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PODCAST TRANSCRIPT :

Andrew Mirams (AM): Hi, welcome. Thanks for joining me. We’ve got sitting with me today a very special guest, Gavin Taylor from Metropol Properties strategists. Hi, Gavin.

Gavin Taylor (GT): Andrew. Good to be with you.

AM: Thank you. Gavin, your line of business at Metropol or the specific area that you work in is more along the building and renovations and, certainly, property development. I’m really interested because I know that lots of people that listen to us that are all interested in doing a development. They’re first, second or tenth because everyone’s going to be the next property tycoon. I guess, let’s start with some of your experiences or maybe just what is a development in your opinion.

GT: It’s a broad question, a very broad question. A development is, I guess, a reconfiguration of the urban landscape. A reconfiguration of a site could lead into, you know, a hundred apartments, could be two town houses.

AM: So, completely changing what’s there?

GM: Changing what’s there. Not necessarily completely changing it because you can take a historical building, like the QV building in Sydney, and redevelop the internal and keep the external and that’s very successful.

AM: You might have a beautiful big block in Melbourne or Brisbane and shave off the block and renovate the front period home and put a brand new one on the back.

GT: Absolutely.  It’s a broad subject. I think it’s characterised by a couple of things. One is you can’t do what you want. You’re going to have to get someone’s permission.

AM: That’s no good, there are rules.

GT: Somebody’s going to have to say ‘yes you can’ or ‘no you can’t’.

AM: I don’t know. I’ve seen lots of developments in Asia that doesn’t seem like there are many rules.

GT: The other one is you’re going to have offer your product to the market at some stage so again you can’t do what you want, you’ve got to do what the market wants. Somewhere along the line you’re probably going to have to borrow some money to help you do this because developments generally are a little more expensive in dollar terms and we don’t always have that amount of cash.

AM: It’s fair to say a development isn’t for everyone, isn’t it?

GT: I think that’s fair.

AM: Yeah.

GT: I think that’s fair, although, everybody is allowed to comment on them because they are part of what we see every day.

AM: Yeah, of course. I’m really interested to probably start with, rather than going through the phases of a development, let’s start with some of the pitfalls or some of the horror things or horror stories you’ve seen because I have a few as well. Tell me, maybe, what is the biggest downfall or pitfall is that you’ve seen a property developer or development where it’s fallen over or come undone.

GT: I think there are probably a number of answers to this. One is the famous ‘you don’t know what you don’t know’ and maybe a developer in the early stages of his career or her career was successful on one or two initial developments so they thought they knew everything and then …

AM: They can be a fluke in the market, can’t they? They buy something, they develop it and the market takes off and they go ‘oh, this is easy’.

GT: A rising market is very kind and generous to mistakes.

AM: The old saying ‘a rising tide lifts all ships’, doesn’t it?

GT: Absolutely but I think hidden in that is the concept of doing a proper feasibility. If you test your solution, you test it against various scenarios, you test it against various possibilities and doing a proper due diligence not only of the financials but of the thinking behind the financials.

AM: That’s so the product as well as what you’re putting out, everything.

GT: Exactly right. As human beings we’ve got this capacity, this wonderful capacity, to give ourselves the answer we want to have.

AM: We’re pretty easy self marketers, aren’t we?

GT: We’re fantastic. When we look at feasibility nothing comes out, this things going to give me a zillionth percent margin. You say to yourself ‘it’s going to go, it’s going to go’.

AM: Well it can if we choose to exclude all of the things that it’s going to cost you to get to that.

GT: The fact that you’ve inflated the end value, you’ve deflated the purchase price, shortened the time frame and yadda, yadda, yadda, it goes on.

AM: But surely a property developer knows when interest rates are going to go down and when the markets going up so it would always work, wouldn’t it?

GT: Yes it would and then if you add to the fact that some successful developers put on these bullet-proof vests, then they’ve done three or four and nothing can beat them. A lot of arrogance comes into it.

AM: Yeah, sure.

GT: You’ve really got to remember that these things, developments, are great exposures at certain . The truth about development is that the successful ones are all about risk management.

AM: Yeah, okay. I think that’s a great point. Risk management, knowing what you’re in for.

GT: Knowing what you’re in for, recognising the risks. We’re doing this for the added value. At Metropol the added value is something that we don’t sell. We don’t realise by selling because there are a couple of reasons behind that. We do this to keep for the long-term but even having said that, the motivating force, being the added value, that’s what we’ve got to keep sight of.

AM: Yeah because, I guess, everyone goes into a development also with a different outcome in mind so there are developers that can look into every capital city of Australia and all around the place that are developing literally to sell. Like a larger scale development and then there are developments, like what you’re talking about, that we develop to hold and to value add to that property and hold and build your asset base long-term, isn’t there?

GT: Yep.

AM: I mean that’s part of your feasibility. What are you going into it for is what you want out of it.

GT: I think, you raise a very important point and my mother used to say, bless her, ‘never sit in a chair you can’t get out of’. It’s a case of know what your exit strategy is before you get into something.

AM: Yeah, exactly and it would be fair to say if you’re doing your due diligence properly that you want to make sure there’s not just the one exit strategy, you want to make sure that …

GT: …fallback position.

AM: Absolutely.

GT: Absolutely right.

AM: It’s like having some contingency, you know, if and what happens when and how and all the answers that are open ended, isn’t it?

GT: Yeah. I think are a couple of natural pause points along the development process and also some positions along the development process at which you can sell the land with the D.A., with the plans and permits, with the construction documentation, with tenants in place or anything like that.

There is the need for contingency just in case things go slightly wrong and you want to continue but you do need a little extra money to help you get along the way. By way of example, on a two unit development that we did a couple of years back, we got a phone call from the builder to come and have a look at the site and we went out and had a look at the site, it was early days, earthwork days, and they’d hit a septic tank.

AM: Unbeknown to everyone because that’s a fair way under.

GT: Yeah so what we do is we do some trial holes to get the profile of the soils so you can get your bearing capacity and design your footings. That’s fine but you don’t do trial hole at one metre intervals and pick up a septic tank so the chances of hitting a septic tank are quite small but in this case, we did.

AM: Yeah, right.

GT: The owner of the property had to have a few thousand as contingency to be able to say to the builder ‘sort it out, fill the septic tank up with concrete, do it now’ and that’s exactly what happened.

AM: Yeah, okay.

GT: We solved that problem by having a contingency. We insist on a feasibility, a financial feasibility and market feasibility. By that I mean, is it the right product for the market and we insist on a contingency because it’s a long time frame, isn’t it?

AM: Absolutely, thank you for your time today Gavin. I think, you’ve been very insightful and given some great tips to our people.

GT: You’re welcome Andrew.

AM: Thanks Gavin.