Charter Keck Cramer and Precisely Property podcast respectfully acknowledge the traditional custodians of country throughout Australia. We pay our respects to their elders past, present and emerging.
Richard: Hello, and welcome to another episode of Precisely Property. I’m your host Richard Temlett, and I’m excited to have you with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property with a focus on dynamic discussions with industry leaders. In this episode, we’re speaking with James Sekhas of Newpoint Advisory. So sit back, relax, and let’s get started.
In this episode, I’ll be speaking with James Sekhas of Newpoint Advisory. James is a Director of Newpoint Advisory and has over ten years of experience dealing with all types of corporate and solvency appointments from formal and informal, including receiverships, voluntary administrations, deed of company arrangements and liquidations.
These appointments represent 1.3 billion of distressed property assets in Victoria, New South Wales, and Queensland in the last five years. James also specialises in risk management with extensive experience completing financial capacity assessment reports on builders and developers throughout Australia. Welcome, James.
James: Thanks for having me.
Richard: James, a couple of housekeeping issues before we get into the show. I wanted to make a big shout out to our mutual friend, Jonathon McRostie. He introduced you and I a couple of months ago, and I think it’s a fantastic connection. I wanted to also thank you for listening to the podcast. But when us three met up for lunch, I already kicked off a good friendship and relationship with yourself. And I think that we will certainly get on very well, and we’re going to be catching up quite frequently just to share information and ideas, especially in the sector you’re in. And I, again, wanted to thank you for coming on the show today, and I really value our friendship and our relationship.
In terms of today’s agenda, I’d like to educate our listeners on your background and then also who Newpoint Advisory is. You’ve also kindly provided a couple of redacted examples of the pre-lend and the builder financial review reports that you’ve prepared. I think these are absolutely fascinating and really powerful reports that the industry can use at this point in the cycle. I’d like to talk to you a little bit about them, what’s brought them around, and I’ll give my views on why I think that they’re so important in the industry.
We’re then going to talk about the state of the property construction market. And then also, we’re going to talk about distressed development site sales. And why I’ve put that topic in is because Charter Keck Cramer typically does the valuation side of things, and I’ve said for a while now that we’ve not actually seen much evidence of transactions where development sites have dropped in value. That being said, I’m convinced that this is happening across various market segments. And certainly, when I was speaking with you before you decided to kindly come on the show, you’ve effectively confirmed that that is happening or has the potential to occur. And, again, the purpose of this podcast is to educate the listeners on what is happening on the ground so that they could identify and mitigate risks. We’ll talk about that as well as more generally what you’re seeing on the ground.
I suppose, before we jump into the show, probably people have asked why on earth would I have someone with James’ skill sets and experience come on the show? Well, to that I’d answer, I’m a lawyer by background, and what I’ve seen, especially more recently, is that property development does have a lot of risk, but also a lot of opportunity involved. And I think that the way to navigate these current circumstances are to identify and mitigate the risks.
And when I was on the train this morning coming in, I thought to give everyone an analogy that explains my logic for asking James to come on. I certainly love the Navy SEALs. I’m doing a lot of personal development right now. And often you listen, or you read their stories and you go, oh, my goodness, these people are absolutely either insane or the most brave people in the world. When they go into battle or when they go in to carry out some of their missions, and what I’ve noticed is they seem to do a lot of risk mitigation and strategy planning before they carry out their missions. And so, it seems very risky to a regular person. But when you actually speak with a lot of them on the ground, the ones that are, of course, humble and things like that, and when I say speak to them, it’s obviously me listening to their audiobooks. What they’ve done is they’ve carried out very detailed due diligence to mitigate the risks. And I feel that the point of having James on is to share insight as to what’s happening on the ground, but also there is a lot of risk hanging around the market right now, but there’s also significant opportunity. And I’ve said for a while now that now’s the time for well-educated capital allocation to mitigate those risks. So that’s really the background to this. I know it’s a bit of a longer one, but I thought it was important to paint the picture.
