A New Property Development Model Is Challenging The Big End of Town

Property Development – Changing the Funding Model

The Australian property market is a potential ticking time-bomb with residential investors increasingly focused on the capital appreciation for returns, whilst commercial property transactions has actively pursued yield based investments over the past 12-18 months. The property market seems buoyed by large interest from offshore investment and local cashed-up investors and developers. The short to medium term outlook for interest rates appears to be positive, but longer term there is an expectation of rising rates – tightening interest rates from banks are coming into play and access to development finance isn’t as rosy as it once was.

The restrictions on institutional lending will become a growing issue as the major banks need to reduce exposure to property leading and markets. The market is also adjusting to tightening on foreign buyers and global policy changes happening around the movement of capital outflows such as China. According to Knight Frank Chinese-backed developer’s bought 38% of Australian residential development sites in 2016.

Developers/Builders – The Challenge

Developers appreciate there are still significant opportunity in the market but the challenge now sits in accessing capital and potentially looking at non-bank capital sources. Key aspects will be to consider development design, building services and fabric costs. Stripping back development costs to these numbers can demonstrate opportunity to extend funding budget and potentially look at specialist funding sources.

The cost of funding might rise on the debt side, but if investor equity is costly, the increase LVRs available with private funders might provide net decreases in the overall cost of capital. The ability to access this funding without pre-sale quotas make it a desirable option for smaller developers.

Typically buildings are being designed and built to minimum code removing the costs of all the bells and whistles to maximise builder & developer profit. Less consideration and emphasis is placed on the new development’s ongoing operation and liabilities.

The New Model

What if we could put in all these additional extras to create a better performing asset with lower operational costs, but not have to increase the capital budget – in-fact decrease our capital cost by accessing Green Structured Finance (GSF), long-term funding available, subsidised by specialist product funding. This new loan/debt will be serviced by the operational savings made by the improved technology and products.

As an example, a developer is building and owning a mixed use site for $50m. We consider the design and energy consuming technologies for the site (ie lighting, solar, metering/embedded network, thermal insulation, glazing performance, energy efficient white-goods, hot water, HVAC).

SFG assess the ongoing lifecycle cost of these technologies. We then create a package outlining which products have an attractive return on investment based off the predicted energy costs. For this example $5m is taken out of the capital cost of the project for the improved package. This will reduce the developers Capex and Opex, improving cashflow and returning profit. This reduction of $5M or 10% is able to used on other projects or contribute to improving the project LVR and financial make-up.

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7 Tips to Know Before You Buy an Apartment

The process of purchasing an apartment is more complicated than that of purchasing a house. This is because you don’t purchase the land right away. If you are going to buy an apartment for the first time, we suggest that you follow the 7 tips given below. Read on to find out more.

1. Freehold and leasehold

First, you should understand the difference between leasehold and freehold. In case of a freehold property, the buyer owns the land and the home. On the other hand, a leasehold is the property that you pay for to occupy, but you share the property with other people.

For instance, flats are leased as they are made in a building that’s shared with hundreds of other people. In fact, this is one of the most obvious differences between a leasehold property and a freehold one.

2. Lease period

In case of leasehold, the buyer buys the right to live in the said property for a specific period. This period can be up to 999 years long. With the passage of time, this value comes down. Therefore, it’s important that you find out the time remaining on the lease. You can ask your real estate agent to find out this information for you.

3. Service charges

You should find out about the ground rent and other service charges you need to pay for the apartment. Plus, you should find out about who will be responsible for the communal area repairs. This will help you set your budget properly.

4. Alterations

Can you make changes to the property? If so, are there any restrictions to follow? The restrictions can be either subtle or obvious. If you have major plans to make alterations to the flat, you may want to contact your lawyer.

5. Major repairs

The service charges may include general maintenance as well. However, it may not cover major repairs like roof repairs. For large repairs, make sure you know the person who will pay for them. This is quite important, especially if you have a limited budget for repairs and other tasks of this sort. Keep in mind that major repairs will cost a great deal of money.

6. Restrictions

Make sure you know if you can keep pets in your apartment or not. Some apartment buildings don’t allow any type of pets. Similarly, some apartments don’t allow to play music after, say, 12pm. Therefore, you should ask your real estate agent about the restrictions you have to follow.

7. Assistance

After you have bought your apartment, make sure you know who will come to your help when you are in need. You can contact the lease advisory service of government to find out information about landlords and tenants.

In short, if you are going to buy an apartment, we suggest that you check out these tips. With these tips in mind, it will be much easier for you to make the right choice and avoid some common mistakes. Hopefully, this can help you go through the process more easily.

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Secondary Markets Building a Unique Investment Landscape

Owing to different market conditions, more and more investors are embracing commercial real estate’s secondary markets.

But what are the existing market conditions? And how are they influencing today’s investors to make the shift to these markets for expanding their commercial real estate portfolio?

Understanding the present market conditions

Commercial real estate has secondary markets that are characterized by:

The potential for having stable national economic trends
The improved risk-taking ability of buyers
A yawning difference in yields across secondary and primary marketplaces

These factors are driving investors to set their sights on secondary markets for improving their returns.

Decoding real estate secondary markets

As the name suggests, these markets acquire the second spot in the hierarchy of making commercial realty investments.

But secondary markets bring in unique opportunities and risks.

The assumptions supporting the commercial real estate investment strategy in the coasts may not hold water for lenders who are operating in the areas with lower liquidity. That means one thing: secondary marketplaces may not be the most ideal business when done on a smaller scale.

The thing is that the difference between secondary and primary markets extends way beyond a simple tally of every area’s commercial real estate. And if someone is foraying into the world of such markets for the first time, they will not be able to make sense of different market participants, different properties, and links to the real economy.

Speaking of their issues, these markets present unique roadblocks related to property acquisitions, investors’ dispositions, and fund availability. (Generally, investors may face a tough time finding the right financing opportunities for initiating buying activities in secondary markets.)

Long-term prospects in secondary markets

Most investors are propelled toward these markets for commercial real estate.
Why?

Mostly, investors are motivated by a secondary market’s prospects for appreciation in the long run.

It is because some markets give high gains, provided that they meet some criteria.
For example, some markets may have a high concentration of skilled workers along with an exceptional track record of innovation. These markets rank at the top spot of the list of lucrative markets. Other than that, some supply-constrained markets can also provide high yields.

But just because a skilled workforce is driving long-term growth initiatives in any marketplace does not necessarily make it any less volatile. Ranging from the time of investment to asset selection, these marketplaces too have multiple factors that govern their liquidity models.

Like any other market, a secondary market will have its own unique risks as well. The investors who want to expand their portfolio by speculating in these markets have to factor in a variety of aspects.

First of all, they’ll have to consider the fact that the global economy is expanding and having an impact on the economies of different countries. Because of its synergic effects, the global economy is pushing itself away from financial crises at a steady pace.

On successfully analyzing these factors, investors must integrate their analyses into decoding how and when these external influencers will change a market’s performance patterns and risk-return tradeoffs.

Successfully analyzing the current economic landscape and its impact on secondary markets will drive policymakers, investors, and lenders in the right direction.

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