Welcome to Episode Two of the “The Constructive Finance Podcast”.
Today, Dan spoke with Daniel Erez of Newground Property 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.
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Read full transcript below:
Daniel Holden: Thanks for joining us, welcome to the Constructive Finance Podcast. Very excited to talk to Daniel Erez from New Ground Property Group, I'll let him introduce them, but we've worked alongside them for last couple of years, and seen the projects that they've worked on and completed, and been involved. So welcome Daniel.
Daniel Erez: Thanks very much Dan, happy to be here.
Daniel Holden: So by way of intro you give us a bit of an overview New Ground property group?
Daniel Erez: Sure so New Ground Property was established in 2008 and we're a, essentially residential development consultancy so we work with developers, landowners, in some cases financiers even to help them answer questions like, "Where should we be looking to buy our next site?" Or, "Hey we already own a site, what's the right figuration for the market today? How many ones or two beds should we have? How big should they be? What's the right layout? What level of finish should we have to achieve a certain GR?" Once we've helped to mould a product to what we've become market relevant, we then have a distribution network around Australia and in Asia that is there to secure pre-sales and sell out stock prior to completion.
Daniel Holden: Alright and so you're obviously the founder of the business?
Daniel Erez: That's right.
Daniel Holden: So I guess propr to that what made you, I guess attracted to pre-sales and that kind of dimension of property, or I guess understand that role?
Daniel Erez: Well prior to start New Ground Property I was actually in the corp world, and running an acquisitions programme for a [inaudible 00:02:03]. So very little actually to do with property per se, but it sort of after that period I saw an opportunity in the market place to provide professional advisors, being financial planners and people like that, with a way of having their clients get access to direct property, because a lot of them just didn't have the time, the interest or the knowledge to do it themselves. I guess the business really evolved from that over the last 8 years of building up that distribution network and through that process I guess we amassed an amount of IP about what a great project looks like, and what an average project looks like, and decided that we could add value beyond just the sales and helping developers to bring product to market that was what the market wanted.
Daniel Holden: Okay that's interesting, and so in terms of the developers that you work with, I guess property developers come in all shapes and sizes, from [inaudible 00:02:56] who are doing a splitter block and build, right up to listed corporate developers, who focus I guess heavily on their share price, and have a different requirement out of their property projects. So what would represent most of your current client base?
Daniel Erez: Yeah most of our clients at present are private developers, what we'd call mint tier, career professional developers, in that they've been doing it for a period of time, usually at least five to ten years. They're in the business of developments, they're not opportunistic developers. They've got a pipeline of projects in front of them and they're really approaching development from a business point of view, and saying, "How do I execute on across several projects, and understanding that key consultants are critical to the successful execution of that business model."
Daniel Holden: So I guess understanding the developers motivations and business model is key for you, to get engaged with them and see why they're doing it and how they're doing it.
Daniel Erez: Yeah exactly, I mean most of those developers that we referred to just there, they typically don't have the internal resources of a sales or marketing team, or a finance team, legal team. They use outside consultants, and that's where we can deliver the most value.
Daniel Holden: Yup, okay, and so when should a developer look to engage a specialist like you, in the project life cycle? You said before that it's sometimes prior to actually buying a site.
Daniel Erez: Correct.
Daniel Holden: Right through to I guess 90 days out from titles, help, help, when's the ideal time?
Daniel Erez: Well I guess it's no surprise that the earlier, the better, and we typically do get contacted at point through that process that you just outlined. I think we can add the most value pre site acquisition or post site acquisition, where we can actually be involved with the PCG case. Being the client, the developer, the builder, the architect, and work around the table to mould a product that is what the market place wants, that's cost-effective to build and that's gonna achieve the highest in value, so the sooner the better.
Daniel Holden: Okay, so you like to actually get involved in help shaping the product to make it easier for you to sell.
Daniel Erez: Well yeah, easier to sell, faster to sell, because at the end of the day time on market, time under construction is money at the end of the day. A developer ideally wants to be sold out prior to completion so that when titles do register they're calling for settlement and repaying that debt facility as soon as possible and I think decisions made earlier in the piece can lead to that outcome.
Daniel Holden: Okay great, and so obviously at the moment you'd be having a lot of developers seeking your services to help with their projects, what qualities do you look for in both the property developer and the property project that attract you to wanting to be on a project?
Daniel Erez: Yeah, no, that's a really good question. It's a question we actually ask ourselves internally, almost on a weekly basis, like "Who is our ideal client? What's our ideal project?" I think first and foremost at the end of the day, like any business, property development is a business about people, and you want to work with people that you get on with. People that respect you for your talents, and will listen to you, most importantly. You and see working together is not going to be hard work, because with so many project opportunities, and so many people out there, why complicate your life, and deal with the people you want to.
