Join us as we dive into the concluding steps of the Ladder of Complexity and we learn about the final and most complex strategies that there are when it comes to property investing. We learn about strategies like development approvals, building units and townhouses, we discuss land subdivisions, and much much more!

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Transcript:
Nhan Nguyen:
My point is that it's not the game for the faint hearted. 

Tyrone Shum:
This is the Think Big Property Podcast where Nhan earns millions from property development and Tyrone (that’s me) has millions of questions.

In this episode we’re going to conclude our discussion on the ladder of complexity. We delve into the final strategies at the top of the ladder that are some of the most complex property strategies with a high risk and reward factor. Strategies like development approvals, building units, apartments and townhouses and much much more!

The final strategies in the ladder of complexity incorporates high risk and high reward. We delve into the 9th strategy, which are development approvals that relate to risksmart and CDC.

11:02          Let's distinguish these two. So the other ones I'd say are just stock standard approvals where you're not really pushing the boundaries. Every council, every city, every state has different rules. And like we said before the one we're talking about before, probably the generic ones where it's stock standard, where you're ticking all the boxes. Sometimes it's two dwellings or less. Sometimes it's four dwellings or less. Sometimes it's 10 dwellings or less which are stock standard, tick the box. This level of development application we can call it impact assessable versus code, which means that it doesn't tick all the boxes but there is a desire or need for it. So it might be, you know, if you're looking at a block of land that normally you'd be able to put 10 townhouses on but you're pushing for 15 because you might be going three-storey or instead of 10 apartments you be going for 20 apartments because you're going five-storey.

11:55          So this is the more complex type of approval and you can call it impact assessable or out of the box or just depends on the council and the appetite for it. Because sometimes councils definitely want more density because it alleviates pressure on the infrastructure and things like that. However, you really need to, it's a case by case scenario. It might even be a residential block of land that you potentially want to put a commercial use on, I've seen it recently, you know, where there's a block of land, 7,000 odd square metres and that normally you can put townhouses or residential blocks on and they've got a McDonald's because it's on a main road. They've got a McDonald's and a petrol station plus a few other shops on it and it takes a little bit longer. Like I said previously, you know, with some more challenging applications it takes longer, takes more money, but because it is a nonessential use or a change of use, material change of use then there's potentially a lot more upside and profit for the developer. But there is some risk to it because you're throwing money on the line and you may have committed to buy the property, spent a million, excuse me, $2 million on it and waiting for the approval to come through. So it's just a bit more of an assertive and aggressive play in the marketplace. And this is often where, you know, the public companies go because they want a better return on their money.

13:17          I've interviewed previously house developers as well who have actually gone through the council and you raise a really interesting point that the council sometimes actually prefer a developer to add more density to the land just depending on where the area is, and this particular developer I interviewed previously, he actually was applying for a development in Melbourne for a 10 townhouse subdivision. And unfortunately he got disapproved initially when it went through because it wasn't, he didn't have enough townhouses. He was saying that they needed to build more and I think the council requested him to do 18 townhouses in this instance. And I thought, wow, how does that happen? So he essentially did go back and had to redesign the whole thing and managed to put in 18 and then finally got it approved. But that was just a very interesting scenario because it kind of triggered me when you said that, you know, if the council can actually increase the density, which they would recommend they would.

14:13          There is a lot more opportunity because that's the same lot and the town plan initially said to him, 10 is going to be fine, you know, to get through. But the council after a bit of time, and it did take him a lot longer than expected because initially he planned for about year to year and a half, it took almost three years for it to be done. But the profit behind it was substantially greater than what he initially did with 10. The outcome was great. But yes, as you said, the risks are quite high and you know, you can be in development for anywhere between three to four years for something like that as well too.