So, James, as I said, thank you so much for coming on. Could you start off the show by explaining to us a little bit about what your background is and then also who Newpoint Advisory is?
James: Well, thanks very much for the introduction and the analogy. I think you hit the nail on the head there. With respect to me, I’m a Chartered Accountant by background. I’ve been in the insolvency industry for over ten years. More recently, in the last five years, distressed property assets have come across our desk almost religiously. And with that, all the experience that comes from that, whether it be dealing with planners, dealing with government, dealing with council, dealing with sales agents, and I guess pretty much the whole spectrum of lending and property asset construction and development we’ve seen.
Richard: James, just quickly with that, for some of our listeners who aren’t as educated in the detail as obviously you are, when you say distressed assets, what do you mean by that?
James: So, at the moment, particularly since COVID, and obviously this is the first cycle since the GFC where we start to see a bit more hurt in the financial space, so interest rates are up. We have experienced financiers, particularly a lot of alternate financiers, non-bank lenders, who have come into the market both new and I guess their staff are new as well, experiencing situations that they’re not accustomed to dealing with when maybe lending parameters were a bit easier, access to capital was a lot easier. And with that have born, I guess, a new situation where we’ve had to understand and start recovering these assets, or at least the realisations of these assets for the finances and try to get him out of a sticky situation. And sticky situations can be from lack of payment of interest, complex situations on this development site alone, and then before all that, before they lend to builders and developers, what risks and how we can mitigate those risks by putting things in their tripartite agreements or more holistically contract security, or what other parameters we could put in to protect a contract term that they may have with their construction people, which could be up to 12 months, in some cases 24 month construction terms.
Richard: In terms of your experience in the industry, you are a liquidator by background. Is that right?
James: I’m hopefully about to be. I’ll actually have an interview with ASIC next week.
Richard: Good luck.
James: Thank you. And if they give me the all clear, then I will be. So that’s a process in itself, but specifically, my senior level experience has really revolved around property and construction, and that’s largely due to how Newpoint Advisory has positioned itself and how we’ve started our company and where we hope to go.
Richard: Great.
Could you explain to listeners a little bit more about who Newpoint Advisory is, what sort of work that you do? Obviously, we’ll get into some of the key outputs, but it’s important for the listeners to be aware of the services that you provide.
James: We’re a reasonably new company that started in 2018. My mentors, Costa Nicodemou and Brett Lennane started the company with a view of dealing with property and construction assets, specifically. Firstly, on the risk management side, and that’s developed relationships with a lot of alternative lenders and developers across Australia. And maybe at a time where these specific reports or these mitigation strategies weren’t necessarily appreciated in the marketplace. We’ve been unfortunate to deal with the COVID situation and everything that’s come of that, and now the motivations and the perspective of everyone in those spaces has definitely changed. Now, DD (Due Diligence) is part and parcel of a construction deal, whether you like it or not.
Richard: Great. Well, let’s start getting into some of the key themes or topics for today. I’ve said for a while now that one of the biggest sources of risk in property development right now is in construction, whether it’s materials or costs. I think that there’s a huge amount that even in a balanced market is very difficult to start to quantify, and you overlay that with what’s happened with the pandemic and with the huge, often unprecedented level of government infrastructure projects and funding going on right now. I think now is the time for that well educated due diligence, and you mentioned that yourself. So could you please explain to the listeners both what your pre-lend or your builder financial review reports are. What they are, why they’re relevant, and let’s start unpacking that. Because when I’ve seen some of the redacted ones, I think they are absolutely fascinating. And I can’t help thinking that is how you can identify and mitigate a lot of the risks right now in the market.
James: So ultimately, we developed this report, and it continues to change and adapt over time. But it’s a snapshot in time when either a developer or a lender is about to start a construction project to effectively open the books of the builder that they’re going into bed with or the developer they’re going into bed with and assess what is their financial capacity, not only right now, but in the future. Obviously, when we’re talking construction situations, that’s a longer term, by longer term – 6 months, 12 months, 24 month situation, which need to be reviewed. Will the builder be able to carry out this project all the way to the end, not just in the immediate term?