So I guess people first and foremost, and if I go back to that profile where they're career professional developers, they understand the business and they understand that having talented consultants as part of their team is key to the successful execution of their business. They see value in what we do, at the end of the day if someone doesn't see value in what you do, then trying to do business with them is fraught with hard work, so from a property developer that's what we look for. Then obviously on a project site it differs, but we have our suppose, model of what we look for and the opportunity to be involved in shaping that project is very important to us.
Daniel Holden: So just I guess again back to an overview of New Ground. You do residential projects, you do apartments, townhouses and house on the land.
Daniel Erez: You got it.
Daniel Holden: Yup, so it's just residential?
Daniel Erez: Exclusively residential, yeah.
Daniel Holden: Yup, and it's just Queensland?
Daniel Erez: Yup, and our focus is South-East Queensland, so we do a lot on the Sunshine Coast, we've done a bit out at Toowoomba, we've worked, obviously our core business is Brisbane, the metropolitan area, and we're investigating a number of opportunities down on the Gold Coast as well. So the Golden Triangle as they say.
Daniel Holden: Yeah perfect, and so in terms of a developer who may think they're smarter than the average beer, that they think they understand project marketing, they think that they can manage the process themselves, with all their spare time. Why would they engage I guess, New Ground to help them manage that process, the value add, like you say, if they don't see the value then it doesn't work for either party. So, lets explain that value add.
Daniel Erez: Well I guess if someone was coming to me and I felt that they did understand, and they had everything under control, I would really be asking them the questions, as to why they thought, where they thought we could add value. We're not in the business of just trying to generate fees, we actually want to add value. I think we can bring a perspective that a developer can never really get because we can cover more people across the different markets throughout Australia and Asia. We're in touch with the market place on a daily basis. So we understand the trends as their happening, we're seeing what people want and what they don't want. We're seeing a mix of different products as well, and we're seeing what their competitors are doing, doing well and not doing well. So I think it's more about perspective and of course the execution side of things, that we provide the most value.
Daniel Holden: So I guess over the last, probably since late 14, definitely 15, were very hot markets, 16 we seem to have seen a little bit of slowing. In that time what problems have you seen developers get themselves into? Maybe some potential ways to avoid them.
Daniel Erez: Yeah, that's a good point I guess we've seen a lot of projects in a lot of good and some not so good and to come back to your point before, a developer thinks that they know how to do something that perhaps they don't, can often be a dangerous combination and it's not lack of trying, it's just perhaps they execute strategy that isn't, doesn't serve the project well and ends up leaving the project half sold or undersold. To restart a marketing campaign, or an unsuccessful marketing campaign, is costly, it does cost. So you would argue that getting it right the first time will actually save you a lot of money, and time, and importantly reputation. If you're a project developer that is building a brand and is building a track record you want to make sure that every single one of your swings is a home run. So engaging with your consultants as early as possible, I believe will hold you in good stead to avoid those mistakes.
Daniel Holden: So just looking at new projects in apartments, there's I guess talk at the moment in terms of the current amount of projects that are approved, how many of them actually start? We don't know. A lot of those that get talked about I guess in the press and in the industry, generally are the higher volume projects. What type of size projects do you comfortably getting involved in? That you see makes the best sense, as a project and for you to get involved in?
Daniel Erez: Yeah sure, well our sweet spot for want of a better term is that between 30 to 100 dwellings, whether that be, units, townhouses or land subs, a little bit different but generally with the Strata product it's between that 30 or 100. I think that's attractive for a number of reasons, it's attractive because what we found is domestic buyers prefer smaller projects, whereas the Asian buyers typically prefer larger density projects. The smaller projects take less time to sell, they take less time to build, there's inherently less risk, because of that they're faster to market. For that reason we feel they're a better option. That's not to say that we haven't worked on projects that are larger than that. We just find we can deliver the most value to a client that's delivering projects in that scale.
Daniel Holden: Okay great, so as of today, when we're recording June 2016, where do you see the market currently in terms of, I guess, ebb and flows, supply and demand, and I guess how that affects you with your business, and your discipline within property.
Daniel Erez: Sure, well there's no doubt everyone's noticed that there's been a real slow down in respect to transaction volume here in Brisbane. We were at an industry breakfast a couple of weeks ago that [inaudible 00:12:57] had put on, and showed the transaction volume decline from, I think the peak being around June last year, the June quarter. Trending about 2500 transactions for the quarter, down to the March quarter, which was sitting down at about 1000 for the March quarter. Typically, a March quarter is the slowest of all of the year for the reasons that most of the industry is sleeping in January, and half of February. So there's definitely a slow down in that respect, which in many ways is actually a good thing. I don't think the industry benefits long term from boom bust cycles. I think consistency in a market is important, less volatility leads to more confidence and when a market has more confidence people do things, and we're in the business of making sure that people are doing things.
