Welcome to Episode One of the “The Constructive Finance Podcast”.
Today, Dan spoke with Steve Wiltshire executive chairman of HoldenCAPITAL about his market views, opportunities and challenges he has faced and some advice/lessons learned thus far in his career.
The podcast will be released every fortnight on Tuesday and will feature an elite developer discussing these same topics.
The podcast will be available to stream from iTunes and via the HoldenCAPITAL website.
For more information about the podcast or getting involved please email firstname.lastname@example.org
Read the full transcript below:
Daniel Holden: Hello and welcome to the Constructive Finance Podcast. My name's Dan Holden. Thanks for joining us. For the first podcast in this series, I thought that I would start with somebody close to home. Our executive chairman here at HoldenCAPITAL, Steve Wiltshire, whose worked in the business now for about two years. Who I've known for quite a few years, more than that, has had a very long and a stern career in construction finance and joint venture involvement. So welcome Steve.
By way of background can you give us a bit of an intro to Steve and your journey to date and roles and responsibilities?
Steve Wiltshire: Thanks, Dan. Happy to do that. How I got into property was sort of, a convoluted story. My father once said to me that real estate was where the future was in terms of business from where his perspective was. I was a bit footloose wondering what to do. I got myself into finance indirectly. I started off in a number of sales roles, but I kept coming back to finance because it was the one product people always seemed to have a need for. Then having got into finance, I spent some eight years working my way through one of the old school finance companies in the days before they deregulated the finance system. I ultimately gravitated to property.
Sorry I should back up the trek a little bit there ... Initially, after leaving university, I did spend six months working in a real estate company. There was a credit squeeze for those old enough to remember it, in the days of Gough Whitlam. I was very quickly shown the door, because I was the young single guy and there were a number of guys there who had families to feed, so it was considered I was more expandable, so last in first out.
I did do a bit of study in the real estate area. I got my real estate licence. Look I just gravitated naturally to property because it did interest me, despite my father pushed me in that direction, I also actually enjoyed the industry. Eventually, I specialised in it. I was lucky enough to get picked up by Macquarie Bank at the time when they were first kicking off from the old Hill Samuel operation. They were looking for young guys to help build their real estate division. A chap called Bill Moss, who many will remember, asked me to be the first guy to come in and work for him in the Melbourne office, and we went from there.
I was lucky enough to spend those 27 years you mentioned working in Macquarie, which I think was very, very lucky because it was such a creative and innovative operation and it was motivated by returns. It wasn't about a culture of individuals, it was a culture of team creating opportunities, but with the main eye always being on maximising return to the shareholders. As a result, we moved from traditional finance very quickly to risk participation type deals where we were the first in the market of our type. By that I mean, banks rather than private individuals, participating in transactions and going further up the risk curve as well as the capital stack as you will. In order to participate and increase the level of return that the bank was taking. It was always a risk-return balance.
People used to ask me what do I do at Macquarie Bank, and the answer was that I gave, was I was a risk manager, pure and simple. Our job was simply to look at the transaction, work out what the risks were and find ways of either minimising them or laying them off to somebody else, quite honestly, but in the knowledge that the person or the party that we laid that risk off to was capable of dealing with the risk. At the end of the day, we ended up with a return that we projected at the outset. Unfortunately that all came to an end some five or six years ago when the change in the EPRA Rules, which we might chat about later came into being. To be honest it just wasn't profitable for Macquarie Bank anymore to expose, it's balance sheet to that style of risk. As a consequence, they shut the division down.
I was lucky enough to be invited to join ANZ Bank as an executive director in their institutional property division. I spent a bit over three, and a half years with them helping to restructure the way that they operate, and a little bit more along the Macquarie lines in terms of the procedural side of things but at a much lesser risk position, in as much as they were just doing the traditional finance side of things.
Then you came along, and I got the opportunity to join this team, which I have to say I am enjoying immensely, because as I've said to you a number of times it's a little bit like Macquarie. We're dealing with risk. We're looking for solutions. The guys are constantly looking at ways to overcome issues for clients, and it's a collective team. We will pull our resources and our energy. It's a small team, and I really enjoy the sheer energy within the team and cooperativeness.
