Attractive returns through disciplined property development

Our next speaker is Sam Moore, the Managing Director from Capital Pudential.

His presentation topic is Attractive Returns through Disciplined Property Development.

Capital Pudential is a specialist fund and asset management and advisory firm focused on creating investment opportunities while providing capital solutions to mixed-scale property developers.

The Capital Prudential Divisified Development Fund is a secured income note offering investors access to real estate development delivered as a fixed income stream.

Ben is an experienced international finance professional and lawyer for over 25 years.

He has worked at Structured Finance, Capital Raisings, M&A, Credit, Lending, Operations, Product and Risk and Compliance prior to that.

Sam spent 10 years as a lawyer.

Welcome to the presentation, Sam.

Thanks, Angelina, and thanks for your time, everyone.

What does our fund do?

It provides access to investors to the attractive returns from property development, and it delivers those returns entirely as regular, predictable income through the property cycle.

The fund's smoke focuses on small to mid scale

developments in the property sector and provides an institutional capital solution to our development managers.

So in that small to mid scale sector of the property development area, generally property developers are sort of one, two, three man bands.

They're very, very good, very, very good networks, high capability and can deliver small to mid scale property developments on a regular basis.

However,

After finding the sites, de-risking those sites, signing up lessees as needed.

Generally, they work on a deal by deal basis.

So then they are having to turn around and find capital for their developments.

Our development managers through our fund are provided with an always on capital solution for qualifying developments.

Today, I just wanted to share some of the insights into our approach.

so that when investors are considering making an allocation to property development, they can take them into account.

And I wanted to focus on two key elements.

The portfolio, so building a portfolio and getting the benefits of diversification in that portfolio.

And then the important role that having criteria for your asset selection has.

So just a disclaimer, this is not personal advice, obviously, it's just general information on property development and hopefully investors will be able to take something valuable out of this today.

So in terms of the traditional property development model, so if an investor wants to make an allocation to property development, how would they generally do that?

They generally do it through a single asset property syndicate.

When they invest in a single asset property syndicate, they're in at one point in the property cycle, and they're out at the other point in the property cycle.

They're exposed to one particular property development.

So let's say it's commercial, it might be a service station, and it might be in one particular location.

It'll be exposure to one particular builder.

And so there's concentration risk that comes with that traditional property development model.

Not only that,

duration of that development is uncertain.

There's obviously a forecast in place, but it's not guaranteed.

And the returns are the same.

There aren't any returns until the end and they're delivered as capital.

Our fund is an alternative.

And by running through some of the attributes, the key attributes of the fund, you'll see that some of the ways that the fund selects and some of the rules

around the fund might help you as an investor when you're making an allocation to property development.

So the fund itself is a portfolio.

So what that means is it invests in multiple assets.

And because it invests in multiple assets and because of a few of the other things that I'm going to run through with you, it enables the delivery of much more regular, much more predictable income through the cycle.

Because we're in a portfolio, it means that we can give a promise to our investors about when their capital will be returned and we can give them regular payments.

Because there's a portfolio and properties are in and out at the same point in the property cycle, then there's less exposure to the property cycle driving returns.

So if I can talk about that

portfolio and the benefits of the portfolio exposure.

You know, for example, as at the 30 September just gone, what does our funds portfolio look like?

You can see a couple of those slides there around asset values.

One's a dollar value, the other's a percentage.

And the biggest exposure in our portfolio is 24% to a single property development.

So what that's doing is minimising concentration risk.

The other metrics there you can see about the portfolio are the diversity across states.

So there's exposure to all states in Australia, other than Tasmania.

And then you can see that there's an exposure difference across sectors as well.

So you've got some exposure to residential, you've got some exposure to mixed use, and you've got some exposure to commercial.

And I mentioned this earlier, the other point is that

when you have a portfolio, then you're exposed to different points in the property cycle.

So you can see in this chart, as an example of the ins and outs in the portfolio, you've got some properties coming out.

In other words, that little bar, which represents the duration or life of a property development in the portfolio, you can see that at the end of the bar, it's coming out of the portfolio at the start of the bar,

it's going into the portfolio, so into the fund.

