Rental management at its worst is a poorly-fitting bolt-on to an estate agent’s operations but the $29 billion sector is getting slicker. Big players are emerging, buying up local rent rolls and gathering billions of dollars of properties on their books.
Among those on the hunt is real estate entrepreneur John McGrath, whose company McGrath Estate Agents has a company-owned division of real estate offices spanning two states and a single rental roll of about 3300 properties under management. There are plans to increase it by 1000 properties a year. McGrath Estate Agents also has a network of franchisees who take that total to 5500 properties.
For some observers, the rental management sector is ripe for consolidation, if only someone could come up with a business model that works. There is something in the order of $1 trillion worth of investment properties around the country and often they are the most valuable possessions of their owners. But their management takes the form of a cottage industry, scattered across thousands of real estate offices that have cut their teeth in sales and marketing, not financial management.
The chief operating officer of McGrath Estate Agents, Geoff Lucas, says the McGrath strategy is to expand its rent roll organically, that is, by signing up landlords one by one. But the company also does strategic acquisitions when it moves into a new area or one with an entrenched competitor, recently acquiring rent rolls in Sydney suburbs Parramatta and Balmain, as well as the Brisbane metropolitan area.
By scaling the business, Lucas says McGrath is able to offer better service and systems to its customers. “Obviously we get economies of scale there which help us invest into high levels of customer service,” he says. “We find that scale helps us differentiate the level of service we [can give] our customers.”
Property management can be lucrative and not just in cash flow. When real estate agents sign a property management contract with a landlord, they immediately get a valuable tradeable asset. Lucas says the going rate in Sydney for a good quality rent roll ranges from a 3.25 multiple of management fees to as much as 4.25. Assuming a flat 7 per cent management fee (in reality the fees are usually more complex than this), this values the right to manage an $800 a week home at more than $12,000 in some areas. A portfolio of thousands of properties can be worth many millions of dollars and it is an asset that banks generally are happy to lend against.
But it is an unusual asset, given the landlord can terminate the agreement at any time and doesn’t always like being transferred to another office that he or she hasn’t personally chosen. Good quality rent books have diverse owners, rather than a lot of properties held in a few hands, so they’re less at risk of halving in value by one person’s decision to exit.
Some of the biggest in the Sydney area are n g farah’s rent roll of about 2000 properties across Sydney’s south-east, and Tony Laing from Raine & Horne Bondi Junction Coogee Clovelly also has a substantial list.
Opinions in the industry vary on the sector’s potential for consolidation. The managing director of property management resources company Apmasphere, Ben White, and a director of Ray White Group, argues property management is inherently local and relationship-based. “You might get some efficiency in the back end but you lose the intimacy with the property and the local people,” White says. “I don’t know of any scale benefits that compensate for that.”
But McGrath in 2005 showed his hand on whether rental management could be folded into a bigger operation by selling his rent roll into ASX-listed rental management group RUN Property, in exchange for an equity consideration. RUN is all about using technological systems to scale the rent roll business and with the help of McGrath amassed a rent roll of more than 20,000 properties across the eastern states. Like traditional real estate agencies, it has a network of offices and direct relationships between landlord and property manager but unlike the franchises, the offices all share the same system.
“Philosophically we have always had the view rental management is probably one of the last remaining cottage industries,” RUN chief executive Rob Farmer says. “There will be at some stage some consolidation in it.”
He argues that a large, sophisticated player could bring a lot of value to property management and the large amounts of money that flow through trust accounts. He cites RUN’s software, which allows a landlord to get a detailed and up-to-date history of all rent payments made, any arrears, maintenance requests, the cost of repairs, scans of all bills that have come in and the outcome of inspections. He uses banks as an example of where property management could go; they have a local presence through their branches but centralise much of their operations. The rent collection, invoice processing and payment, trust reconciliations and statement production could be centralised the same way.
“There’s only a small part of it that’s out in the field by real estate agents,” Farmer says. “When you think about it, the only part of property management that fits in with a real estate agency is letting it when it becomes vacant every two or three years.
“Back seven years ago there was hardly anyone with 2000 or 3000 properties under management, now you have a few players there. I think you’re going to see the more sophisticated players start to build market share and the ones with 50 or 100 will start to drop off.”
The relationship between RUN and McGrath ultimately soured and the two parties ended up in court, McGrath ending his association in 2008.
RUN, which has seen its share price triple in the past 12 months off a low base to about 18¢, is in talks with aspiring property management juggernaut Rental Express and a related company Heritage Acquisitions, based in Western Australia. A sale was announced last May but negotiations are ongoing. Heritage Acquisitions chief investment officer Stuart Bell told The Australian Financial Reviewlast year he aspired to become a go-to outlet for smaller agencies to sell their rent rolls.
In December, RUN also formed a partnership with Mark Bouris’ financial services group Yellow Brick Road that will result in RUN distributing YBR’s products and YBR offering RUN’s property management services.
Free of the RUN alliance, McGrath has again been building up properties. The McGrath Edgecliff office services a vast slice of Sydney’s eastern suburbs, stretching from Watson’s Bay down to Clovelly and west to Surry Hills.
Lucas says it’s important for a property manager to have a local presence and a direct relationship between property manager and landlord. But this doesn’t mean having an office “on every street corner”.