The intention of this article is to provide a brief overview of the operation of Management Rights in New Zealand. There are many variables in the way these businesses operate, and it is beyond the scope of these notes to cover all of those. Suffice to say, that Management Rights have been operating in Australia for many years, often on a smaller scale, (many by expat Kiwis), but also on a large scale by publicly listed companies.
Essentially the business of Management Rights is the operation of an accommodation business, similar to running say a motel. Usually the units or apartments are run as short-stay travellers’ accommodation, however in some cases they are let as residential tenancies.
The units or apartments are usually on their own (freehold) strata or unit titles, with the collective owners making up what is called the Body Corporate. In Australia, where the industry is regulated, most contracts operate on more or less the same basis. In New Zealand the industry is not regulated and consequently there are many variables and different types of contracts.
The main difference between operating under this arrangement, compared to say leasing a motel or any other building, is that the Manager is not paying a set rental. The revenue is split between the Owner of the apartment and the Manager, with some of the costs of operation being shared between them. The income for both the Owners and Manager will therefore vary depending on the tariff and level of occupancy achieved for the apartments. This can be less onerous for the Manager than a set rent when business is slow, however when it is brisk then the holder of a lease on a set rental would reap the full benefit of any revenue above expectations.
The Manager’s share of revenue can be anything from 10% to 50% of accommodation receipts. The split of revenue between the Owner and the Manager varies according to how the operating costs are allocated. Typically, the Owner would directly receive the bills for rates, insurance and electricity. The Manager would account to the Owners on a monthly basis with a statement outlining the revenue from the apartment, less the Manager’s share and less other items such as a proportion of common area electricity, telephone line rentals, Sky TV and in many cases consumables and cleaning and laundry services. The Manager will generally pay the cost of operating their own business, including office expenses, phone charges, cleaning and laundry costs (depending on the split), accountancy, bank charges, postage and stationery etc. The Manager may also earn additional revenue from ancillary services provided directly to the guests, such as valet services, arranging of transport, provision of additional food and beverages and commission on the sale of third party tourist activities.
The Owners would usually pay an annual Body Corporate levy, which would contribute to overall Body Corporate costs, including payment of either a Manager’s salary or remuneration for looking after the common areas of the property. The Owners are often levied for a sinking fund for repairs, chattel replacements and refurbishment as required. A small percentage can also be levied against Owners income for advertising and marketing. Often this marketing is topped up by the Manager who naturally has an incentive to promote the business.
The security of the Manager’s tenure can vary. Ideally, the contracts would be secured by a three-way relationship. The Manager would be appointed by way of a long term contract with the Body Corporate and the individual Owners are to a certain extent bound by the Body Corporate rules and constitution. Each Owner then usually has an individual contract with the Manager, drawn up within the parameters of the Body Corporate – Manager contract.
In most cases, whilst in the letting pool, the Owners have some rights to use their own apartment short-term and can if they wish withdraw from the letting pool by giving suitable notice. In purchasing a Management Rights business, there can technically be a risk that the letting pool would dwindle, however in reality this is seldom the case. Anyone wishing to own and occupy a residential apartment, would probably look for a different environment than that provided by a commercially managed apartment complex. Some management agreements are secured by individual registered leases from the Owners to the Manager, providing the manager with total security of tenure.
In addition to the purchase of the Management Rights business, the Managers usually buy their own apartment as well, this is often a mandatory requirement, however there are exceptions.
Similar to the lease of a motel, the businesses will usually change hands a number of times throughout the tenure of the contracts. The value of the Management Rights business will remain relative to the profits generated and the prevailing rate of return accepted by the market at the time.
In summary, the industry offers good returns and in many cases has advantages over the more traditional ways of operating in the accommodation industry. We expect to see the growth of this way of operating in the New Zealand market to continue in the future. To view our current Management Rights listings click here.