So you can see there that some properties are coming out at the same time that others are going in.

So what that means is that you're buying and selling in the same market.

And because you're buying and selling in the same market, not the same property, of course, but you're not as exposed to the ups and downs in the property cycle.

So they're the portfolio benefits.

Then there's the asset selection criteria benefits as well.

So what rules are important to consider when the fund invests in property development?

In terms of commercial, what's important there is specialty commercial.

So what do I mean by that?

Aged care, child care, medical centres, fast food, service station.

These are generally single story commercial premises.

because they're single storey, there's lower construction risk, because they're specialty, then they can be pre-leased before the property commences.

In terms of residential, what does the fund focus on?

For example, it focuses on infill.

So no high rise, no urban fringe.

Of course, in urban fringe, you're in the mortgage mortgage belt suburbs.

And so you're more exposed to changes in the interest rates.

The other thing that's important for the fund, and this is important for anyone making a investment in property development, is to ensure that you minimise risk before you commit to purchase that property or invest in that property development.

So as I mentioned, we have a network of development managers that work for the fund, sourcing and securing sites.

And what I mean by that is they enter into options

or conditional purchase agreements for sites.

So do not commit fund money until they complete due diligence.

This could take six months.

This could take 12 months.

And through that time, they'll get environmental reports, development approvals in place.

And in the case of commercial, leases in place to commence when the development is practically complete.

And what this does as well,

is minimise time in the fund.

The other thing that's important is bottom-up financial analysis.

So what I mean by that is working out what can be built on the site, therefore what it can sell for, what it's gonna cost, how long it takes so you can work out holding costs and finance costs, working all the way back including a development margin to determine how much you can pay for a site.

And that financial analysis is critical.

It's then continually run through on a monthly basis as re-forecasting occurs to ensure the site can get delivered for the price that was expected.

A good example of this is the Grosvenor site that's just there up on the screen.

This is in Victoria, just out of Geelong.

It was well over a year that this was in due diligence.

So the site had been secured, but it hadn't been completed on.

And in that time, environmental

reports, development approvals were obtained, leases were entered into.

So in the case of Grosvenor in Victoria, KFC, Guzman and Gomez, Starbucks, those types of lessees, financial analysis was conducted and because it all got through, then that site was settled into the fund.

So in terms of

those criteria that the fund applies, what that enables the fund to do is to be very confident around the returns that can deliver to investors.

Remember, I talked about what the fund does, provides access to the attractive returns from property development, delivered entirely as regular, predictable income through the property cycle.

Well, with these risk management tools in place, with the governance in place,

then the fund's highly confident around the returns that it can deliver.

It pays its returns quarterly, so you're getting regular income as you're getting regular asset realisations.

And upon the expiry of a term, the fund can return the capital to investors.

So through the four year history of the fund, 100% of the interest that has been paid on time, 100% of the principal,

has been paid where requested by the investors, but in the great majority of cases, role.

And the fund will continue to leverage its investment in its network of development managers and its centralized risk management and governance to keep growing into the future.

Angelina, back to you.

Thank you, Sam.

We have been hearing a lot of these in the press about beauty failure, especially at the current environment.

Can you comment on that?

What impact has it had on you?

So there's always risks in the building industry and construction industry.

We're seeing a lot of it in the press and they will always continue to exist.

I guess it's about risk management.

So when we engage builders, we conduct financial analysis.

So it's either our CFO sitting with their accountants or with their internal team to assess their financials.

And then it's back to my point around diversification.

So because we have so many property developments in the fund of different types, commercial, residential, in different locations, then we're engaging a great variety of builders rather than having a single builder risk.

Yep, yep.

And Australia's housing affordability crisis doesn't seem to have any solutions inside.

So how can these be addressed?

It's just a supply side issue, isn't it?

I think it's, as you say, there's no short term fixes there.

I guess we're welcoming build to rent.

You know, there's institutional capital coming into that space.

With more capital coming into the space, I think it'll lead to better decisions being made around how that supply side's met.

But we're going to be behind the April for a long time, given the level of migration.

Yep.

Well, thank you so much, Sam.

Good to see you.

Take care.

Thank you.