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17/11/2009 -
IT'S NOT THE GFC, STUPID! |
IT'S NOT THE GFC, STUPID!
Article by Mike Phipps - Mike Phipps Finance
www.mikephippsfinance.com.au
All is not always as it seems. Drive in to Byron Bay, as I did earlier this month, and you’d be forgiven for thinking the place was bankrupt. Many of the roads are potholed, there’s bugger all new development and the road to Wategos is still controlled by temporary traffic lights after subsidence effectively reduced the road to one lane many, many months ago. The joint (no pun intended) is hippie heaven and a great place to sit back and have a look at where our tax payer funded social security system is working best.
But here’s the rub, spend a few days here (as I do whenever I can) and the place really gets under your skin. The passing parade of alternate lifestylers, backpackers, international men of mystery and the seriously wealthy makes for great people watching. The lack of development is a welcome change from the frantic pace in most tourism centres and even the potholes seem strangely welcoming. To paraphrase a great Australian movie...”It’s the vibe, man”.
The accommodation in Byron is not cheap and neither should it be. Clearly the local accommodation managers understand their market and appreciate that blokes like me will pay a premium to be here. The charm of the place, while not immediately evident on the run into town, is well understood by the locals and capitalised on by most businesses. This is as it should be. Take the time to understand your product and you’ll mostly do well. The fact that She Who Would Be Queen manages to spend more money per hour in Byron than any other location we holiday at surely stands testament to a product well presented!
Of course, fail to appreciate your product and market and things tend to go a bit pear shaped. One only has to pick up a copy of the Australian Financial Review to see how many examples of this failure to understand are emerging within the Australian property and business sector. In fact, in the 12 months to July 2009 banks appointed some 1320 receivers to deal with corporate insolvencies. That’s about triple the average for the previous 5 years. Just as alarming, companies entering some form of insolvency administration hit more than 10,000 during the same reporting period. At first blush it would seem that any number of investors, business operators, entrepreneurs and speculators have fallen upon their swords. What were they thinking? Surely the risks were self evident.
Perhaps all is not as it seems. My immediate reaction to the challenges that face most sectors, accommodation included, is a simple question…. “Where were the trusted advisors when the wheels fell off?”. I’m not talking about the industry professionals who’ve been there for the long haul. I’m talking about the non industry expert accountants, lawyers, consultants and, mostly, the lenders who jumped on the gravy train just as it left the station in late 2006. Let’s face it, without supporting advice and capital (read gearing) not much happens in the lucky country. If the lenders don’t get it or simply miss the risks it’s a recipe for disaster. In a previous life I worked for a lender that took the time to understand the management rights and accommodation sector. I mean really understand at a fundamental level. That lender was one of several who made the necessary investment in expertise that ultimately saved many operators when the GFC came a calling. Of course, in the process they lost some business to the more aggressive lenders but I suspect that chicken is now home to roost!
As recent advertisements for so called troubled assets reflect, not everyone has been saved. Again, not everything is as it seems. I would assert that in most cases the assets themselves are not stressed and, in fact, represent real up side opportunities for forward thinking operators. Let’s face it, given enough rope many borrowers will, in fact, hang themselves. So, when a number of management rights lenders chose to enter the market in the recent past the storm clouds started forming. Forget the Global Financial Crisis. Some of the deals done in the past few years were just too highly geared and risky to survive even the most modest of market aberrations.
Lenders have a responsibility to provide funding on the basis of a clear and technically competent understanding of the industry they are lending in. Sometimes they spend so much time ascertaining the relevant expertise of the borrower they don’t stop to think about their own credentials. Lenders should also contemplate downside risk and stress test based analysis when approving funding. To have management rights operators with debt funding terms longer than their management and letting agreements is simply unacceptable. To have operators geared at levels that will not withstand rack rate discounts, letting pool movements and occupancy slowdowns is likewise questionable.
The bottom line is very simple. Every asset has it’s breaking point. Generally, a combination of high gearing, economic slowdown, lack of fall back capital and no margin for error will end in tears. It would be folly to assume that assets subject to forced sale are intrinsically compromised. More likely they are simply the subject of poor advice and way too much rope. If in doubt seek the opinion of an independent advisor (sorry, couldn’t resist the opportunity for a plug). Any way you cut it forced asset sales are not a good look for our industry and thankfully are not the norm. I am sure that the highly professional brokers who take these assets to market take no pleasure from the circumstances that predicate the sale. However, let’s not confuse a stressed borrower with a stressed asset.
I reckon the tourism operators in Byron have risk assessed their demand factor based on how many pot holes would need to appear before people stopped coming….it’s a hell of lot more than I’ve seen so far ! I love the place and the accommodation manager who took my money this week knows it (and more importantly, she understands why).
For all queries, contact Mike Phipps on 0448 813 090 or 07 54735 531
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