel that property is on a very solid footing. Next let’s look at the generational change occurring – where many Baby Boomers (aged 60 to 75 approximately) are assisting their children secure a first home and of course as the life cycle turns, many will also be leaving their often-considerable assets to their kids.  And in the main most Australians are wealthier than ever before through their property, other assets or indeed inheritance. Statistically, the average Australian is worth around $395,000 which is at record highs. Next, let’s look at the underlying factors that we are experiencing today that may affect property, negatively or positively. We are enjoying a robust economy, low levels of unemployment, record low interest rates and significant overseas immigration and investment. None of these are likely to change significantly into the future. After all, we are the lucky country. So, when you combine the strong levels of home ownership with the robust economic and social markers it’s easy to see why the negative pundits have consistently got it wrong. Australian real estate is one of the best investments on the planet and that isn’t changing. Now I do have concern with housing affordability however. Despite the average Australian being technically wealthier than ever before there is no doubt that the ability for many Australians to buy their own property and in many instances even rent their own property is challenging. And this situation needs to be addresses urgently by both the Governments (Federal and State) as well as the private sector. What has been and will continue to be most Australians’ best financial freedom strategy, residential property, does have another side which must be addressed. Every Australian should have a path to securing shelter for themselves and their family and this issue will need strong collaboration by both private and public sectors to ensure we achieve this.  And at McGrath we are in a great position to assist and influence positive outcomes in this space. And we will.
John McGrath is the founder of McGrath Estate Agents.
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60 Minutes property segment was misleading and melodramatic: John McGrath

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OK, so you haven't got around to the household renovation wish list yet. And not wanting to spend too much, here's wise 10 tips from John McGrath on adding value to an investment property.
They all will give the place a boost, but without the likelihood of overcapitalisation.
The style and quality of the improvements together with careful budgeting will be important as to whether over capitalisation becomes an issue. 
It can certainly be minimised with reliable professional advice, careful planning, market trend assessment, along with the wise sensitive execution of the improvements.
It probably starts with buying a house or apartment with a value at or lower than the suburb's median price as that allows greater scope for capitalisation.
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<li>Paint it </li>
<li>Build a carport </li>
<li>New curtains or blinds </li>
<li>Install a skylight </li>
<li>Replace light fittings </li>
<li>Put in a barbecue </li>
<li>Steam clean carpets </li>
<li>Sand the floors </li>
<li>Replace door handles and knobs </li>
<li>Install a dishwasher</li>
</ol>
"Your goal is to add the wow factor without blowing the budget," John McGrath suggests in his <a href="https://www.mcgrath.com.au/index.cfm?fuseaction=renting.contactus" target="_blank">Smart Guide to Property Investment</a>.
I'd reckon perhaps two of the tasks might require a phone call to the council just to check on the approval process for car ports and skylights. And if you are in an apartment block best check on the rules regarding dishwashers in the kitchen.
(Source John McGrath's "Ultimate Guide to Real Estate" HarperCollins Publishers.)
 
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John McGrath's top 10 ways to add value to your investment property without over capitalisation

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Sydney's price growth this year will be between 5% to 8%, estate agent John McGrath forecasts.
"That would give us a collective 20% growth for the first couple of years of this cycle and that’s a significant – yet sustainable, rise in property values," he told the readers of <a href="https://www.switzer.com.au/the-experts/john-mcgrath-property-expert" target="_blank">his Switzer blog</a>.
He still expects further price growth in 2014 but says it will inevitably slow. 
John McGrath had earlier this year forecast up to 10% growth this year, so the upper range of his forecast has been adjusted slightly downwards.
"In Sydney, I think we will see 5% to 8% growth this year off the back of almost 15% last year," he said this week.
McGrath says the past year in Sydney real estate had been a "really exciting time."
"The market has been in full recovery mode and the hottest I’ve seen it in many years. 
"However, people are now starting to talk about it being all over," he recently noted. 
"I’ve been doing this for over 30 years and I can tell you recoveries never occur in a straight line. 
"We often have a bull run at the start; then after a period of great growth, it eases off. 
"Buyers become concerned they’re going to pay too much, others get sick of missing out and take a break. 
"Demand comes off the boil and price growth slows.  And that’s the key. It slows, it doesn’t stop or go into reverse.   It’s very healthy for markets to take a breather now and then during a new growth cycle. 
"That’s how price bubbles are prevented. 
"We saw 14.5% growth in 2013. At the start of this year, I was tipping 5 to 10% growth with an inevitable decline in the frenzied activity of 2013.  Sydney achieved 4.1% in the first quarter.  If we have just 0.5% growth every month for the remaining nine, we’ll end up with 8.6% for the year. That’s good, steady growth."  John McGrath said last year, the strongest segment in Sydney was inner city and beachside markets between $750,000 and $2 million. 
"Now, we’re seeing more activity in the higher price brackets and RP Data’s research confirms this trend." He said that as with most market recoveries in Australia, what happens in Sydney eventually happens everywhere else. 
"If Sydney is starting to slow down overall, other markets are probably about to heat up."
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John McGrath lowers his 2014 Sydney forecast to 5-8% price growth

