Market Insights
DEVELOPMENT – ADVERSARIAL BY NATURE OR CHOICE?
BY BENNI ARONI Client Director -Property Pitcher Partners
I have a background as a litigation lawyer. I can honestly say that the bulk of the legal profession were courteous and supportive compared to the inherent conflict I have experienced at almost every level of the property, development and construction industry. This is even more incongruous when I factor the symbiotic nature of the property eco-system compared to the relatively independent business models of the legal profession.
Let me illustrate my point by examining the evolution of a property development: 1. Acquisition of a site – vendor wants to get highest price; purchaser wants to pay the least possible. If there are multiple buyers, they are pitted against each other by vendor and its representatives. All healthy competition (unless you want to make the end product affordable), noting that the land component will be 15-25% of your development cost. 2. Schematic design – at this point various consultants are engaged with the focus on yield and planning. Architects, engineers, planners, quantity surveyors and, on occasions, builders are all asked to provide services at discounted rates with the promise of a job if all stacks up. Relationships are formed only to be subsequently exorcised by the inevitability of D & C Contracts and Novation. 3. Feasibility – the elements are consistent: · Revenue less GST (if applicable) · Land Cost · Construction Cost · Consultants
5. Marketing – pricing your product to meet expectations of owner occupiers, investors and affordable owners/renters is an art form. Pre-sales involve engagement of agents and channels both of whom require material commissions years before any revenue is accessible to the developer. The traditional display suite combined with visual material and social media marketing is a seriously expensive exercise. 6. Finance – sourcing debt from traditional banks has become a mythical exercise for many developers. A plethora of alternate funders at double the cost of the traditional banks have accordingly evolved. “Relationships” were created in this space but in recent times shopping around has become necessary and is often encouraged. Sourcing equity has become extremely difficult in view of the returns available to investors from traditional 65% LVR property secured debt. Self-managed, externally managed and jointly managed “opportunity funds” have sprouted, seeking to capture investors with higher risk appetites. These opportunities generate higher returns but require independent investment committee risk assessment and are ripe with potential conflict. 7. Construction – engaging a builder is currently my definition of “inherent conflict”. That includes: · Tendering – clearly intended to achieve a win/lose, lose/ win or lose/lose relationship. · Design and Construct contracts expressly granting a “value management” right to a builder which has been obliged to accept a profit margin no other business would contemplate. · Novation which severs voluntary creative relationships and imposes servile largely forced relationships. · Risk allocation which historically imposes on the builder numerous risks including latent conditions, weather, supply chain costs and delays which were previously the concern of the Developer.
· Authority fees · Finance Costs
Development profits or Rates of Return calculations determine viability. Ideally at 18% plus IRR is achieved but this has been very rare in the last few years, leading to stalled projects, insolvencies, extended holding costs, cascading acrimony and frustrations. 4. Planning – after the first 3 steps we have sufficient belief in our project so let’s get a Permit. Best case scenario: 8-12 months; worst case scenario: infinity and beyond. Cost is immeasurable. Objections are often bizarre and driven by self- interest or delusion. Process roadblocks can and most likely will include local authorities, statutory authorities, Cultural Heritage Reporting, VCAT, ESG compliance or Affordable Housing requirements.
8 – April / May 2024
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