So, we break this down into a few key categories. I guess the things you can tell on the public databases, both litigation and on ASIC, etcetera. Have a look at the group structure and work out, okay, are their ATO obligations up to date? Are they paying their creditors in line with industry standards? Are they following security of payments? What is their cash position like? We don’t harp too much on about history and historical financials while that is included in our report. It’s really about what is it now and what is it looking in the future.
Historically, by historically I mean over the last few years there’s definitely been cash deterioration in a lot of businesses using their reserves to try to plug some of the holes that they’ve had in their pipeline or some of the legacy loans where they’ve been impacted by construction costs increasing over a very short period of time. That has diminished a little bit, and now we’re looking a bit more into pipeline and how they’re actually performing in their current projects. And with that, our reports have changed, and the data we’re getting off those reports holistically has also changed.
And current projects at the moment are key in our reports, and I guess more of our extensive level reports to look at these and look at where in the state they’re doing these and where they are on the timeline of these projects. Are there further contract security things that they need to provide? How may that impact their cash flow? And ultimately, how would they be able to complete the project in the end?
Richard: Great. I’ve got a couple of questions to dig into some of the details on those reports. I will let our listeners know. If you jump on their website, it’s fantastic. There are some freely available reports that I’ve seen where you’ve looked particularly at the tier two builders. And I find that fascinating because you have mentioned that there is publicly available data. But what I like about what you guys have done on some of your reports is you’ve basically put on a property in a construction lens, and you’re looking at some of the builders and the size of them in the industry or some of the risks or opportunities that you need to be aware of. And those are freely available reports. In terms of the actual reports, what else do you assess, and what are some of the most important things that you’d let the listeners know if they are carrying out? And, certainly, I would advise the clients to carry this out. What should they be looking for in a builder, and why is that?
James: Look, I think ultimately visibility is extremely important. So, to make sure in the relevant agreements that they have access to review the builder’s books and records throughout the project because these things can change over time. Other than that, I think, first of all, our reports, we never try to stop a deal going through. It’s clear to say we always want a deal to go through. We try to put as much recommendations as we can to protect our client in that certain situation, and builders are becoming more and more expecting of these reports now. It’s very usual in the industry for a builder to provide these. And if they’re not willing to provide the information that builds these reports, you sort of have your first red flag.
Richard: Absolutely.
James: With forecast cash flows, that’s extremely important. And whether their cash flow is not something they put together with a few Excel formulas, it it’s actually something that’s based on their historical performance, but also what they have on their book at the moment and not pie in the sky. “We’re going to get three times the amount of revenue this year compared to last year, and none of the expenses.” Obviously, I’m talking a very high level, but that is something where we really dig down into the detail and we do ask for a project-by-project specific revenue and expense. And obviously, all these things are confidential, and even when we report to the client, they’re very high level and confidential as well. So, we protect the builder with the things they want to be protected, but we also provide the relevant information to the financiers and developers.
Richard: Very interesting. As you’re talking, I’ve realised you would have very good line of sight on what’s happened with, for example, build costs or materials costs over the last few years if you’re looking on a project-by-project basis. Could you let our listeners know some of the things that you’ve seen? Again, it doesn’t have to be in intricate detail, but are there certain items that have increased more than others in costs? Are there items that have really surprised you at this point in the cycle or shortage of labour or things like that in preparing or carrying out these reports when you’ve done projects over if it’s 2019, 2020, 2021, 2022, how they’ve evolved over that time, but from a cost and a risk side of things.
James: Look, general rule of thumb, since 2019, I think construction costs have gone up variably, but between 30-50% as a whole. I think these have plateaued now. I think people, specifically developers, have been able now to track what they expect construction project to complete. I think back in 2019, there was a lot of “we need to build the pipeline”, rather than “let’s just take a step back and maybe slow down.” I think everyone was worried about the future.