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The McGrath agency secured Sydney's cheapest weekend auction sale.
Not the $370,000 two bedroom house sale at Marayong in Sydney's Blacktown district, but $368,000 in Centennial Park.
It was a 25 square metre studio apartment at <a href="https://www.propertyobserver.com.au/https://www.mcgrath.com.au/buy/apartment-centennial-park-nsw-2021/231241" target="_blank">37/80 Cook Road</a> in the 1970 block, Gardinia (pictured below).
<img src="/images/2014/07/29/centennial%20park_0000_1.jpg.jpg" alt="">
<img src="/images/2014/07/29/centennial%20park_0001_2.jpg.jpg" alt="">
It last sold at $298,500 in 2006, reflecting 2.5% annual growth, while the Marayong house last traded also in 2006 at $265,000, so reflected 4.3% annual growth.
By coincidence John McGrath commented recently on a RP Data report that worked out where the bulk of capital city sales takes place.
Sydney’s top price brackets
<ul>
<li>$400,000 to $600,000 – 29.6% of sales</li>
<li>$600,000 to $800,000 – 20.5%</li>
<li>$200,000 to $400,000 – 17.3% 
</li>
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Melbourne’s top price brackets
<ul>
<li>$400,000 to $600,000 – 33.9%</li>
<li>$200,000 to $400,000 – 29.1%</li>
<li>$600,000 to $800,000 – 17% 
</li>
</ul>
Brisbane’s top price brackets
<ul>
<li>$400,000 to $600,000 – 38.8%</li>
<li>$200,000 to $400,000 – 37.7%</li>
<li>$600,000 to $800,000 – 13.1% 
</li>
</ul>
Canberra’s top price brackets
<ul>
<li>$400,000 to $600,000 – 51.7%</li>
<li>$200,000 to $400,000 – 20%</li>
<li>$600,000 to $800,000 – 18.1% 
</li>
</ul>
Perth’s top price brackets
<ul>
<li>$400,000 to $600,000 – 43.2%</li>
<li>$200,000 to $400,000 – 19.8%</li>
<li>$600,000 to $800,000 – 19% 
</li>
</ul>
Adelaide’s top price brackets
<ul>
<li>$200,000 to $400,000 – 48.4%</li>
<li>$400,000 to $600,000 – 30.1%</li>
<li>$600,000 to $800,000 – 9.2% 
</li>
</ul>
Darwin’s top price brackets
<ul>
<li>$400,000 to $600,000 – 41.5%</li>
<li>$600,000 to $800,000 – 23.3%</li>
<li>$200,000 to $400,000 – 19.8% 
</li>
</ul>
Hobart’s top price brackets
<ul>
<li>$200,000 to $400,000 – 54.3%</li>
<li>$400,000 to $600,000 – 23.3%</li>
<li>$600,000 to $800,000 – 5.8%</li>
</ul>
Putting the capitals together, estate agent John McGrath noted that 9.2% of homes were sold between $1 million and $2 million compared to just 2.5% some 10 years ago. 
2% sold for $2 million-plus, which is the greatest proportion on record. 10 years ago it was 0.7%.
"If I told you there were more homes sold between $200,000-$400,000 in Sydney than $800,000-$1 million, would you believe me?," John McGrath <a href="https://www.switzer.com.au/the-experts/john-mcgrath-property-expert/most-popular-price-points/" target="_blank">blogged on Switzer</a>.
"I thought this particular stat was interesting given how much we hear about Sydney being ‘unaffordable’ these days. 
"It’s certainly fair to say Sydney is expensive, but by no means is it impossible – as this data clearly proves.
"Many buyers today can still afford a range of suburbs, but the closer they get to the city and lifestyle locations such as beachside areas, the more likely they are to have to compromise on property types.
"This is why RP Data has measured the most popular price brackets for houses, townhouses and apartments combined.
"These days a lot more buyers are comparing apartment and house prices when deciding where to buy.
"If the location is more important than having a house, plenty of buyers will settle for an apartment."
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At what price are the bulk of sales taking place? John McGrath's capital city sweetspots

