In The Urban Developer’s upcoming event series “Defensive Development”, we’ll be exploring how developers and the wider industry can manage risk and create opportunity in uncertain times.
As the pressures of funding restrictions impact both developers and purchasers alike, and the industry braces for a slowdown in construction activity, we are now beginning to ask ourselves questions of survival rather than opportunity.
The Urban Developer reached out to three of the speakers from three separate disciplines – sales, valuation and funding – and we’ve collated the 9 common mistakes they commonly observe in the market.
Ged Rockliff, Head Of Residential At Savills Australia
In a market like the one we are experiencing it comes down to [not] taking the buyer for granted. The most common mistakes would be:
1. Not Understanding Your Key Buyer Market (Owner Occupiers, Downsizers, Investors, First Home Buyers Etc).
Understanding the market is critical in ensuring all elements are finely tuned to capture the attention and confidence of your key buyer market (i.e., product mix, size, layout, branding, finishes etc)
2. Lack Of Pricing Strategy And Time Management
Momentum and velocity is key in achieving the maximum sales value – you need to build this and have the ability for increments (ensuring the upfront branding and development of collateral remains on time and on-spec).
3. Lack Of Product/Market Information
There are still buyers around and with stock levels likely to decline (with funders becoming more reticent); it is important that developers and agents are aware of what competing projects are doing. Developers and agents need to keep abreast of information regarding key infrastructure works as well as project specific information to be able to firstly engage with buyers but also to give confidence in purchasing.
Jozef Dickinson, Director Of Valuation & Advisory Services At CBRE
From a valuation perspective, the most common mistakes are:
4. Not Asking For Advice
Although we are all experts, always engage with other professionals for advice no matter what stage of the development cycle. There is so much happening that it can be hard to be across everything, the potential “value-add” of a second opinion or additional advice should not be dismissed.
5. Lack Of Quality
Delivering the promise is key. The most pertinent reason some valuations may not represent the pre-sale contract price or general purchaser defaults often relate to the quality of the product and fixtures, fittings and finishes not being what purchasers were expecting or had been advised.
Sometimes excessive value management can severely impact this and although a vital process, this must be managed with a priority on delivering the quality to purchasers. This is even more relevant for owner occupier and locally targeted stock.
6. Lack Of Preparation
The financing piece of the development process is becoming harder and more onerous. Developers must be well prepared and engage financial consultants early to ensure that when a potential deal is delivered to a potential financier and all ‘boxes-are-ticked’.
Baxter Gamble, Director Of Development Finance Partners
When it comes to financing a development the most common mistakes are:
7. Mistaking Your Lender’s Objectives With Your Objectives
Ever found yourself in the situation where you get along famously with your banker (or lender’s relationship manager)? Perhaps you meet the credit officer and they like your project – you accept their discussion paper/indicative approvals, and then they decline to fund the project without notice.
This occurs routinely in all market conditions and is driven by something that is even beyond the complete control of even the banks: lending appetite. First and foremost, your banker is in the business of profitably lending money.
To mitigate the chance of being caught without funding we recommend that you accept that lending appetite is ever-changing and accept that you may meet bank policy but not bank appetite – you always have alternative funding options.
8. Confusing Cost, Price And Value
Have you ever said any of the following to your banker?
- “I can sell the site for more than it’s valued at”;
- “I can sell the completed stock through marketers at higher prices than it’s valued”;
- “I can build the project for less than the quantity surveyor has reported”; or
- “I am happy to make a small profit on a deal”.
If so, you likely know that it did not change the funding outcome. This is because banks need to fund projects that have:
- An acceptable risk-adjusted return;
- A valuation on the basis of the prices and sales period of the local market;
- Costing on the basis of an external party completing the project.
To reduce your risk of being frustrated by the numbers, we recommend you ask yourself if the project’s margin of safety (i.e. profit) is sufficient for the bank – and, how would the bank, (if you didn’t factor) complete construction? Sell the completed project? Sell the development site?
9. Insufficient Equity To Complete
Often the first question we get is the wrong one: “How much can I borrow against the site?”
It’s a natural question – it’s great if you can control the project with less equity – but it inhibits developers asking an even better question: “How much equity do I need at each stage of the project?”
As a consequence of not asking better questions, we often find developers have been “successful” getting large borrowers and “successful” in ensuring they can never develop the property in their own right.
To ensure this problem does not happen to you we recommend:
- Begin with the end in mind: develop a plan for funding the project from conception to completion.
- Seek the services of independent project finance experts to model and plan the outcomes.
- Avoid borrowing against a site for purposes other than progressing the site after careful deliberation.
URBAN DEVELOPER | July 19, 2017