Trade coverage is still an issue, particularly if we look at the distressed side. It’s incredibly hard to get trades on distressed assets because obviously you want to go to the person who’s going to pay you and doesn’t have any bad name in the industry and so on. Realistically speaking, there was a lot of talk about concrete going up and all those sorts of trades where maybe we lose people to civil projects both in Victoria and in the mines, and losing a lot of key engineering trades and stuff like that.
But look, I think ultimately things have plateaued, which have made things easier to analyse. But ultimately, there are other pressures now, and I’m sure we’re going to go into it a little bit with interest rates and holding costs and compliance issues now across the states as well. But I think that’s where a lot of the money is being spent at the moment in making sure you can mitigate those unforeseen risks or potentially now these capital costs.
Richard: Very interesting. Alright. Well, I’ll follow your lead there. I understand that you’re active across Melbourne, Sydney, Brisbane. Let’s talk about those different states. My observation is when I speak with the Valuers on the ground, and I do have the privilege to act for a lot of the developers across all those states, they are actually at very different points in the market cycle, and there are different levels of risk across the different states. And quite simply or at a high level, when I speak with my colleagues both in Brisbane and the Gold Coast, there’s a much smaller labour pool there, and there’s a huge amount of risk in the construction side of things and being able to actually retain a third-party builder right now. There’s also a shortage of subcontractors. You compare that other end of the extreme, it sounds like Melbourne, Victoria, has a much larger labour pool because there have been large infrastructure projects that are either being delayed or Commonwealth Games being postponed. There don’t seem to be the same sort of levels of issues with retaining third-party builders. I’m interested to know and Sydney really lands in the middle of all of that, but it’s also a much bigger city, bigger economy. There’s a larger labour pool and more capacity in the industry. What are you seeing on the ground across the three different states? Feel free also to talk about interest rates, cost of capital. What do our listeners need to know in this property and construction and development space?
James: Yeah. I think there’s no secret in Victoria that things are harder. Gross realisations on finished products aren’t quite stacking up when you take into account holding costs, construction costs, and even site costs at the moment. And we’re definitely a bit delayed here in Victoria in the regeneration of the developer and the regeneration of delivery of quality assets to the market.
Richard: Is this across all assets or just residential?
James: Look, I think it’s across all assets. We obviously see development sites built for residential, probably at the forefront of our business on the distressed side, but ultimately, things aren’t stacking up. I mean, it doesn’t take a genius to drive around at the moment in Victoria and see a lot of empty sites. You see the hoarding up. It feels like it’s been there since two years ago, graffiti all over the marketing renders, and the civil works seem to have stopped. And you can see piles of dirt in the corners, and it doesn’t really seem like there’s anything moving. Now, obviously, with every state there are exceptions to the rule if you drive down Mordialloc and stuff of Victoria, you do see great developments, and they’ll no doubt be able to sell for high margins, and that’s exactly what we’re seeing in Sydney already. And Sydney, I guess, is benefiting off those gross realisations, and developers are definitely finding it more feasible to do larger construction projects, high density residential specifically still stacks up.
We do see a lot of owner builders in New South Wales compared to Victoria, and I think that has also impacted the regeneration of the Victorian property market. With Queensland, I take your point that trade coverage is becoming increasingly hard. They seem to feel that things are selling like hotcakes in Queensland, particularly with the lead up to the Olympic Games. It is also an area of high risk for specifically lenders and developers who aren’t accustomed to that market because you could sell something on one side of the highway that could get you 30-50% more on a square metre rate than on the other side of the highway. And if you’re not there on the ground and you don’t have experience of the Queensland market, you won’t be the first people to be burned. I feel like every cycle, this is the time for Queensland, this may very well be the time for Queensland because we haven’t had an Olympic games on the horizon, but it does come with its own risk. Obviously, you got concentration risk, which what you mentioned. There’s really only a handful of contract builders there. And with that, I do believe that is a, I wouldn’t say a red flag, but a serious situation where you should be reviewing your builder if you are doing anything in Queensland because you really need to know how many projects they do have on foot and why is your project going to be treated any better than the others or any worse.
