Matthew Hughes, Managing Director at Capital Property Advisory
May 20, 2019
Do It Yourself (DIY) Development or Development Syndicate. Which is right for you?
So often nowadays we are asked by our clients about the merits of investing into a property development syndicate as opposed to completing your own development.
The answer is a complicated one, as from a high level, it relates mostly to the individual investor.
What is your appetite for risk? Are you comfortable with leverage or would you prefer someone else carry this risk? Do you have the time to progress a development and complete it on time, while also working your full-time job?
There are so many questions to be answered about you before we can address the initial question of which is best for you.
So what are the key differences between these similar, but different approaches to property development?
In this scenario, you are the developer. You take all the risk. You enjoy (if you execute it well) all of the rewards. So how does it work?
We encourage developers to only start down this path with a purchase budget of approximately $600,000 or greater. This helps you get some economies of scale on the fixed costs of subdivision and development. While you can have success below this level, the risk often outweighs the payoff.
You will require the deposit and costs to complete your purchase, plus the cash or usable equity needed to fund your subdivision costs. If you plan to construct, you will require more capital again, although there are some strategies we have used in the past that can help you minimise your contribution to construction costs.
You will also be the one providing the security and guarantees for the debt component of the total development cost (TDC). Meaning you alone are on the hook for the 80% loan on the property, plus whatever debt you require for construction, assuming this forms part of your plan.
Generally, our opinion on this option is, if you have the risk profile, capital, time and desire – then this is for you. If not you can engage a reputable project manager to help you progress on time and manage the risk, or you can explore a…
In this scenario you are still a property developer, albeit a more passive one.
If you are passionate about property development and want to learn throughout the process, then this passive approach may not be for you. However, if you (like many of our clients) are time-poor and more focused on financial outcomes than learning, then welcome to the world of property development syndicates.
A syndicate is a group of investors who have combined resources to achieve a shared desired outcome. Pooling funds allows the syndicate to play at the top-end of town, where returns (and sometimes risk) are magnified.
Before you commit to a syndicated investment, there are some important questions you need to ask, such as:
- What is the proposed time frame for the project and what is the potential for delay? If the development syndicate requires “pre-sales” (many developers have to sell 50% or more of their proposed dwellings before they can obtain the finance to start construction) and they can’t achieve them in the current market, then your 30-40% return on your investment doesn’t sound as appealing if it takes 4-5 years to achieve, or worse still, the development never gets off the ground. There are many examples of this in the subdued Perth apartment market.
- Who is responsible for securing and guaranteeing the finance? Most development syndicates do not require the passive investors to provide security or personal guarantees. This mitigates much of the risk of property development, as whilst your capital is always at risk, you are not borrowing on top of that and risking your other assets or professional licenses (doctors, lawyers, etc.) if something goes wrong.
- What is the appetite for the end product and what is the time frame for the sales to be completed? Returns are generally paid out to investors once the sale of last dwelling has settled. What is the average days on market for the product in the proposed area? Are you priced below or above the median price? If above, what is your unique value proposition to separate you from any competitors? Speaking of which, how much competing stock is there on market now, and in the pipeline?
As you can see, the answer to this question is complex. We have barely scratched the surface with the comments and questions above.
If you would like to learn more about these or other property investment strategies, make an appointment with our Qualified Property Investment Adviser today.