How does that affect our business? For one would with think that less transaction buying means less opportunities for us, but I actually see it as a benefit because when the markets hot, everyone thinks they can sell anything. They probably can, it's when the market slows down that people really need to get good at what they do and really carefully consider how we're going to take this project to the market, and make sure that we get our share of the sales that are out there in as fast as possible time. So I think now more than ever, New Ground Property, and our team can really provide a developer with a strategy to take some risk of the table.
Daniel Holden: Well I think definitely from our side of the table and the funding its important for us to see a developer have a business model and one thing we talked about with our guest last week, Steve [inaudible 00:14:36], he's always been very focused on seeing developer have a marketing plan, and that they understand sales and marketing. For him, in his 30 plus years, he's seen that as I guess critical for a financier to understand. So I guess as we come off this heated market, it's more critical for developer to engage those people.
So as we say, June 2016 we're seeing some interesting times. APRA seems to be the puppet master I guess playing their role in the industry and regulation. Last month APRA garnered the major banks to curb lending to foreign lenders, on their property purchases. Now we have I guess four, or five weeks to let that sink in, and read it every day in the press. How do you see that affecting settlements on completion, and I guess the potential for new stock to hit the market that was considered sold, and may now fall over?
Daniel Erez: Sure, well there's few things to that question. I guess firstly foreign lending is curbing it a good idea or not? I guess I don't really get to make policy so I don't have a save. But what we're seeing is that there's a number of the sales groups, sales channels that we deal with, both domestically and offshore that have sold a substantial number of sales over the last two, three years to buyers from places other than Australia. That are concerned as to where they're going to be sourcing that funding from, given that they were primarily relying on The Big Four hit to provide that loan.
Having said that, we understand from the research that we've done, the travel that we've done, that there are a number actually the Australian banks, based in places like Singapore, Hong Kong and so on that will still lend to Singapore and Hong Kong based passport holders, on LVR's that are very comparable to what they are here, because they have line of sight into that client. I think there, what APRA and perhaps the major banks are trying to do, is perhaps curb lending to a, one particular country, but they can't come out and say that they're banning lending to that particular country. 'Cause that may be politically incorrect, or whatever the case is. So it's more of a blanket, "We're not lending to anyone that's not Australian." But you would argue sitting here that an investment banker that currently works over in London, who wants to buy a unit in Australia, is a pretty low settlement risk, wouldn't you say?
So it is somewhat confusing, how that is going to impact settlements here is anyone's guess, but there are still a number ways, outlets for finance, so I don't think it's really as bad everyone would make it out to be. I know from where I sit, the APRA and the media doing their best to try and take some sting out of the market. Which as I said before is a good thing, unfortunately they've created a lot of uncertain, a lot of misinformation, which is slowing things down and causing concerns for people, which I believe fundamentally are unfounded but it's having the desired effect.
Daniel Holden: So how would that affect you in your day-to-day role looking at new projects, and I guess how would that affect your decision process in taking on new projects, with that APRA none lending thing? You're saying it's not as big an issue, it's a storm in a teacup, but would that factor in your day-to-day approach to a new project that knocked on the door tomorrow at your office?
Daniel Erez: Well it's definitely a factor but one of the reasons why it isn't or hasn't been as much of an impact for us is that previous to APRA saying, well the banks saying that we're no longer lending to foreigners. The banks on the development side as you would know, were putting caps on what they would allow a foreign buyer, the percentage of foreign buyers sales, in the pre-sale hurdle. So for that reason it meant that we really couldn't go hell for leather and go to Hong Kong and bag up a 100 sales for a 100 unit project. We had to keep that at around 20, 25 sales of the 100 needed. So that now means it maybe that 20, 25's no longer an option, and we need to find those 20, 25 sales in Australia back home, so that's affecting our business from the point of view of we really need to focus domestically and only domestically.
That has meant that some projects that we were previously looking at that we thought would be more attractive to the offshore buyer, we're now saying to that client, "Well look maybe we need to find another way of reconfiguring this project to be more attractive to the domestic buyer." But in any case our business really wasn't that exposed to foreign buyers, we probably account for about 15 percent of our sales for the last year came out of Asia. About two thirds were coming out of Sydney, so we're somewhat insulated from that potential fall out.
Daniel Holden: Interesting on the finance side, probably in the last two to three months I've had at least half a dozen approaches from developers coming to me saying, "I'm funding this project" whether it's 20 product, or 100 product, "I want to sell the whole project overseas." They are aware of private capital costs more, but for them the path of less resistance is to pay that extra couple of hundred grand, get the project funded and be able to do what they want with their project, which is interesting.
