Interest Rates Cool FOMO for Rent Roll Acquisitions
The ongoing increases in interest rates are taking their toll on the appetite for paying above-market odds for rent rolls across most markets in the country.
With the rate rises commencing in May 2022, it has not been until the beginning of 2023 that sentiment cooled quite sharply for paying above market prices just to secure the portfolio. Nearly all buyers have taken a sidewise step to this approach, as opposed to the “Fear of Missing Out” mentality prevalent across the previous eighteen months.
This is not such a bad thing. There has been a great deal of discussion that multiples in some sectors of the market were becoming unsustainable.
This is not to be construed with the demand for portfolios declining – far from it.
The demand has not waned in any capacity for quality assets or strategic acquisitions of businesses, and this demand continues to be robust – but now not at any cost.
We continue to receive high numbers of enquiries and multiple offers on most portfolios. We have completed a higher number of off-market transactions over the past four months compared to the same period last year.
All non-cash buyers have seen their loan repayments almost double in nine months and are now taking a more thorough and cautious review of debt serviceability. Buyers are telling us that they are factoring in another 1.5% – 3% in their cashflows for loan repayments. While the increases for the most part are serviceable, it does dictate what they are prepared to offer.
We envisage the rate rises will see tier one portfolio multiples potentially dropping 5% and tier two and three portfolio multiples potentially dropping 7%-10%.
And here is the silver lining – minor adjustments of multiples won’t negatively impact the sale price of most rent rolls in any capital city.
Nationally we all know the supply of rental properties are at their lowest levels for many years, putting severe strain on rental prices that are skyrocketing and expected to keep rising.
With rent rolls being sold based on the value of the annualized management fees times the applicable multiplier, with annual management fees automatically increasing due to the increased rents, the sale price may stay constant or increase regardless of modest adjustments to multipliers.
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