Richard: I think that’s great advice. I worry, I don’t think that there’s enough workers, enough materials to build everything out in Queensland. And that is even just purely looking at the residential where I do specialise, we’re basically going to have to build unprecedented levels of dwellings across Australia, but in those three states. You overlay that with what’s happening up in particularly Brisbane with all that infrastructure coming through. All the cranes and the skyline both in Brisbane and in the Gold Coast, it reminds me of Melbourne back in 2014-2016. What are you seeing on the ground there? Do you, in terms of the capacity of the industry, what are your views on stock being built out? Is it taking longer? Is it more costly? What are you seeing?
James: I think what we’re seeing, not a lot of people are seeing, and that is there are sites there that look like they’re moving, but then they’re not. We’re talking over a hundred apartments that are being stopped, whether it be compliance issues or I guess the money’s drying up again with the interest rates and the delay in getting these trades to complete the contracts that the principals have been involved in.
Look, in itself it is a hard location, and I’ll go back on that point if you haven’t been in Queensland for a long period of time. I think people should really be careful with going into industries no matter what it is and locations, no matter where they are. If they don’t have people on the ground that have long, long periods of experience in those where they’ve seen multiple cycles, they can feel what is about to happen, but also what maybe is already happening, and they know because in construction I think gossip goes a long way. We can laugh about it. I mean I’ve heard things that are definitely not appropriate for this podcast, but the gossip mill in construction is rampant. And if you do have people that are in the game, then you’ll be the first to hear of opportunities, but you’ll also be the first to hear of any issues.
Look, I don’t think I answered your question perfectly, and I danced around a little bit for good reason because I don’t think there is a silver bullet answer to what you asked me. Just mitigate your risk as much as you can. Do as much DD (Due Diligence) as you can because now’s the time where we are coming out of a cause. Now’s the time where we are coming out of probably a downturn, but we’re also coming into an upturn. And now’s the opportunity time for people, but you do need to mitigate those risks as much as you can.
Richard: Great. Look, before we get onto the distressed development sites, we were talking offline, and you mentioned we’re coming into a new cycle or a new part of the cycle. Let’s talk about that a little bit more. What are you seeing, I suppose, on your workbook? And, again, what are you hearing from some of your clients with respect to the parts of the cycle that we’re in?
James: Yeah. Look. I think the opportunities there, particularly if you have a team with experience, and that’s for developers, lenders, and to an extent builders. If you’re aware of the risks, particularly the current risks in the landscape, and you know how to deal with those and also provide the right expertise in order to structure an arrangement that might not necessarily have been correct five years ago, but now the time has come to use all this experience that you’ve come up with and put that together into a structured arrangement, maybe sharing some of the upside with the builder and the developer, and collaborate and make sure that every element of a construction project is addressed. And whether that starts at the planning, how many lot sizes you could do, or how many apartments you could build, and whether that is actually a marketable product in the end.
Richard: Great. Alright. The final topic for today, I’ve been dying to get into it, is distressed development site sales. Now the background for our listeners, I get asked this all the time and they go, Richard, particularly in Melbourne, but even in Sydney and Brisbane, we’ve had astronomical development or construction costs, but also development costs increase. We haven’t really had commensurate revenue increases. Basic economics would tell you that because projects are not stacking up, land values are one of the metrics that potentially has to move. There’s one school of argument that says, well, we’re so chronically undersupplied. Planning has a big role to play, and right now it’s not doing enough. And as a result, land values are not going to correct because of the fundamentals of supply and demand, and there’s a shortage of supply. There’s other schools of thought that say, well, you need to break it down into the different grades of site, whether it’s A grade, B grade, or C grade sites.
