A Traditional Challenge to Management Rights – Just Say No!
The Unit Owners Association of Queensland (UOAQ) has for many years opposed long-term management rights contracts – especially requests for ‘top-ups’ or extensions to those contracts without benefit to the lot owners.
Our basic mantra is ‘Just Say No’. And if you say it often enough the contract will wither away, leaving the body corporate able to choose for themselves what, if any, arrangements they prefer regarding caretaking and rental rights.
All players in our strata world would be alive to the growing trend to say ‘No’. More and more bodies corporate are now following in the path of many who already have reached self-determination (e.g. Carmel by the Sea – and the list is growing).
A New Challenge to Management Rights
Another trend has emerged, often attributed but not limited to Airbnb and other short-term platforms. This trend does not involve the body corporate itself; it is much more organic, and investor driven.
It involves investors choosing to by-pass their on-site rental manager – and tapping into the myriad number of options available for managing their rental properties in partnership with on-line services like Airbnb.
On-site rental managers typically need to service large mortgages necessitated by paying inflated prices for their long-term contracts. These charges then must be factored into the long list of fees they charge the unit owners each month.
If the private investor can by-pass the inflated fees charged by their on-site rental manager, the potential for increased rental returns would be obvious.
A quantity surveyor, David Leary of Leary & Partners recently published an incisive article about this emerging trend, a trend which must be very worrying to those benefitting from the traditional caretaking business model. We republish it below with his permission.
Will Airbnb Kill the Caretaking Business Model?
The effect of Uber on the taxi industry is well known. It has been completely disruptive to the point where the values of taxi licenses are decimated and class actions have been taken in retaliation. The question is now being asked whether the same effect will occur in the caretaking industry as a result of Airbnb and similar businesses.
Caretakers derive the majority of their income from two areas of operation. The first is from a contract with the body corporate or owners corporation to provide caretaking services, and the second is from the letting business. Whilst the caretaking income is generally stable, rising annually in accordance with an agreed formula, this is not true for the letting business which frequently provides the majority of the income.
Worrying trends emerging
As a consultant to the caretaking industry, I see some worrying trends emerging as a direct result of the disruptive influence of companies offering short term letting services online. It is not uncommon for unit owners to bypass the on-site manager or caretaker and let their properties directly using Airbnb or similar share services. I know of one large complex where approximately 50% of the available units are managed and let by an independent company using Airbnb to place lettings, competing directly with the on-site manager.
I’m also aware of complexes where individual owners acquire three or four units in the complex and run their own letting business in competition with the on-site manager. This trend is increasing. In response, there are now a number of third-party companies who offer investment unit owners a full letting and cleaning service as an alternative to the on-site manager.
It was recently reported that Dr Schwartz, who is Australia’s largest private hotel operator, is offering to subsidise the cost of renovations for investor owners at the Hilton Surfers Paradise, where he owns the management rights if they cut their ties with Airbnb and return to the letting pool. In another related move, Bank of America financial analysts recently downgraded the stocks of several hotel companies, including Hilton and Hyatt, citing pressure from oversupply and competition from home share services.
Owners no longer bonded to the onsite manager
Traditionally, investment owners in residential complexes were bonded to the on-site manager because he was the principal means through which owners let their property. Occasionally owners would use the services of an outside real estate agent, but for most, this was not the case.
With the advent of online share services, owners do not always see the on-site manager as the principal source for short term letting services. There is now an incentive to aggregate groups of units, either unilaterally or in conjunction with other owners, and offer them to the market using Airbnb. This is the trend that I see occurring, particularly in older complexes.
Older units more at risk
The Accommodation industry has always been price sensitive. The problem has been reaching the market. Whereas apartments in older complexes were once sold off at cheaper prices to people wishing to use them as their permanent residence, they are now increasingly being sold to investors who let them through the likes of Airbnb. This trend will continue.
The complexes that will be most affected are situated in the tourist hubs, including capital cities around Australia. This constitutes a large proportion of the available strata accommodation. Whether the trend is powerful enough to destroy the current caretaker business model remains to be seen. There are government inquiries currently being undertaken with a view to curbing the influence of Airbnb. The question is – will it be enough?
This article has been republished with the permission of the author and first appeared on LookUp Strata website.