Daniel Holden: What would you say your roles and responsibilities are as Executive Chairman of HoldenCAPITAL?
Steve Wiltshire: As, you asked me to do at the outset. I see my role as really to take the experience that I've gleaned over all these years and try and pass on as much of it as I can. Simply be a sounding board. A mentor. Just help, hands on help in whatever way I can to help the guys find solutions for our clients because at the end of the day we're only as good as our last deal. We're a service industry. Our focus needs to be on delivering for our clients. If I can help in any way in terms of the guy's coming up with a specific solution for a transaction or just helping them personally in honing their skill sets to help clients, then that's really what I'm here for.
Daniel Holden: Great. In your 30 plus years of construction finance you've seen quite a few cycles. What have you noticed changed over that time specifically within the construction finance sector or marketplace?
Steve Wiltshire: There's an old saying that "Everything old is new again," I think that really does play out in the property finance sector. In as much as I've said a number of times at presentations I've given recently, I've not really seen a lot change in terms of the way finance is actually transacted. We keep seeing new products appear with fancy new acronyms and everyone's got to have an acronym for their latest product, but the reality is when you distil those products down, they are not new. Some of them have been around for centuries. They're just a new way of doing something that's been done before. Usually slightly changed to meet changing needs in terms of the market, the regulations what have you. I think the things that's changed the most over my period is the product i.e. what we're producing in terms of real estate and the way we go about producing it.
I think the big game changer that I've seen progressively move through the markets, has been high-density housing. Obviously not [you 00:08:33], elsewhere in the world but for Australians and our lifestyles it's been a big game changer. I was lucky enough to see that sort of start to play out in Melbourne in the late '80s. Sydney obviously had already started that process sometime earlier, but right up until the mid-'80s Melbourne was predominantly a house of land market and apartments were few and far between. We've seen more and more of that together with townhouse developments and big planned cities, such as Springfield up here and similar sort of projects around the country where you've got master planned of states. The sophistication that's gone into the product I think it the real change and finances had to adapt to deal with that. I think that's where we've seen some changes in finance. Not so much the product but just how it's needed to be adapted to deal with the product.
Daniel Holden: Cool. You've been a credit manager on hundreds of projects and involved as a joint venture director/participant on behalf Macquarie's whirl. Quite a few of them are landmark projects and high profile, developers. What would you say from your experience the qualities of an elite property developer?
Steve Wiltshire: I think the most crucial thing is understanding both their strengths and their weaknesses. There's plenty of guys out there who are very good at a component of the process, but very few can do it all. I think the really good ones are those that understand where they are good and take control in those areas. But more importantly understand where they need assistance and are good at negotiating, either indirectly engaging people to work for them or engaging consultants, which includes people like yourself in terms of the finance side of things, to do the heavy lifting in those areas where they don't have the skillsets.
I particularly saw that in some of the more complex joint ventures where we worked with the likes of Greg Norman and the [Troon 00:10:50] Team, putting together the golf course land sub-division deals, which were quite complex and required a lot of multi-disciplined players, I guess. It was very difficult for one person to pull that all together. They really were joint ventures in the true sense. We had boards of directors. We had various sub-committees and they all needed to work sort of cohesively together to make sure that nothing got missed and that the timing was right on each of the elements.
I guess egos are important. These things don't happen if you don't have developers with large egos and drive, but that ego sometimes need to be tempered. I think the successful ones know when and how to do that. To hand over the reigns to some elements of the process to other people and trust them. I think to me that's the real nature of them understanding the risks, knowing who to bring in and then having the trust to let them do their job.
Daniel Holden: Great. You've managed many joint ventures in your time on behalf of Macquarie what would you say some are lessons learned, be it pros and cons, of having two hands on the steering wheel in steering these projects large and small?
Steve Wiltshire: Yeah, that's an interesting question. It kind of goes back to what I said in the last answer in terms of knowing who you need to bring in and to have trust in them. I guess to do that I would say you've got to do your homework before you go into a joint venture. You really do need to understand the strengths and weaknesses of your co-dependents so to speak. I probably wouldn't rush into a joint venture with somebody's site unseen without having a good understanding of what they bring to the table. I think you've got to be very flexible. Understand that things won't always go the way you envisaged or you want them to go.