Another thing I think we're seeing come up is that banks will dictate two out of ten sales, before a month ago it was probably two out of ten sales, maybe now it's less. But they will dictate two out of ten in the pre-sales before you start construction, could be foreign buyers, but they very often, and nearly all projects they also have a condition subsequent that means that from that point forward the balance of your stock, you can't just then put it on a plane and send it offshore to sell the balance of it, that's a continuing ratio or covenant for all of your sales ongoing.
Daniel Erez: Gee that's interesting.
Daniel Holden: A lot of developers I guess didn't realise that, that was an ongoing thing, it wasn't just the first couple of sales that needed to match that criteria. So yeah we're seeing a bit more of that unfold now, that it's more relevant.
Daniel Erez: Yeah, it's interesting you say that because we had a number of approaches from clients, perhaps maybe even the same clients, saying, "Oh why can't we just sell this whole thing overseas?" While it seems attractive from a, couple of months ago we probably could have sold it all overseas, but then as you rather point out, the financing at home would prove to be almost impossible. As an addendum to that, I think it's important to note, and something that perhaps the bankers may or may not be seeing, is that a lot of the say Chinese buyers are buying, not because they're attracted to the financial or potential financial gain of the rental yield of buying an apartment in Brisbane, but they're genuinely, most of them are very wealthy and my experience of people who are very wealthy or ultra-high net worth's is their primary goal is wealth preservation, not necessarily wealth creation.
Wealth preservation means perhaps it makes sense for me to get some of my assets outside of China, and into a safe haven, and Australia still has a triple A credit rating and strong legislative framework, strong government and weather, and education, all the factors. So they're buying apartments to preserve wealth and for that reason I don't think they're going to be that too bothered by a change in rate, or rental yield that goes down by half a percent or something like that. They're buying for reasons other than the typical Australian investor. They're taking a 10 to 20 year view on it.
So I would argue that a lot of cases those buyers are solid and reading through some of the annual reports of the [inaudible 00:22:45], reporting their settlement rate, settlement defaults, it's still sitting at less than one percent. They represent an aggregate of probably 10,000, 20,000 settlements, and that's largely reflected in our numbers. In most cases most of the non, the settlement defaults are more a reflection of actual just life. People getting divorced, people dying, people losing their jobs, whether that remains true in the next six to 12 months I guess we'll sit here and again and have a conversation about it again. But so far I don't think, I don't think it's gonna be the big disaster that the media would like to think it would.
Daniel Holden: Well that's reassuring to hear, I saw in today's Industry Publication, and I don't want to rely on the media as a, the worlds turning, but; ...
Daniel Erez: But you know everything they say is true don't you?
Daniel Holden: It's absolutely true, but I guess it's becoming more of a thing that we're seeing with this increase tax for foreign buyers. So they're talking about a four percent surcharge on real estate purchases and an extra point 75 in annual land tax, under these new measures. As you mentioned before we started, Victoria was in it a while ago, Queensland joined suite and now New South Wales talking about getting on board. The foreign buyers must be feeling pretty unloved at the moment. How's your dialogue going with the, I know foreign buyers are only 15, 20 percent of your business but how're you finding the dialogue in the last six weeks?
Daniel Erez: Well there's no doubt that it will have an impact, one thing that we find, and certainly when we go overseas into Asia, is that while we think our city of Brisbane is one of the best cities in the world to live in otherwise we wouldn't be here and it's a new world city and so on. When you go to Asia, and you're marketing Brisbane as a destination or you're marketing Sydney, or you're marketing Melbourne, you're one of 10, 15 cities, global cities that are vying for that same investment dollar, and I think sometimes we're a little bit arrogant in our approach to the world of thinking that just because we have sunshine people are going to want to come here.
In Asia investors do look through that lens of, "Okay well why would I buy in Sydney, or Melbourne, or Brisbane instead of Manchester? Or instead of New York or Vancouver or London?" So for that reason I think it will have some of an impact, how much will remain to be seen. It's a good thing I think that all three of the Eastern seaboards states have decided to do, because if one hadn't and then it probably would have made one state more favourable than the other and quite frankly Queensland needs everything it can get right now against the other two states.
It is a relatively small tax, but it's a tax number nonetheless and we certainly don't think it's a positive thing for the industry, at a time when the Queensland economy is making that transition from mining to construction and other industries. So obviously they've got a deficit to fill and the good thing about foreigners tax, taxing foreigners is that they don't vote. So it's an easy take and hopefully it won't have too much of an impact and time will tell.
Daniel Holden: Okay, that's great, reassuring to hear, so what advice to developers in 2016 in Brisbane, what [inaudible 00:26:23] broadly speaking, would you give, when you say you get involved in projects and helping shape them, in terms of product mix of one's plus one's, two's, and I guess now as we're entering the cycle where under occupies becoming a lot more dominating? The three bedroom and even bigger luxury three bedroom, in terms of I guess price point, and attracting attention and also competing, so I guess firstly product mix, and secondly price point in 2016.
