With roughly 25% of all Australian mortgages switching from 2% fixed to 6%+ variable in 2023 & RBA taking a more hawkish stance to fight inflation, cap rates across real estate assets are facing price discovery and decompression. Our team is on the look for potential acquisitions of assets that mitigates higher interest expense with structural inflation hedges, or can ride the current trends of increased travel / China re-opening / Australia’s huge inflow of international students due to China’s stance on foreign online learning. With occupancy rates on the rise, the environment presents
itself with a more nuanced approach balancing rising revenues with inflationary pressures and increasing cost of capital, with the best assets hopefully maintaining coverage ratios and thus maintaining negotiation leverage with lenders going forward into 2024. Thus, optimizing efficiencies and economies of scale becomes even more crucial during this new discovery period.
Similarly, there are economies of scale in management rights investments. For just a single project, usually there are redundancies for caretaking hires or property management hires. A portfolio of projects within a meaningful radius allows for greater optimization and also emergency relief management. A gardening team can handle gardens for multiple projects and the same can be said for the cleaning team and the repairs team.
The market for the maximum number of units that a property manager can handle is approximately 400. However, it is seldom where an individual project will have 400 units to manage. And for those projects, usually there is a lot of competing investors to bid for such.
Similar for caretaking, though there is more variation depending upon the type of project, seldom will a full-time caretaker be optimized. Thus this is reflected in ROI, whereby size of income affects valuation multiple.
Here (graphic 2) is a measure of the number of units to manage and number of units in leasing pool for the AUD 2m-5m projects listed in October 2022. The average number of units in a project is 137, with the average number of units in leasing pool at 61. Given this information and without deep diving into the specifics of each project, we can derive that many of these projects can be handled with a full-time property manager plus casual caretaker, cleaner or gardener combo, given that the property manager will handle a lot of the daily routines.
Diving deeper (graphic 1), we can compare wage efficiencies of each project. This measures the price an investor has to pay for hiring a manager to manage one unit per annum. A value of $400 meaning that the investor is paying the manager $400 per annum for each unit managed. Using such analysis gives further insight in comparing projects. Obviously singling out wage efficiency as a factor, the lower the unit cost the higher the ROI. The range of efficiencies here range from a cost of $315 per unit to $1100 per unit.
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