I speak with our Valuers on the ground, and whilst they’re different markets across Melbourne, Sydney, Brisbane, and even the smaller states, for the most part, they say that they’ve not seen much transaction evidence of land values correcting. So, it’s well and good to say that, and I certainly believe them. But I’m interested to hear from you, because I do a lot of work, especially for private credit, I detect that there’s a lot more to the story than either what we, than what Charter Keck Cramer would see in the actual transaction space. I’m interested to hear from yourself, James, because I’ve spoken to a few developers, particularly in Melbourne and they go, the longer that interest rates stay where they’re at, it’s more likely that some larger sites, 100-200 apartments, are going to come to market and their land values will actually correct. Again, that’s one of their hypotheses, and some of them are even getting ready next year to start making those countercyclical purchases.
I caught up with you a few weeks ago, and I asked you what you were seeing on the ground. I’m interested to hear, what are you seeing in this space? You have a lens, a unique lens as to what’s happening. And developers, certainly, as much as they’re very nice and they’re kind and they share information with me, it’s unlikely they’re going to tell me or tell the market what they’re seeing. So, again, we’ll never breach confidentiality, of course, but I’m interested to see, what are you seeing in this land value space? Are sites coming backwards? Really, what are you seeing?
James: I definitely echo your comments that there hasn’t been a lot of transactions in the distressed development site space. That does make it difficult for Valuers. I think everyone appreciates that. And at the moment, the bargaining power of developers means that they can go around to every Valuer in town and find the one that better suits their narrative, and then they can go to a handful of lenders or their brokers and then also control the narrative there. I think we’ve seen that over the last few years, and particularly when capital was cheaper, there was definitely more incentive for non-bank lenders and lenders, both new and old, to dispose of the capital that they held for their investors. And as such, there was a lot more refinances on sites that may not necessarily have been extremely feasible at the time, but if you really look at the fundamentals, they will work. Now we’re kind of in the time where the interest rates are up, the hot potato’s been passed to the last of the line in the financier space, and these financiers are looking at their book, particularly now. We’re talking at the end of the calendar year is probably a good time that they usually look, and they’re going, wait a second. This hasn’t moved in a year. All of a sudden, our LVRs (Loan-to-Value Ratios) have blown out, and there’s a second mortgagee there, and there’s a third mortgagee there. What are we going to do? Because we don’t really feel that the site can be completed as it is, and if we do sell as it is, what are we seeing?
I can hands down tell you that there has been an extreme loss in development site value that hasn’t reached Valuers mainly because the transactions have never been exchanged and settled. We’re out of time now, and I’m definitely not going to name anyone, and to be quite frank, it really is across the board. There are deals where the lender is unable to give us the instruction to settle or exchange a development site because then they will need to report to their investors that they incurred this large loss. And at the moment when it’s quite hard to find investors to fund your future loan, given banks are offering a lot higher percentage than they are, why would I go into a construction deal that’s this risky, that’s got this much time on it to someone who has already been unperforming in previous deals.
So look, I can’t really give you a percentage, but we’ve seen at least 30% reductions in the valuations that maybe their lenders got a year ago, and that is even when we have people in the EOI (Expression of Interest) campaigns or not. I can tell you that there’s even less submitting parties in the EOI campaigns. There’s even less of those that are actually validated parties and have source of funds. And as such, we’ve had to change our own style at Newpoint Advisory where maybe we could easily transact a site in 2019, 2020. Now we’re having to flip certain campaigns to look at structured deals where the lender and the incoming developer or the incoming buyer, whether it be a builder or owner/builder or so on, JV (Joint Venture) agreements is probably something that we’ve looked into a lot more now. Or product delivery agreements where you can agree a land value to hold a loan at a certain amount and provide some future funding and everyone’s in together on any upside. And that seems to be the real way to get our lender clients out at the moment, which isn’t necessarily something that anyone’s used to or anyone has done before. And with that comes its own complexities. We’ve had to use lawyers a lot more. We can laugh about lawyers all you want, but, you’re a lawyer and it is definitely a need at the moment to make sure everything’s signed clad contractually because with distress does come desperation, unfortunately, and with desperation comes litigation. And everyone’s looking going, who am I going to blame?