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Spring auction numbers are emerging in both Sydney and Melbourne, but the small spike is no serious test yet.
APM has around 570 scheduled listings this weekend in Sydney, up from the 430 last weekend.
In Melbourne there are 715 offerings, up from 646 last weekend.
Then the early September weekends will see around 520 and 520 offerings in Sydney.
It's about 700 and 800 auctions per weekend in Melbourne over the first two weeks.
Neither city is showing signs of listings surging well in excess of last spring's volumes.
The Sydney estate agent John McGrath told the Australian Financial Review he did not expect the market to change much in spring and summer, after it showed strength over winter.
“The indicators remain positive, with record-low interest rates, a solid economic growth cycle in play and renewed demand from both local investors and overseas buyers,” Mr McGrath said.
“I believe this market has at least two years left in its growth cycle before we see a plateauing.” 
However, McGrath said Sydney’s current rate of growth would moderate.
It would likely settle back at a more sustainable 5% to 10% per annum over the next two years, he suggested.
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Two years left in property growth cycle: John McGrath

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Guest observation
Amid current speculation that John McGrath is looking at listing the reputable McGrath Real Estate Agency brand on the ASX, my mind turns to iconic investment tycoon Warren Buffett, a man referred to as "The Oracle". Buffett has the uncanny way of knowing when to take advantage of market highs and market lows.
It's interesting to take two pages from Buffett's encyclopaedia of successes and compare the premises to McGrath's alleged venture.
The first page, or principle, is Buffett's patience in waiting for markets to turn or bubbles to pop, enveloping vulnerable companies when the moment is right. He likens people's emotional purchases and the high risks taken when markets are overheated to "a virus spreading through a kindergarten".
Can we take Buffett's observation of 2003's mobile-home industry, where credit and purchasing was rampant and out of control, as a mirror of our current property market?
Is there a sign, a possible game changer to the operation of real estate companies, that our own Aussie Oracle sees?
Does McGrath see something that the average punter, property investor, or even real estate agent and property economist has failed to see? If the rumours prove to be true, I would judge  McGrath's move to float the agency (brand), as a bold and strategic consideration, at the present time.
It could also be the a possible ideal exit strategy for current real estate office holders, in a time where a turning property market is imminent. An exit strategy that can well end with a bang.
Another Buffett principle is to "invest in or buy a company that will produce 20% growth year in year out". Buffett refers to this as a "compounding machine".
When we apply Buffett's compounding machine strategy to the nature of the real estate business, in essence, the asset has to be a well-oiled and refined machine to produce high yielding dividends for stakeholders. Will this hold true of the individual agencies/offices that make up the McGrath brand?
Can a real estate brand or, more to the point, an agency with 61 offices, be a sustainable or profitable proposition that can be referred to as a compounding machine (even with growth into the Asian market)? Will the perceived growth in the real estate arena be enough to persuade investors to buy shares should McGrath list on the ASX?
False perceptions
In my view, there is a general and false perception that most real estate agencies are prospering.
The public have formed this belief solely due to high property prices, which are heavily inflated. Nonetheless, people make an association between high property prices and the myth that real estate offices are making it big.
Contrary to people's perceptions, the media is currently reporting that there has been a downturn in property listings.
This therefore means more competition among agents and agencies. As a matter of fact, more real estate offices are navigating towards bankruptcy, let alone being profitable enough to have any close association to this idea of being a "compounding machine".
I strongly believe that many real estate agencies, which are highly reliant and dependent purely on sales-listings, are pushing towards the red zone very quickly, and will soon be out of business. I know of many offices with rent rolls - landlord databases - in which the licensees have not paid themselves for up to a months.
The value of a real estate agency (other than the freehold).
The true value of a real estate agency is in the rent roll, not sales listings nor office fixtures or fittings. Not even the European cars most drive. Anything else outside of a rent roll is a liability, not an asset. Rent rolls are traded, "bought and sold". Some would like to believe that the so-called "databases" of purchasers an agency has, hold some sort of value. On the contrary, the only database of real value is the landlord database.