Joint ventures are usually undertaken with sort of larger projects that have lots of moving parts, and as a result, there are different things that can go wrong. I think you do need flexibility. Sometimes you've got to be tough and make decisions that maybe you don't really want to make but you know you have to in the interests of the actual joint venture. I think one of the keys is remembering that you are all there for the same outcome. In most joint ventures some of the director rules apply. You can't just think of the self-interests you have to think of the collective. Some people have difficulty doing that. I had the luxury of being the financier so in some respects I had a bigger stick than others in some instances, but I definitely tried not to use that.
Daniel Holden: The golden rule.
Steve Wiltshire: Yes, the golden rule. Look I used that when I needed to use it. I felt it was appropriate but not always, there were times when I had to sort of compromise the bank's position to get a better long term outcome than the short term outcome. I think flexibility but definitely do your homework on your partners upfront.
Daniel Holden: Is it important, I guess have a division of tasks upfront to say "You're handling this, I'm handling that. We'll agree, but most of that day-to-day is going to be carriaged by me. This is going to be mostly done by you"?
Steve Wiltshire: Absolutely. I think when you sit down you do need to put a list together of responsibilities. From time to time you'll cross over because quite often ... My principle role was as the banker, which in some respects was the easy role, but I suppose the beauty of it, and I guess it's what I bring to the table at HoldenCAPITAL is that when you see hundreds and hundreds of transactions, unless you're completely stupid, you are going to learn a lot of tricks. You're going to see smart developers doing smart things. You can't help but take that knowledge and bring it to the table at the next project and the next if you're on your game. What I tried to do was use whatever was current and take that knowledge that I was seeing in other projects. Obviously, without compromising my other clients. Take the innovations and the opportunities and overlay them into the joint venture, which often the developer hadn't thought of or wasn't aware of. And they could be real game changers. I think everyone's got to do it, but I was in a lucky position of having a multiplicity of developers that I was seeing to poach knowledge from.
Daniel Holden: That's the benefit I guess of working across many projects. It's good to hear that it's not just the money in terms of a joint venture with the bank or equity partner. There's many other things that can be brought to the table.
Steve Wiltshire: Look on a personal level that's probably the most satisfying part of it. I think that was probably true of a lot of people in joint ventures. Part of the pleasure is what you get to learn from your partners. I know when developers who had the same attitude and just really relished the opportunity to suck a brain, so to speak, and take that knowledge, because often they had other projects. They too would take the knowledge and apply it elsewhere and that's what makes it worthwhile, it's not always just about the money it's about the day-to-day wins that you will get.
Daniel Holden: My understanding of Macquarie and some of the clients that dealt with both the banks and yourself is that they had many continuous projects back-to-back. Obviously, it's not just about the money because after a couple they had their [coin 00:17:03], but they kept coming back because of that partnership and interaction.
Steve Wiltshire: I think it's always about the money, but profitable relationships and I suppose also knowing that when things got tough, we would be there. They saw the ups and the downs. They knew that when we were committed to a joint venture we were seriously committed and until such time as we actually withdrew from the marketplace, which was unfortunately a different story, they knew that we were reliable, dependable we would be there, and we would help them work through the tough times. We understood that by doing that repeat business was always as they say the best business. We really nourished those relationships because likewise, we knew that they were the sort of guys who when the going got tough they knew how to roll up the sleeves and make it happen. Mutually beneficial relationships always good ones.
Daniel Holden: Great. Fast forwarding to 2016 and I guess the current market in the landscape we find ourselves in for construction finance. You were top brass credit and portfolio manager, executive director in one of the big four banks until recently, helping shape policy and appetite for the bank. What's your view on the latest EPRA Policy relations kind of last October/November. I guess your crystal ball into how long you think it will create a stranglehold on funding for property developers?