Daniel Erez: Sure, and there really good points, and obviously to be specific it largely rests on the location. For example the advice you'd give to a client that's bringing a project to market in say Toowong, would be inherently different to that you'd give them in Bulimbla, or conversely in Hamilton. But you make some really good points, is that there's a shift taking place in terms of buyer preference towards product type. I think the two bedroom, two bathroom, one car product has been very dominant in the mix in inner city Brisbane and will remain so.
I think whereas prior to this, sort of 2015 most of the product was one and two-bedroom product, there's been a real resurgence of three bedroom product because largely that market has been overlooked and I think there's a real opportunity to provide, what I call value three bedders in that you can almost break that segment up into two segments. There's the affordable value three bedder, that's a market that wants something bigger than a two but isn't really in to spend probably over say 900,000 or something like that.
Then you've got the premium three bedder that's happy to spend anywhere from 800 up to 1 point something, early ones, to get exactly what it is that they want. I think when you're delivering that product you really need to know your marketing, and you need to have the finishes and so on, reflective of that market.
I've seen clients try and sell three bedroom product for 1.1 million dollars but skimp on stone bench tops and not have wine fridges and just a product that's essentially a standard 2-bedroom product. I think it really misses the mark because there is a market for that in Brisbane, people will pay for it, but you need to deliver. So I think from that point of view there is an opportunity there.
Daniel Holden: Is that capturing the empty nester market? The late 50's, kids have left home, I'll sell my house at [inaudible 00:29:02], and come into town. Is that where that product is pitched, or how [crosstalk 00:29:10]
Daniel Erez: Definitely, that is definitely one of the segments, and that's the one that people I suppose think of straight away. But there's also the, call it the childless, the double income, no kids, that want luxury and they can afford it. They're both on very healthy salaries and they're willing to pay for the good life. That's reflected in look, good at Edward Street here, undergoing this massive revitalisation of High Street brands and someone ... that level of affluence is really starting to grow in Brisbane. Whereas it really wasn't there probably 10 years ago, 15 years ago and that's a segment that will pay good money for a quality three bedroom that has all the trimmings. We're seeing a number of clients that are executing on that strategy, both in a townhouse product and an apartment product and they are, the market is responding with very strong local sales, owner occupy sales.
Daniel Holden: I remember pre [inaudible 00:30:12]
Daniel Erez: I'll just have to shut up.
Daniel Holden: That's not good, so 06, 07 we had Mirvac do the New Farm, Terrace Homes if you will.
Daniel Erez: Yup.
Daniel Holden: Actually now that I think about it, Mervack did the other one at Balmoral, where they had the standalone 400, 350 square metre blocks of land, two story, like if it was in Bernduc, it'd be a townhouse, but it's in New Farm and Balmoral and they're selling for a million bucks a pop.
Daniel Erez: There you go.
Daniel Holden: In terms of land use it's actually, you're pitching to a market that can actually, it can hold the family and do well. So maybe we'll see more of those projects coming.
Daniel Erez: When you talk about town, I think that's a really big opportunity for Brisbane and we're advising a lot of our clients to be considering that. The townhouse provides a way of living that suits those buyers that you're talking about, certainly from the point of view of they don't want to live in an apartment but they don't want to live in a house. They don't want the maintenance aspects of a house, but they like the space. So a three bedroom, two and a half, double lock up townhouse with a bit of a yard, and hey body corporate takes care of all the maintenance, is very attractive. We know a client that's currently selling a project right now over in an affluent Northern Brisbane suburb, where they released to the market 36 of them and they've sold 10 in literally two to three weeks. All owner occupiers, local owner occupiers, and that's in the 700 to 900,000 dollar bracket.
Daniel Holden: I remember a project that I saw, and it must have been built in 2004, going way back and it was in Auchenflower, great suburb, close to town and it must have been a massive site. I think it was, it wasn't on Birdwood Terrace, but it was near there, and this project actually had probably lets say 40 townhouses. However, it may have been 25 to 40, however it actually had, it was town homes, villas, whatever you want to call it but it had the whole site was a basement garage. So you drove in off the street into a like three and a half metre basement garage, but probably two metres was submerged. So the site ground floor actually sat a metre and a half above the ground.
The whole thing was covered in walking area, villas, townhouses, whatever, they were worth one, maybe not quite a mill but, a two story on top of the basement. So you'd got storage downstairs, you put your cars downstairs, your bins downstairs, everything's out of site. You come up into this nice little community of these close adjoining, some of them were attached to each other, just two, and they were basically detached through the whole thing, and it was just a great little concept. Maybe land prices will get to a point where that might stuck, but I remember it was a great little kind of.