Richard: Well, thank you for that. That was quite…I’m not surprised to hear some of that. It’s confronting to hear, but it’s important to hear. I’ll make a comment, and then I’ve got another question for you. The comment is you mentioned that it was across the board. My view on that is it’s definitely submarket specific, and no doubt I act for a lot of developers or financiers. Some of them have bought very well, or they do have very good structures in place, or they’re well capitalised, and they’ll be able to make the most of the cycle. And some of them are, in fact, so well capitalised, especially some of their private credits, and they’ve kept their powder dry that they’ll be able to pick up some of these opportunities potentially at a discount. So, it definitely is submarket specific. My question for you then…if there are sites now that have dropped by 30% in value, what else is happening, or what can some of these clients do? Are they going to continue to hold and just hope and pray that interest rates don’t increase and, in fact, decrease? Are they going to get into some of those contractual arrangements that you’ve described? What do you think will happen, or what are you starting to see happen?
James: Look, I think inevitably lenders will take a loss, which will recalibrate the market for both values, transactions will change, provide opportunity for those people coming in to finish the product. We’re reassessing a lot of the planning outcomes and seeing whether you can increase GRs or increase whether the product financially can stack up. That’s something that’s definitely been worked on. However, unfortunately, a lot of these land bank sites are preplanning, pre-serious reports, and there is a lot of work. And it’s easy to say, I want an opportunity. I’m happy to come in, and I’ll take this off your hands. But it’s another thing to roll up your sleeves and actually line by line look at every facet of the site. Use the experienced team you have around you to be able to come to some solution where it may not be as large a margin as you expected, but there is a pipeline there with doing these special situation workouts or opportunities if you are to buy a cheaper site. You’re really only going to know when you start getting into it, and if you do one or two, you’ll start to get a blueprint of how you can maybe implement that blueprint across multiple asset classes and also different sites around. And then you’ll also have the lenders tapping you on the shoulder and saying, “look, you did a great job here. We have something else that maybe you should look at that’s more of an informal workout, and we can get you involved there,” and so on and so forth.
Richard: It’s interesting. As you’re talking, I had a thought that popped into my head. I’m going to say it anyway. For a while now, we’ve had the state governments, particularly in New South Wales and Victoria, trying to increase supply. And I suppose, talking out loud, if supply is increased and there’s more supply that comes to the market, arguably, that’ll put downward pressure on prices or land values depending on the area because there’s just more supply coming to the market. If the banks are exposed, there’s a lot of players in the industry that do not want land values to decrease. And I just wonder, you’ve got a political issue with the cost of living crisis and increasing supply. If you’ve got the big four banks or whoever it is that are exposed on these sites, there’s something there that is going to play through. And I just wonder, I certainly don’t have the answers, but there’s something in that that’s just tweaked in my mind. No one wants house prices or land values to go backwards. But you’ve got now the government looking to increase supply. And I just wonder, it probably will be site specific. It’ll come down to the financing arrangements, but there’s just something that I think everyone needs to be aware of as a risk that if some of these sites are going to decrease in value and the reality is I do believe some of them will, especially the B and the C grade sites. I still believe that the A grade sites will hold their value. But if you look in Sydney, for example, around the TOD zones that are being rezoned or in Melbourne, the activity centers, if certain sites have been purchased at a premium, well, that in itself and the calling a spade of spade, that’s obviously a strategic error by the developers. But there may well be sites in those areas either that can be picked up for a bargain if you’re coming in now with fresh capital. But I think I’d encourage you to reach out to James or whoever else in the industry to work out how finance can find a way through in this space because there certainly is and are those risks. And that’s what I want to start teasing out in this episode because it’s not all rainbows and sunshine and happy days. We will get back to a more balanced market, but perhaps it’s inevitable after coming off such a strong cycle, over the last 20 years with the industry perception that land values always just increase and property increase by you know, doubled every 7-10 years. That is not necessarily the case. It is cyclical. You look at some of the stats, there have been patches where it has gone back or it has been badly distorted. The most recent one was obviously the GFC, and now we’ve got COVID.