Steve Wiltshire: Yeah, interesting question. We've talked about this a fair bit over the last six to nine months. I should just say I wasn't really shaping policy I was more shaping how we delivered policy to the marketplace. The boys upstairs were busy working on the implications for the bank in terms of balance sheet and what have you. Look, as you're are aware ... My view on this is that this is a regulatory change that isn't going to go away. I think the reality is, it is a bit of a game changer, but it's no more so than when we deregulated the banks. Every now and then you get a regulatory or structural change within the industry that means that everybody has to shuffle the deck chairs a bit as to how they participate and that's how I see this. This is no different. The banks will still continue to do construction finance.
My own view on this is that they won't come back to dominate construction finance like they did following the GFC, where they were able to very much take the market over and really control where it was going. I don't think they'll have quite that much level of influence as they once had. It's less profitable for them relative to the product. As we've discussed, we've seen that the banks have constantly tried to reinvent themselves as service providers preferably where they are not using their balance sheet because they get a better return. They are driven by their share price. They're driven by the assessment by various analysts. They have to be constantly finding ways to improve their bottom line and their return to shareholders.
As such the new requirements from a balance sheet perspective means that property is no longer as attractive as it once was. It's a good solid regular way of providing income. However, it's no longer one of the major frontline I suppose products in their [quiver 00:20:48]. As such, I think they'll be more selective. I think we're already seeing this. Flood to quality they will pick and choose who they deal with. They'll continue to try and poach the best deals they can to improve the quality of their loan book, but it will be less of a volume going, particularly at the larger end of the market.
From time to time, we will see at the business bank level sort of mid-sized project. As deals run off their balance sheet they'll come back in at the marketplace, and it will depend on appetite at the time as to how from a pricing point of view how competitive they will be. All of that means that what we're seeing at the moment. The greater influence of smaller private lenders and fund lenders and money coming in from overseas. All of that is going to find its own level over the next few years. We'll see that ebb and flow depending on how the Australian market is seen internationally, in terms of returns, and I suppose the availability of capital outside of the major banks will also have a part to play.
Exactly how that's going to settle down not sure, but what it does mean is there will be greater diversity for developers. I think what it does ensure is that we will see more competition and probably more innovation. As I said the product doesn't change but how we deliver does. So yeah I think that's how it's going to play out.
Daniel Holden: A question that I've been asked a few times in the last six months from people is, there are a lot of cranes in the sky, Brisbane, Sydney, and Melbourne. It's fair to say that the market was a little bit hot particularly through late 14 and 15 and the banks have pulled back our appetite. But some people have the view, and they ask me the question, once they get the money back from those cranes in the sky will they then just open up the books again? But you seem to have a different view that even in 2017 and 2018 when they do get that money back that they won't necessarily get back to the critical availability we saw in the last two years.
Steve Wiltshire: They're going to have to manage their use of capital far more carefully. There may be times when it's convenient for them to actually attack the market and put capital out there, without loans, because it represents a good option for them and the mix in terms of their exposures is right for them. I don't think we can count on it is what I'm saying. I don't believe that the market is necessarily going through a major correction or anything like that. It will really depend on where they sit in the marketplace at the time and how their balance sheet is looking as to where their appetite will come from.
Daniel Holden: So I think in terms of them retracting their appetite it was previously led by EPRA in the capital allocation but also a little bit maybe three-fifths EPRA, two-fifths market in terms of them having a decent exposure in the marketplace?
Steve Wiltshire: Yeah. I don't think there's any doubt that EPRA plays the major part or the regulations play the major part in this. Also, I think I can say that all of the major risk heads within the banks were concerned about where the markets were heading and were keen to take the steam out of it. I don't think there's any doubt about that at all. I mean I speak regularly to senior risk guys in both the bank where I was working and others who are in the marketplace. The collective view remains that the market was getting a little too warm and being driven by I suppose things like offshore sales, we've seen a lot of press about. They were keen to take the heat out of that. They were also concerned that their overall exposure to property was too significant and they needed to drag that back in. There are other factors at play there that will continue to play out. It's never just about capital availability. It's also about their risk assessment.
Can I just say that the only other thing is the big risks are always the ones we don't see coming. There are those that said they saw the GFC coming. They may have seen that there was a correction coming, but they just didn't know what the trigger was going to be and the exact timing of it. That's the thing that always catches us unaware.