So in terms of if someone came to you today with the site, and there's plenty of sites out there with 40 to 50 unit approval, and wanted to rejig it because they bought it well, or they're coming to you for advice. In terms of product mix right now, lets call it 50 units, lets call it eight kilometres from the CBD, in terms of you being able to maximise the value of that GR where would you see the ratio of one's, two's and three's?
Daniel Erez: Well obviously I'll have to charge you for that answer Dan.
Daniel Holden: Very good.
Daniel Erez: Well again depends on exactly where it is, but yeah we're seeing, I think ones are typically, whilst they're the easiest to sell because of price point, everyone knows you make the least amount of money on them. So there is a lot of wasted, or opportunity costs with ones. So we're tending to steer away from ones and instead perhaps looking at two bed, one bath, as an alternative to that. Because you can generally squeeze them inside of these four plates and get perhaps a smaller premium than you were, more of a premium than you would have one better and really look at the two and three bed mix to come up with the right ratio. Again depending on floor plate and the constraints and that of site, but product mix is more important now than ever before I believe.
Daniel Holden: So without giving away the secrets, where would you see the current one bed size, and two bed size, is it now, it's definitely grown but; ...
Daniel Erez: Yes it has.
Daniel Holden: Is it now kind of late 80's, 92, 95 square metres for a two bedder?
Daniel Erez: Yeah sure, well there's the standard and then there's the, "Oh wow" size. So standards are for one bed in terms of internal are generally between 55 and 60. Two beds, 80 to 85, anything smaller than that is looked at as on the smaller side, and that's internal space. Balconies generally sit between 50 to 20 square metres. So if you're able to bring a product that's a two bed product that's between 85 to say 90 square metres, and obviously that's an advantage, but one of the missed opportunities in many cases is really layout.
I've seen a number of layouts that in the early stages of a working drawings, that aren't really maximising the amount of floor space available. Any good architect will tell you that the true opportunity is really in smart layout, to take advantage of maybe a constrained space. Floor plate permitting, but smart layout design in terms of having bedrooms preferably either side of the apartment, living throughout the middle. Even opportunities for study nooks and stuff by taking advantage of walls that otherwise would have been redundant.
Very hard to sort of describe without seeing it in front of you, but I think layout is probably one of the biggest things that we try and focus on. Because buyers, it's about livability, people want apartments that are livable, not just a certain size. At the end of the day, it's a tenant or it's a buyer that's going to live in it, you must think through that. Things like hallways, we've seen, God we've seen some strange things, but from a price standpoint of view, there really isn't that much of a price premium for substantially bigger apartments, which then of course causes a bit of a disincentive for developers to produce them.
But as the number of product increases, buyers have more choice, and inherently that will tend towards what offers them better value, and if you can deliver a bigger product or a better laid out product for the same price as your competitor is, then you're going to attract the buyers, which in a market where sales volumes are contracting, is really important.
Daniel Holden: As you say, sales volumes are contracting, off a pretty high, high though.
Daniel Erez: Correct.
Daniel Holden: So they're not disappearing but as they do decline from the high volumed, what would you I guess advise or see as price barriers for somebody doing a project in late 16 early 17? In terms of a two bed, six to 10 kilometre ring product that they should be mindful of to attract enough buyers to get the project off the ground, and hopefully pick up a bit of premium as the project kicks on.
Daniel Erez: Sure, well again it depends on the type of project that you're bringing, marketing what your brand is. I mean if you're a, we do high end luxury product, and you've got a very different sort of challenge to solve, then I'm doing affordable investor products, two very different, same real estate but two very different outcomes. So price point now in Brisbane has reached new heights that we've never been before, which is great to see. Hopefully that gives flexibility to developers, to bring to market product that is better than what we've seen before. In terms of the question of where is the, so the question is where is the price point?
Daniel Holden: Where's the ceiling, that if somebody brought you a project and said, "I'm selling two bedders at 840." You'd go, "Mate anything over 680 is crazy.
Daniel Erez: Sure.
Daniel Holden: Where's that comfort level for you to actually engage with somebody.
Daniel Erez: Yeah it's a good point, given that say two thirds of our sales originate out of Sydney or about 60 percent anyway, there is a psychological barrier for them to pay more than, say 650 for a two bedroom product in Brisbane. Maybe in some cases we've seen some 700, and again it depends on where it is and what it is. But I think as you start to go over that limit while it still might be value relative to the rest of the market in Brisbane, because you've got a bigger floor plan, there's only 60 apartments in the project, and it's well immunised and blah, blah. If you're selling to investors down South then you're going to have a price point, and likewise if you're selling to owner occupies in locally, you're going to be, you don't want to be price pioneering.
Daniel Holden: Okay, good point, so dusting off the crystal ball, where do you see the market place in 12 months, and secondary three years?