So, I think therein lies one of the points that I was trying to make about doing your due diligence, speaking with people like James in the industry who can help you mitigate these risks so we can actually get through. And I suppose for the financiers or the developers, understanding, come speak with Charter Keck Cramer, speak with James, speak with lawyers. Work out what is your site? Is it A grade, B grade, C grade? What can you do to get this project financially viable and move it through? That’s probably some of my thinking.
James, I know that we are running short of time. I just want to tie off today’s conversation. No doubt there’s probably going to be a bunch of people reaching out to you either to get confidential advice and I certainly encourage people to do that. The three things that I’ve learned today, the first one is I didn’t make a comment at the beginning of the show. You’re wearing a tie. I love that. You, like myself, are probably the only two people in Melbourne that still wear ties. I think it’s absolutely fantastic, so keep doing that. As an aside, though, the three points that I would advise everyone to keep in mind is just how important doing your due diligence and using data and evidence is to identify and mitigate risks at this point in the cycle. I can’t emphasise how important it is right now. It probably is no more important time than right now because we’re at different points in the cycle. There’s lots of countercyclical opportunities for developers to proceed, but also clearly is going to have to be outside of the box thinking to work some of these projects out of the distress that they might be in or are in.
James’ point about knowing your market, speaking with people on the ground, I can’t emphasise that enough, and especially in the building and construction industry. I’m well aware of some of the gossip you talk about, but often that gossip is true. I’d encourage people to keep talking, keep hustling, keep up the reputation with the builders or subcontractors. That is also how you mitigate risk and hopefully how you can be ahead of the market before, unfortunately, the inevitable happens.
And a final point I’ll make, the lawyer in me, I made a note in my former life, when I also used to do a lot of liquidations, one of the things I used to do with title searches and you can see if there are unpaid ATO liabilities, and that, unfortunately, is a huge red sign if people aren’t paying their tax bills. Often that tax and super are the last ones that get paid, often because the ATO is sitting in the background, but they don’t make a noise until bills get out of control. And so, from a risk mitigation perspective, you do those searches and look if there are those unpaid obligations. That is something certainly that you could, I’m assuming, raise with the builder.
James, before we close off, thank you very much for coming along. Is there anything else you wanted to say to the listeners?
James: Look, I think it’s a bit cliche, but prevention is the best cure. Before you go into a transaction, it’s always better to be definitely ahead of the curve with what you will expect in that transaction. And whilst we offer it, there are other people out there who offer it too, and everyone should be doing it now. I personally think if we take one step back, we’ll go two steps forward rather than the phrase allows for. So, I guess that’s my summation.
Richard: Great. Thank you, James. The final point I’ll make to the listeners, and I will remind everyone, I appreciate that perhaps some of the comments made today were quite confronting. The reality is that they are true. I don’t doubt that for a second, and I have spoken with some of my lawyer friends, and they’ve confirmed what James was saying. Even if it is confronting, people still need to be aware of this. You cannot go into property investment and development with your head in the sand. And so, I encourage everyone to follow the three points that I’ve highlighted above but keep speaking to people like James in the industry, and we will be able to get through this quite difficult sticking point in the cycle. Anyway, that’s all from us today. I hope you enjoyed the session, and talk to you soon. Thank you. Bye.
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Precisely Property is a podcast presented by Charter Keck Kramer and is for educational purposes only. Nothing in this podcast should be taken as investment or financial advice. Please engage the services of an appropriate professional adviser to provide advice suitable to your personal circumstances. The views expressed by our podcast guests may not represent those of Charter Keck Cramer.