Daniel Holden: Okay. I guess in the many meetings I've attended with you in the last two years talking with property developers. I've noticed that you're very passionate about hearing about their business and their business model and I guess what drives them and motivates them. One thing you particularly hone in and continually ask until you get the answer you want is about their marketing plan. Good or bad or indifferent you're wanting to hear how they're going to shift this product and make it a success. What's the push talk towards hearing about that?
Steve Wiltshire: Yeah, you're right. I do get passionate about it because for me the success of a project really turns on how well you can sell that product. When you're talking about 30, 50, 100 apartments in a development, the key is you can build the best possible project in the world but if there's no demand for it, and you can't sell it to anyone, you're not going to make any money. For me there are two things, one is do the homework and understand the market demand. You've got to get that right. Second part is, doesn't matter if you've done the study and you've got the right product. If you haven't got the right conduit to get it to the right players, you won't sell it. Yeah, I am passionate about making sure that the people understand those two elements and know how to deliver it because that will kill a project so quickly it's not funny.
I've seen so many skilled builders become developers. Developers who take on building risk etc. but they don't have the answers when it comes to the marketing side and the sale side. That's a double barrel thing putting aside the understanding that the product and the demand. Sales and marketing are two different elements. You've got to be able to get the message out there, which is the marketing and let people understand that you've got the product. Then you've got to be able to close the sales. If you don't have that closing ability, it can really cost you.
Daniel Holden: I think also we've seen a shift in terms of marketing and sales that we've said it a couple of times in the last few months, that it appears you can no longer just buy a sale. Previously you kind of throw more money at the sales [coms 00:28:03] and the agents and the channels and throw more money until it hurt and then you'd actually attract a sale. Whereas it seems now that even paying six, seven, eight percent commission isn't going to guarantee a sale.
Steve Wiltshire: That's my fear is that it's been ... too easy is a bit of a [tripe 00:28:20] thing to say. It has been easy to put this out to various market sellers and say "For a price, go and sell me those units?" And it's as simple as that. The developer in that situation really doesn't have a, he doesn't have control and b, he has no understanding of what the buyers are wanting and how he needs to adjust his pitch. He's totally reliant on the third party.
As we see this market moving back to where it's more reliant on owner occupiers there's an experience level that's really missing for a lot of developers. They will get caught out if they don't learn how to do that directly.
In some instances ... I have to say pre-GFC my preference was always to work with a developer who directly controlled his own sales and marketing because the ones that failed were the ones that relied on third parties. Again the reality is you're only as good as your product, but a marketer is only as good as his product and he will chase the path of least resistance. So what we saw was marketing teams were just dumping projects and running to where they thought the easy sales were going to be, leaving developers in a hole. From that point of view, I think there are a lot of developers out there who don't understand that in this current marketplace who as we go into a different cycle where there is less reliance on those bulk investment sales, they're going to have to re-learn those skills or find themselves in trouble.
Daniel Holden: An observation of something you said before about the loan products or the ebb and flow of the demand for the products, but the products have mainly stayed the same in the last 30 years. You also touched on that there's room for innovation. What would you see is the opportunity for innovation in the construction finance place?
Steve Wiltshire: Yeah. That's a good question. I suppose for me the change is probably going to come ... I think the major banks as we touched on before are being forced to re-invent how they deliver their product. One of the things we've discussed is I suppose that one thing they need to change is cost. To be more profitable in how they lend, they need to cut cost. I think we've all seen that they have cut their teams fairly tight over the last few years. I know there's a lot more room to manoeuvre there, but one innovation that we are starting to see and it plays to you I guess is that, their far more prepared to deal with brokers then they ever were at this commercial level. We've seen the rise of the broker in the mortgage markets ... where I'm not sure of the exact statistics, but I think you've mentioned them, what is it?
Daniel Holden: So 58% of home loans are now written by an independent broker [crosstalk 00:31:36]
Steve Wiltshire: What was that 10 years ago?
Daniel Holden: It was 6% in 2002.
