At Killarney Capital we like to back good deals. But what does that mean? And good for who?
It’s no coincidence that this is being written at 3 pm, but a good deal is like a good cake. It requires several ingredients of various quantities, an accomplished baker, and time in the oven. If you’re missing a few ingredients, then it may still be edible, but may not turn out quite how you expected. There must be enough ingredients going in to ensure there’s enough cake to go around at the end. Hopefully, it doesn’t take too long in the oven and ends up being over-done.
We all love cake. So, a good deal means that it is good for everyone. You. Us. Shared ingredients. Your expertise as a baker. Our kitchen.
Here’s the recipe:
1. The Property / Development
The property itself is the foundation ingredient in a good deal – the flour you may say. It is the critical element. At Killarney, we can’t back a deal without it.
Key aspects to a property, particularly one that is being developed, are:
- Location (3 cups). They name television shows about property after this. Never forget it.
- Planning and Design – has this been carefully thought out and is it the best use for the land? Does the property design comply with local planning requirements and building regulations? Will it appeal to buyers? Is it being built to stand the test of time? Most important of all – does it make sense?
- Quality Control – will construction be completed to a high quality by capable builders? How will this be monitored to ensure high standards are maintained throughout the project?
- Project Management – who is keeping the project on track in terms of time and budget? What are the key milestones that need to be met along the way? What are the key relationships that need to be nurtured to ensure the development succeeds?
2. The Market
The market is the temperature of the oven. And cake doesn’t go well in a cold oven.
It’s important to know your market. If you’re developing a property, then who are you going to sell the finished product to? Is it at a price point where there is demand? What happens if that demand changes in the time it takes to deliver the property to the market? Is it worth seeing who likes the sound of it based on the recipe (also known as pre-sales)?
It’s all well to be using the finest ingredients but you still need the right environment for a cake to rise. We’ve seen plenty of finely finished properties sit on the market for long periods of time, for no better reason than buyers are on a diet. No matter how well they’ve made, eventually all cakes can go stale. It’s important to know your market and understand the needs of your potential buyers to ensure this doesn’t occur.
3. Funding
It is important to make sure that there’s enough ingredients, and the right balance, to put the cake together. This is where funding is so important.
There are several options when it comes to funding.
Equity is what you can contribute to buying or developing a property. It’s what you already have in the pantry. A couple of eggs, some sugar, baking powder and a dubious bottle of vanilla essence with a best before of June 2014. The rest you’ll need to go shopping for, but it’s a start – a very important start.
You may be able to source other private capital – a bit like asking your neighbour for a spare cup of flour. You may find though that your neighbour also loves cake and will want a decent slice of it when it’s ready.
Then it’s off to the shops for the rest of what you’ll need. The banks are like supermarkets. The shelves are full of stock but it’s hard to find exactly what you need, and there’s no-one working in the baking aisle who knows much about cakes. You can spend a lot of time here without finding the right ingredients or what to do with them.
Then there’s specialty stores like Killarney Capital. We live and breathe property (and in case you haven’t noticed, we’re also pretty fond of cake). We have funded hundreds of property projects, so we know what the right ingredients are for a good deal. Like any specialty store you can expect to pay more, but you’ll get to deal with experienced people who have genuine interest in your project and the capability to help see it through.
4. Margin
What good is cake without icing? Preferably cream cheese icing and lots of it. This is your margin – the sweet aftertaste after biting into your finished masterpiece.
Before you get into the kitchen it is important to run a feasibility on how the project will run financially. Property developments are generally high on the investment risk scale, so the margin needs to reflect the risk. Compare your forecast net margin to returns on other investments – bank deposits, corporate bonds, managed funds and sharemarket returns. If the proposed return on a property project is less than these, then it is worth questioning if water crackers and a slice of Colby are a better alternative to cake.
A key factor, and one that is often underestimated, is the impact of time on margin. If the cake takes too long in the oven, you can find that by the time it comes out the kids have already licked the icing bowl clean and there’s no more ingredients left to make more. This is where stress testing the recipe for a property project becomes so important. Can it withstand 3, 6 or 12 extra months at peak debt for unexpected delays to construction or a change in market conditions?