Eight billion reasons owners are ripped off

A story in last weekend’s Australian Financial Review makes grim reading for anyone concerned about the spreading trade in management rights into NSW and Victoria from Queensland.

We always knew the buying and selling of management rights was a lucrative business. Why these huge profits are concerning is that it’s going to make it harder for any state governments to put a squeeze on what can be, at its worst, exploitation of apartment owners that verges on legalised rorts.

To be clear, there are many different kinds of management rights and not all of them are in any way suspect.  If a company wants to pay the owners in an apartment hotel block a handsome sum to take over the running of the building, then that’s the owners’ choice.

If, however, the owners never had a real choice, and the money from the sale went to the developer and not to them, and then that contract is subsequently sold to another entity – again with the apartment owners having no choice – then that is another matter entirely.

Imagine if you bought a new car and the salesman said that part of the deal meant you couldn’t choose your mechanic and had to pay whatever bills they presented and, by the way, if they sold the right to service your car to another mechanic, then you’d have to go to the new guy.

And when you tell the car showroom to stick the deal, they tell you that everyone does it and it has the government’s full blessing so you may as well buy the car you want.

According to the AFR story by Larry Schlesinger, nationally the trade in management rights is worth $8 billion, a jump of 67 percent on the estimate for last year by specialist real estate entity Resort Brokers.  Part of the reason for the huge increase is that Resort Brokers – which claims to negotiate 45 percent of all management rights deals – spread its net to pull in figures from sources other than its own trades.

Its 2023 Management Rights Report, as quoted in the AFR story, says there are currently more than 4000 management rights schemes covering almost 290,000 apartments with a collective value of $164 billion across Australia.

OK, so what’s the problem?  For a start, management rights are sold on the financial benefit of multiples of net profit. 

As quoted in the AFR, the Resort Brokers report says average earnings multiples are 4.89 times net profit for short-term management rights (typically holiday apartments or serviced apartments) and 5.26 times net profit for permanent management rights (owner occupiers or long-term renters).

Where do these profits come from? There is only one source of income and that’s the fees or levies from apartment owners.  Logic dictates that they must be inflated to cover the cost of purchasing the management rights. If there’s any other source of income, someone please tell me about it.

But in simple language, to take the bleakest view, money is being screwed out of apartment owners to finance buying and selling of their democratic rights to manage their own affairs.

To be fair, in Queensland they don’t have any such rights as they have long since been handed to developers, banks and management rights traders by successive governments.

Resort Brokers claim that proof that apartment owners like this system is in the fact that 85 percent of all schemes are topped up when their original deals expire.  Impressive.

But what about the pressure put on owners to top up the deals – including, in extreme cases, threats of being sued for restraint of trade when the original contract runs out. 

Or there’s the fact that in many of these schemes the majority of owners are non-resident investors who never see the managers in action and may well assume that there is no viable alternative.

Or there’s the bullying of resident owners who might find that their needs are suddenly no longer the highest priority for manager whom they have challenged or threatened to allow their contracts to run out.

Or there’s the simple fact that Queensland’s courts and tribunal will do anything to avoid ever canceling a management contract, regardless of however egregious any breaches might be.

I have heard literally dozens of complaints about managers who have ignored the terms of their contracts and abused owners who dared to challenge them.  I have yet to hear of a single contract that has been terminated by a court or tribunal. 

Meanwhile, some developers are marketing new blocks as terrific places for permanent residents, but getting approval for them as holiday lets.  Why?  Because the holiday letting module in Queensland can sell 25-year management rights contracts while the residential module can “only” sell contracts for 10 years.

In NSW and Victoria, developers can’t pre-sell management rights … except they can.  Recently a Queensland developer completed a building in Northern NSW and used their residual voting power, and the proxies of cronies, to award a 25-year contract to a management firm, against the wishes of the majority of residents.

Building management contracts in NSW have a limit of 10 years.  But this wasn’t a building management contract – it was for rental roll management which apparently doesn’t have the same cap.

In any case, a 10-year contract is ridiculous.  Strata managers get a one-year contract in a new block, to see if they’re are a good fit, then three years at a time thereafter.  This system has been in place for almost seven years and the strata management business is booming like never before.

Getting back to the dubious awarding of rental management rights, if the apartment owners can prove that the developer gained a financial benefit from this deal, they can demand it be paid to them, under the legal precedent set by the 2007 Arrow case in the NSW Supreme Court.

But they would have to go to court to win the money back; a high-risk strategy that they shouldn’t even have to pursue.

Back in Queensland, the Strata Community Association (SCA-Qld) – the strata managers’ and service providers’ professional body – is pushing hard to get the government to rein in the management rights rort.

But what is already an uphill struggle is made much harder by the fact that the management rights business is such a huge earner for the people who buy and sell apartment owners’ collective right to choose who manages their homes.

Maybe now that it’s a growing business in NSW and Victoria, we can stop it here and hope for a reverse domino effect that will help the ripped-off residents of our northern neighbours.