Steve Wiltshire: Yeah. I think recent statistics are showing a similar growth albeit we're only in about 16% or something like that currently.
Daniel Holden: For commercial, it rose from 12% in 2012 to now, it's currently 38% was the last number I heard.
Steve Wiltshire: Is that right?
Daniel Holden: Of commercial papers written by an independent.
Steve Wiltshire: Look, I think that's where the game is changing. I think you'll see the banks less reliant on their own relationships managers because again, that's a cost that they don't need to carry. I think realistically brokers are sitting in the right space and we will see a growth in their use. From where I've been sitting over the last two years as part of the team is I'm seeing the real value add that it brings to both sides of the equation, because at the end of the day the banks want to deliver the product for a minimal cost. If they can as they have with the mortgage is still write the business without having to have a massive sales team out the marketplace, that's beneficial to them provided that the quality is there and that's always the [lighter 00:32:59]. From the developer's points of view, it's a gain, and it comes back to what I said, smart developers, use the people they need where they don't have the skill sets themselves.
I think that's probably one of the game changers that will happen in terms of how the market plays out over the next few years. I think it's probably going the same way, albeit a little differently to the mortgage markets.
Daniel Holden: In terms of the banks not doing as many lines as they were doing for the last couple of years. What's going to fill the gap there?
Steve Wiltshire: As, I've touched on before we're seeing the rise of the private funds in the [pinnate 00:33:41] funds to private lenders. Definitely, offshore money is starting to have an impact, and that's right across the capital estate both in terms of senior debt lending, mezzanine debt lending and participating as preferential equity or joint venture monies. I saw that actually play out when I spent some time, about three years, in New Zealand for Macquarie. Their market albeit a lot smaller in the Auckland market. It went through a similar restructuring. I actually saw private money take control of the development sector during the mid-'90s over there, which was well before we were seeing the impact of it in Australia. It's interesting it's played out somewhat similarly here, we saw that sort of rise through the late '90s early 2000's in Australia, but then the banks following the GFC, the banks really took control again after the squeeze. I think we'll just move back into that sort of structure if you like or balance.
Daniel Holden: So, in terms of your experience today as a career, property and property finance person, what would you say to a younger you about navigating through the game of property development?
Steve Wiltshire: Well, I kind of been a quasi developer by default being the finance joint venture partner. Firstly I think you need to understand risk. What risk is and what's your appetite for it is? I think if you want to play in the property sector you firstly have to know exactly what your appetite for risk is and then depending on that, that will kind of determine where you would sit in the equation. Having determined that I guess my best advice would be to go out and get as much experience as you can in as many diverse roles as you can, be that in finance, be that working directly for developers, working for consultants. You can't beat hands-on experience, simple as that. Get out there, get your hands dirty, involved in the process and listen and learn. Be a good listener. Listening is underrated. We all like to talk and give our views, but actually listening to other people is probably the most important thing. If you don't understand something the obvious situation, ask and soak the knowledge up, be a sponge.
Don't be afraid to change tact. Recognise where your strengths and weaknesses are as I said with a good developer. Maybe you're not cut out to be a developer, maybe you are. Maybe you fit somewhere else in the equation. Play to your strengths.
Daniel Holden: So the most important question, what's the best bottle of wine you've had recently?
Steve Wiltshire: Okay, best bottle of wine I've had recently would be a 2007 Kay Brothers Block 6 from the McLaren Vale.
Daniel Holden: Sounds good.
Steve Wiltshire: I bought it about six years ago, and it got forgotten. I pulled it out ... I actually went over to McLaren Vale and was drinking their more recent wines thinking how good they were and remembered I had a bottle. And it was a cracker.
Daniel Holden: That's delayed gratification waiting six years for a bottle.
Steve Wiltshire: True but it was worth it.
Daniel Holden: Great. Thanks very much Steve. I've learned a lot working with you for the last couple of years. Thank you very much for that and thanks for sharing with the listeners your experience and journey to date.
Steve Wiltshire: Thank you. Thanks for the opportunity and thanks for the opportunity to work with you at HoldenCAPITAL. I'm having a blast.
Daniel Holden: Great.