Daniel Erez: So the Brisbane market has, there's a decent amount of product coming up for settlement in this next six to 12 months across the main prescient of Fortitude Valley, Bowen Hills, New Stead. On the other side of the rive, South Brisbane, South Bank, West End. I think a lot of people, a lot of industry whether it's the banks, whether it's fund managers, whether it's a valuers, marketers, developers, builders and everyone in between, are really going to be looking at the valuations. Settlement defaults if any, and I suppose taking a more cautious approach to the market place. I think a lot of the people we're speaking to are really sort of sitting on their hands and waiting to see what's going to happen.
Fast forward that three years and we're talking about Brisbane really becoming a new world city, in the sense of Queen's Wharf, which is a major project for this city and such an exciting one for us to be present to. Howard's Wharf, Howard Smith Wharf, obviously as well, at the same time and we hopefully at that stage undertaking construction on both of those projects and they have completion dates somewhere in 2020, 21. At that stage Brisbane really becomes a different city, as far as I'm concerned. I kind of see those projects as marquee projects for the city, in the same way that Marina Bay Sands was for Singapore, kind of an ear marking of a new era for the new Singapore.
I believe those projects will be a defining point in time for the new Brisbane. We really then will become a world city, a destination city, and I believe there's going to be a lot of opportunity for smart property development, providing quality accommodation in that marketplace in that point in time. So we're really looking forward to it.
Daniel Holden: That's reassuring to hear I guess, one thing I guess I've noticed over the 10 plus years I've been doing finance and the five before that doing property side, is that career developers, which both you and I prefer to work with are the guys who currently sit back and go, well I guess when the more novice developers move into the market, it creates a little bit of skirmish, and a little bit of, not territory wars, but pricing competition. It creates all these types of things, and what a lot of my clients that I've seen over the last 10 years, they actually like, not a slower market, but a market that is reliable and a market that is consistent. What that does for them, is that's when they actually make good money. When a heated market comes on and properties are cyclical, that happens, you can't avoid it, it just creates tighter margins, more of a machine type effect rather than a opportunistic entrepreneurial property developer. It creates more of a cog in the system type of developer.
So I think the coming couple of years for a few people that I've been talking to, in the last couple of months anyway, are definitely I guess, they're sitting on the sidelines like you say for the next six, nine, twelve months, but then they're willing to catch the falling knife if you will, to say, "I know that, that's still represents good value." If I can buy this at 60,000 a site, when it was sold for 85,000 a site 18 months ago, I know that I can build a product then at 580, or 620, less my construction costs, less my finance costs, less my marketing costs. I know I can make a profit, and I know if I build a good product, it's going to sell even if it's lower market.
So I think there's the career developers, the educated guys, the entrepreneurial leap developers, are definitely ready to jump in and take advantage of that market, which I think is exciting.
Daniel Erez: Yeah I agree, to echo that I still think there's a lot of, I'm seeing a lot of optimism in the market still. Yeah there's caution, but I certainly wouldn't say it's become pessimistic by any sense. There's a lot of reasons to be positive, it's just about being more considered in the approach.
Daniel Holden: So, what would you say to a younger you about navigating through the game of property development?
Daniel Erez: Leave, leave now, get out.
Daniel Holden: Leave with your hair on.
Daniel Erez: Leave with your hair, that's true. What would I say? I would say probably that the best advice I give to anyone starting a property game, or any enterprise for that matter, is try and seek out the smartest, and people that you admire the most. Offer to buy them coffee regularly, or take them out to lunch. Just sit there, shut up and listen to what they have to say, because this property industry isn't a new industry. There are plenty of people and your fortunate enough to have one of them in your team, Steve, who I respect and admire. He's been there for, this is not new to him, he's seen all this before. I think having people like that around you, and really listening and taking perspectives from those is probably the smartest thing you can do. Certainly there's a lot of mistakes that you can make, and hopefully you can avoid some of them by having people like Steve around, so that's probably the first piece of advice.
Second piece of advice is prepare to work hard, harder than you've ever worked before, and just when you think you're not working hard enough, you need to work harder again. There's no shortcut to making this business work. I know a lot of people come into it, these opportunistic developers, that see a quick buck to be made in property development. They may have watched a channel nine renovation show, or something like that, and there's no lack of those, and thought, "You know I'll have a go at this." Quite often, and I'm sure you would have seen this too Dan, like a lot of them come unstuck because of the things they didn't know, they didn't know.
Probably one of the other things that springs to mind is don't be impatient. I think when you're younger you have a tendency to want it all, and want it now. Property it's not the stock market, property is a longer term play, and you often need to sit through one, maybe two cycles before you really have all the pieces and enough significant or sufficient rather, knowledge to be able to go out and do something on your own, if that's your wish. So I think being patient and surrounding yourself with people that are doing it, is probably the best advise I could give to someone, and give it time, be patient, work hard, be humble.