The current values of rent rolls on the market are reflecting ratios from $3.00 to $4.00 on a dollar income per annum. If the annual rent roll income of an agency was $100,000 per annum, the rent roll would be valued between $300,000 and $400,000,and this would depend on how clean and up to date the property management files are kept.
Would I buy shares in the float?
The main reason I would buy shares, if the McGrath brand was to be publicly listed, would be no different to a land release sale.
I would buy in the initial expression and I would be prepared to sell soon after the hype levelled out along with the price. As they say when buying in a land subdivision, buy in at Stage 1 and sell in Stage 3 and 4 before they release Stage 5. Anyone buying in after Stage 3 runs the very high risk of making no return on their investment, or worse still, going into the red.
I am of the opinion, because of the brand name and the level of respect the general public have of the brand, it may well be a welcomed stock. The public's misconceptions around how an agency is valued will further fuel the price of the shares. Therefore I will definitely buy in, sell soon after, and not buy with the view of keeping the assets long term.
Why I wouldn't buy shares?
It is not a question of why I wouldn't buy the shares; it is more a question of how long I would be prepared to keep them. Shares can take on similar characteristics to current overinflated real estate prices in most capital cities.
After all, shares tank every seven or so years and we have had a good six year run so far in this market.
To understand my short-term plan, allow me to scope the property management operation as a business. To do this, we need to drill down into how a successful office operates and have a better understanding of the need to maintain a profitable rent roll. These observations are not based on the McGrath rent roll operation. The following are general industry observations.
<ol>
<li>Young and inexperienced, underpaid property managers do not add value to the rent roll. Highly trained and skilled property managers and property officers add value.</li>
<li>It is an industry that requires a lot of "human attention" and care, as opposed to a manufacturing plant system that is automated with machinery and robots.</li>
<li>Although systems and office procedures can minimise the human work load it can never eliminate the need for skilled supervision required to run an efficient property management team.</li>
<li>Property management fees are highly competitive and volatile and these range from 4% to 7% from weekly rents collected.</li>
<li>The landlord's contractual obligation to an office is only by way of a 30 to 60 day notice. An Exclusive Management Agency Agreement does not mean you own the management in a literal sense.</li>
<li>The ratio of a skilled property manager (PM) to property managements (M) is 1PM:250M</li>
<li>The return of investment at the mid-range value of a management is three and a half years. It will take three and half years to recover any capital investment made, provided there was no attrition of clients/landlords.</li>
<li>Point seven does not take into account cost of overheads to maintain the office open.</li>
</ol>
Personal experience
Over the last 24 months I have seen rent rolls creep up in value, from $2.75 for every $1 to $4.00 for every $1 earned. When I have inspected property management files to determine whether or not our office would purchase these, they have come very short of the mark. Most have required more money and work to get the files up-to-date and in order, so their asking value was priced at more than they are worth.
We have in the 24 months also bought a rent roll for as little as $1.20 for each dollar of income it generated. This is not a common occurrence, but it does happen.
We have also been offered a rent roll for $2.20 per dollar of income generated. Although it looked like an attractive proposition, it cost more than it was worth. It was a risk not worth taking for the reason previously stated: no guarantee that the expenditure could be realised over the three and a half years and in this case in two and a half. It was just not worth the risk.
Therefore, on the previous figures provided, I have also wondered whether or not current rent rolls are overpriced. Are they also caught in a bubble of their own that could just as well pop?
As previously stated, I would be the first to take up an offer in the McGrath float.
I would not, however, buy in with the view to keep the shares long-term. There aren't enough factors that would make me consider the stock to be one Buffett would label a "compounding machine". I am nonetheless intrigued and keep asking myself: "Is this the perfect exit strategy for the man and the licensees that make up the brand?"
Again, I make my observations purely based on my understanding of a real estate office model and the perceived value of a rent roll. A share broker would have a complete and better understanding of the actual value or worth of the shares when taking into account other assets not just the rent roll.
EDWIN ALMEIDA is managing partner and licensee-in-charge of <a href="https://www.just-think.com.au/" target="_blank" rel="nofollow">Just Think Real Estate</a>.
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John Mcgrath

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