Laying the foundations
Property development takes years—but it all starts with a project and funding. Westpac Property client David Knight of TDF Projects shares his insights about the process of funding and beyond.
Specialised property segment
Three years ago Westpac Commercial started a specialised property segment for south-east Queensland for clients operating up to $20 million. Geoff Dick, Head of Westpac Property in Queensland, says it was counter-cyclical, with a focus on looking after long-proven clients: “Two years ago we were still concentrating on existing clients; a year ago we started aggressively taking on developers from other banks.”
One such existing client was boutique residential development company TDF Projects. “They had a good delivery record, experienced professionals—within the partnership they’ve got quantity surveying skills, estimating skills and building skills,” says Dick.
For David Knight, partner at TDF Projects, a strong relationship with Westpac has been a core component of his company’s development success. “They have shown a confidence in our business model that few, if any, other residential developers would be achieving,” he says. “This mutual respect has grown over the years mainly due to our control of the project numbers, from inception to completion, and their ability to look not only at the numbers but to also look at and understand the end product as well as the team driving it.”
Loan to value ratio
In response to a tighter market, TDF has adjusted the way it approaches funding, including the loan-to-value ratio in its feasibility studies, to fit financial requirements over recent years. Knight says this inevitably means more money up-front from their side. “Our planning/management strategy hasn’t changed all that much,” he adds, saying that quality, well-priced, well-located property always sells. “Having been through the mid-to-late ‘90s as well as the post-GFC dramas, our belief of ‘Don’t develop anything you’re not prepared to live in yourself, because you may have to one day,’ keeps us honest.”
Formed in 2000, TDF Projects is led by Knight, David Woods and John Doran, who have experience as developers and business owner/operators in associated industries. Previous projects include 24 luxury townhouses in Bardon, specifically designed for empty-nesters. TDF is about to wrap up on Laurentia—12 luxury three-bedroom apartments and four luxury townhouses in Taringa, also targeting empty-nesters, in a $13 million project.
And it doesn’t look beyond Westpac for alternative funding, with Knight saying that while there are other courses of finance, the cost of it is too high. “There are developments that need that type of funding, but I’ve always got to ask the question, ‘Why do you need that type of funding?’ Are you equipped, if people have got to put that amount of risk on the job? “I suppose I’m a little bit spoilt when it comes to funding, because we’re fairly experienced in what we do and people, half the time, come to us for advice.”
When funding a new development, Dick says the most important element from the bank’s perspective is that the development is going to be self-liquidating. Developers need to demonstrate there’s a market and that they have equity to back their judgement. For the developer, there are many boxes to tick off. Knight says the fundamentals are the same for all developers: if the site has an approval, it must review plans for costs and marketability, and conditions of approval for any red herrings. The developer must also produce a detailed budget cost of construction and complete a detailed feasibility study. “Prepare your own comparable [end product] valuation,” Knight adds. “Have the answers before the financier asks the questions. If the site has no approval, employ an experienced architect to develop your concept and have a well-oiled team of subconsultants at the ready. Use historical costing to guide the process.”
Challenges with approval
And Knight acknowledges the challenges developers face in getting a development project approved, funded and under construction. He’s critical of archaic council conditions designed for large land subdivisions being placed on infill development sites, describing them as expensive and unnecessary. “The vendor perception is that a developer can get an approval in three to four months when, on average, it’s nine to 12.” Knight expresses frustration at the time it takes for things to come together. “At local council, you can have a team of five or six individuals needing to respond to their assessment manager to process a simple application. You only need one individual who works a three-day week and another who takes a holiday midway through your application for their prescribed 20-day period to be extended another 20 days. It’s an automatic one month delay. If this falls over Christmas, make that a two-month delay,” he explains.
Valuations of the end product are also a major issue, as well as finding sites in the right areas, weather conditions and buyer procrastination. “They know they need to move and downsize but many hang on and miss out on the quality of life they should be enjoying.” As for key lessons learnt, Knight says it’s important to understand the hidden costs of development—costs other than land, building and finance/selling—because there is much more to consider. “People don’t believe the real cost of construction as no two jobs are the same.”