Daniel Holden: Love it, so I'm going to throw this one in there. I've I guess seen a lot of property developers amass a good business and they get to point where they've got good processes, good capital management 'cause they work with a firm like ours.
Daniel Erez: Of course.
Daniel Holden: They've got good marketing machines, 'cause they engage guys like yourself to get that humming nicely. They've got a great business model and then they get to a point where they think that, that model, or that business has an inherent value as opposed to the project that they're working on today, tomorrow, which most smaller private guys they know the value is in the property they deliver. Once people get to a certain amount of volume, turnover, either they get to a point where they go, "My business now has value." You didn't mention it earlier, but I know your previous background was actually in kind of mergers and acquisitions, and transiting that skill set into property I guess do you have any thoughts or feedback for people, when and at what point their business actually has value? Because a lot of them, potentially have no value, but they've just brought on shareholders, and they go to that small thing called the OSX to raise their capital instead of raising it day to day. At what point do you see an actual property development business has value?
Daniel Erez: Well at what point does a property developers have value, it's a hard question to answer, probably a better question to a developer looking to do something like that is, why would you actually want to list? Because most of the developers that we deal with who would be the candidates to do something like that, those that aren't publicly listed, those that are privately held and successful developers. When you look at who those people are, the drivers behind, they're entrepreneurs, they're guys that get out there and make it happen. They don't answer to anyone but themselves, and maybe their wives, but generally they don't have a boss.
If there's one thing I've learnt from working in a corporate and having advisers around me who are running publicly listed businesses, is that the stock market is a terrible boss to have. Shareholders in a public, are a terrible boss, and generally people of that temperament don't last very long in companies like that. There's no autonomy anymore. You've got to answer for everything.
So I guess it's more about, is there smarter ways to, if you're doing it to access capital, is there smarter ways to access that capital. If you're doing it for ego, well only you know the answer to that. But in terms of value in a business, I think property development is inherently hard to value. When you look at the property developers who are publicly listed, a majority of those, like [inaudible 00:49:33], Stocklin and Lease, aren't pure played property developers. They're a mixture of retirement funds management, office, property development is a part of the business but it's certainly not the focal point. Villa World, Sunland, guys like that, they've executed, and they've gone it well.
Daniel Holden: They've got recurring long term track records and they then become just a little bit more, processed, not talking about those two guys you mentioned individually. But those developers that reach that level and then do that, it then becomes, and also the debt available to those companies is much lower.
Daniel Erez: Correct, that's right.
Daniel Holden: All of a sudden they're getting 30 to 50 percent of TDC, the capital they've got to put into that, which does come from [inaudible 00:50:16] but it's still their whole business model, their whole economics and metrics as a business changes massively.
Daniel Erez: Again I've got to wonder if you actually went and asked the CEO's of those companies, or the Chairman's of those companies if you could take, go back in time and not list, if you could buy back your company, would you do it? I would be interested to see the answer, 'cause I would hazard a guess for a lot of them the answer would be yes.
Daniel Holden: One thing I remember talking to somebody many years ago, the appeal for a property developer and a leap property developer who understands their business model, and operates as a proper entrepreneur, they liked the ability that they could do nothing. To see the market, see what's happening and to actually wake up and go, man my four staff, or 10 staff, because they outsource a lot of things, they engage consultants like you and I, and everyone else in the cycle, sorry in the project life cycle. They have the opportunity to just go, "Do you know what I think the markets too hot right now." Maybe early 2015 they said, "I'm going to sit on a beach for the next two years, and I'm going to wait, and I'm going to make my counter silica play in 2018. When people are running for the exit signs, and thinking that they bought in the wrong time." So I guess that opportune cost of being able to not do something.
Daniel Erez: The luxury of not being able to do anything.
Daniel Holden: Yeah.
Daniel Erez: 'Cause that doesn't work if you're publicly listed.
Daniel Holden: When you've got a machine, you got to feed the machine.
Daniel Erez: Although the market expects results, they want to see something every quarter, even if it's not necessarily a good thing.
Daniel Holden: They just want to see it churning through. So, well thanks for joining us Dan. The most important question today.
Daniel Erez: Yes?
Daniel Holden: What's the best bottle of wine you've had recently?
Daniel Erez: Well what's the best bottle of wine I've had recently? Well actually one of, probably the most stand out, it's not that recent it's actually back in Christmas, I was fortunate enough to share in a 2006 bottle of Hermitage Grange and I can not only say I was speechless for the first ... It's like nothing else and I hope to drink one of those again in the future, but that was definitely a standout for me. Perhaps a career? Career highlight I'd say.
Daniel Holden: Magic, well alright thanks for joining us Dan.
Daniel Erez: Thanks very much Dan.
Daniel Holden: Talk to you soon.
Daniel Erez: Talk soon, bye.