I would add re-‘caretakers’ that Bodies Corp should not renew long term management rights contracts under almost any circumstances – there can be rare need for exceptions.
If a ‘caretaker’ paid for their ‘rights’ say one half or a million dollars, or whatever, renewal at expiry can represent a gift to the ‘caretaker’ of around this sum or more. I know as a unit owner I would love someone to gift me $1m. The ‘caretaker’ has already recovered their $1m (or whatever) along the way plus interest (return on capital invested). If they haven’t they should look to sue their accountant. Unit owners would be much better off without this investment cost built into their annual levies.
Renewal part way through the caretakers term contract also represents a partial gift of the ‘rights’ capital value. Do not renew even if your ‘caretaker’ is a ‘good’ or ‘nice’ person. One day he or she or them will sell out. They will have collected their capital and interest along the way and in the resale. If worth keeping, they can also be reappointed on an ongoing cost at a far lower rate upon expiry of their contract. They can also be terminated more readily for non-performance – a significant industry problem.
Better still, do not buy into complexes with long term management rights contracts. The concept lacks incentive to perform like that expected of the rest of the working community and relies upon the caretaker uniquely and voluntarily applying themselves fore mostly in the property interest – a hit and miss outcome under a long term contract. Employ your ‘caretaker’ short term under your terms of contract with a bonus provision to encourage long term employment.
Further get rid of corporate managers (caretakers). Inevitable staff turnover can mean a never-ending loss of corporate memory (how your property works), the hidden inefficiency costs of which are borne by the unit owners.
Exactly Ray. The price paid for MR results in necessity to recuperate the input costs reflecting in higher prices / fees. Extending the contract gives the windfall to the holder 1 who then sell to another, for inflated price which needs to be recuperated – higher fees for owners again. Extending the contract gives the windfall to the holder 2 who then sell to another, for inflated price which needs to be recuperated – higher fees for owners again. Extending the contract…. and the circle goes around, reportedly on average every 3 years.
Owners pay, owners gift extensions, owners pay more for longer whilst having no flexibility in negotiating the terms.
MR holders receive, MR holders get to keep the gift (aka $$$ profit) and move on.
To be able to enter into mutually negotiated contract for a market price, the only avenue is to let the non flexible contract expire. Then there is nothing to buy – bodies corporate are prohibited by law to sell the contracts (such right is given in law only to the original owner, ie developer). With no costs upfront, the body corporate opens itself to the market of service providers who are capable of servicing, but were locked out by inability to access the financing for the purchase of contract. More flexibility, more competition, better outcome for all involved.
The toxicity of the politics of dividing owners to support the extensions goes, and the harmony and livability in the scheme begins.
Renting out a unit through something like Airbnb allows a much more personalised and flexible renting experience – especially if you choose to use the unit as well as rent it out. It’s the only way we would rent out our unit now. On site Managers tend to want all their units to be the same and without any personalisation. One time, without any warning, we found they had just dumped a lot of our stuff (cushions, glasses, crockery, lamps etc) in a box in the basement, no wrapping just dumped in so the glasses broke. We prefer to stay in Airbnb – usually more is available and they have more character.
As with many disruptors, short term stays platforms (in class 3 buildings) should give owners a bit more sway when it comes to negotiating fees and charges caretakers/letting agents impose on them.
When Property Occupations Act 2014 deregulated resident letting agents commission rates and removed the requirement for a resident letting agent to live on-site many owners were holding ‘take-it-or-leave-it’ letting contract, having little power of negotiating. Short term stay platforms may provide the owners with access to competition – as usual, with exclusivity comes complacency – competition brings competitive terms.
We have a few airbnb’s in our complex. Unfortunately they do not always observe the by-laws and often using our limited visitors car parks. This is frustrating for the Manager to police and also the resident owners who may have a legitimate visitor with nowhere to park.
As has been pointed out many times through UOAG, The current law in Queensland is obviously flawed. The trend in the early 2000’s to “corporatise” management rights added another level of cost that unit owners were forced to pay, usually without any commensurate increase in value. If the advent of online share services encourages more owners to take a close look at what their onsite manager provides and discourages corporatisation then it will have served a valuable purpose.
Great article stating the obvious alternatives do exist, don’t feel trapped using poor performance service providers.
Creating community and harmony in unit living is what everyone should strive for choice joined the dots for me. Well done.