Call us on 1300 794 893

The Experts

Property management for 'niche' market property

Margaret Lomas
Tuesday, July 10, 2018

Bookmark and Share

If you are a property investor, chances are that you intend to buy more than one property.  You most likely want to build an entire portfolio of them. If this is the case, there’s a chance that, at some time in your property investing period, you might consider acquiring what I call a ‘niche market property’.

As I have explained in a previous article, a niche market property is one which is designed to cater to a specialty market.  Included in niche market properties are Holiday Houses and Apartments, Serviced Apartments, Student Accommodation and the fast growing area of Seniors Accommodation. 

Buying any of these kinds of property not only requires extra research and attention to detail, but it means that they are more than likely going to be managed differently.  Having a sound understanding of the different kinds of potential management arrangement is critical – as with any property, poor management can impact on not only the return, but the ultimate value of your investment.

Here are a couple of the more common forms of niche market property management arrangements.

Management agreements

The first one is known as a management agreement. This most likely involves an on-site manager already in place, who may have been retained under a range of different arrangements. A management agreement refers to a written contract between the owner(s) of property (often as a body corporate) and an experienced operator. It will consist of a list of requirements of this manager, along with a schedule of remuneration for his or her services, typically expressed as a percentage of gross or net revenue.

Where a manager has been retained via a management agreement, and there is no associated granting of real estate or retail rights, it’s usually fairly simple to terminate his or her services if the grounds are just. Make sure you’re familiar with the exit clause and that there is not a large cost to terminate a poorly performing manager.

Management rights

Management rights are similar to management agreements, however they’re usually ‘purchased’ by the manager and involve the acquisition of some of the real estate. Typically, management rights will be sold by the developer prior to completion of the project for several million dollars, and may include an apartment in the complex plus rights over any restaurant, bar and reception area.

Terminating a poorly performing manager who has purchased these rights can be fraught with problems, and very often these types of management rights are bought by couples with little or no hotel management experience. This could have dire consequences for the success of your property investment, and you should ensure that you have an appropriate risk profile, plus money to lose, before buying a property under an arrangement such as this one.

Leasebacks

Finally, Leasebacks differ from other management agreements in that they involve a manager actually signing a lease with each individual property owner, in order to then on- rent the property.  Some investors feel more comfortable with this type of arrangement because it means that rent is going to be received even when there is no one occupying the property. That lease can be negotiated to include a clause requiring the lessee to pay all outgoings, such as rates and electricity, from the gross rent they receive.  This way, the property owner knows exactly how much they are likely to receive each month.

This can be false security, though, as the ability of the manager to pay the lease is linked directly to his or her success in running a profitable venture. Where the venture returns less than needed to honour the lease agreement and all it’s included clauses, the manager has to provide top up funds from other sources (such as the restaurant and bar that are a part of the complex your property is in, or even another establishment) or, if there is no other source, the lease will not be honoured.

Niche market properties tend to have an added layer of risk which ultimately impacts on the overall value of the property and the short- term performance.  I always recommend that, where an investor believes that any niche market property may be a suitable addition to their portfolio, they seek sound and independent financial and legal advice, and ensure that their entire investment strategy, including non- property investments, is taken into account. 

Many niche market properties have an exceptionally poor track record, which is rarely discussed by the property spruiker selling the property, and when it comes to this type of property, the term ‘Caveat Emptor’ (let the buyer beware) is never more appropriate.

Published: Tuesday, July 10, 2018


New on Switzer

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300