14:41          And if you think about, you know, the holding costs on something like that, the land wouldn't have been cheap, let's call it $2 million at 5% you know, that's $100,000 a year. You might go, a hundred grand year is fine, but one year that's $100,000, 2, 3, 4 years, that's $400,000 just of holding costs and you might get rent of maybe $15,000 a year if you're lucky, $300 a week. Then the capital is tied up. Opportunities tied in there and the market changes as well. You know, if he bought that in 2007 and came out in 2010 and the GFC happened in the middle, just those risks because with development approvals, sometimes you win, sometimes you lose. It is a skilled game. The other thing is councils change their mind as well over time because of elections, local elections, council elections, state overlays, state sentiment.

15:32          So my point is that it's not the game for the faint hearted. Oftentimes the people with the deeper pockets who sit and land bank on stuff, they might lobby for three to five years or they might wait for infrastructure to catch up with them so that they don't have to put in the expensive sewer that's upstream. That's going to come up with them. I know guys who sit on $10 million worth of land in huge estates and they're just waiting for the guide upstream just to connect the services to go past their block and they've saved themselves $5 million or $3 million and then they come out of the ground knowing that because I've got the deeper pockets and they can lay and bank. It's just a different ballgame that moms and dads I suggest steer clear of for the time being until you have, you know, 1 or $2 million sitting around doing nothing. 

16:22          The next one we'd like to probably talk a little bit about is subdivisions. So this is something that's really, really right up your alley in terms of subdivisions and you just also mentioned an example about it as well. This particular part of it is subdivisions where we're creating two lots or more. So, as you've mentioned, you've got a 30 lot subdivision. Let's talk a little bit more about this one and how this one goes up in a lot of complexity.

16:54          It's very much congruent with what we were talking about before with increasing the number of dwellings that you're building when you're building dwellings, it's not too bad simply because you can see what you're doing and you know what's going on. And once you've got the design line and you've got the finance right, it's not too bad, I'd say in this context of subdivisions, when you're doing more and more of them oftentimes with some reasons of challenges, you don't know what's under the ground. You don't know what's under the ground and whether it's contamination, the soil's bad. You've got other things like retaining walls, excavation. You've got headwalls which are like, if you're putting some storm water into creeks, if you're into waterway corridors. So at the moment I'm dealing with the handful of things such as, like I mentioned before, flooding where we have to build retaining walls for roughly, let's call it a hundred metres of walls that you wouldn't normally have to spend on a flat block.

17:53          And that's the other thing with subdivisions, is land. For example, if you've got a thousand square metres, there's only a few ways you can cut it up. Whereas a thousand square metres with apartments, you can pretend to put 10 dwellings on it, 20 dwellings on it, depending on how many levels you go. So with land, when you're creating multiple lots, you're dealing and you're pushing the envelope, you're dealing with things like slope, retaining walls, wall costs, buyer retention. So civil contractors as well. So it's just a more complicated form of construction because you're moving dirt around versus houses often because the blocks can be leveled and the earthworks with the subdivision have already been done, essentially you're just building the house. So that's why I think subdivisions can be a bit more complicated than a building. 

18:41          In terms of say for example maybe timeframes and so forth, subdivisions versus say getting I guess the dwelling put onto them, do you think that there is much difference in timeframes or would it be something that is quite similar?

18:59          One into two subdivisions, you can get it done between 6-12 months depending on the approval timeframe. So it could be approved in 6 months and then the actual work is finished in 6 months, which it sounds pretty crazy because all it is is just 2 blocks of land. You actually got no building in that same 6 months. In that same 6 months, you can build 1 or 2 or 3 houses. So actually, it might sound funny and it might sound crazy because it takes 6 months in subdivision, but it's the process that takes awhile and the paperwork is a fair bit of paperwork, just waiting around. Sometimes you might wait 2 to 4 weeks just for something to get stamped. And that's not unusual. Whereas a building, once it's finished, certified comes through double, triple checks it because it's been checked all the way through by the certifier and the engineers.

19:48          You can pretty much, keys in, turn the key, you move into the house. But because the subdivision is underground, they want to make sure it's done properly. They do, you know, CCTVs of the pipes. They do vacuum tests, they make sure the pipes don't leak, they make sure they're sealed properly. I heard of a situation where a water main was connected and the subcontractor was annoyed at his boss and therefore he didn't do the job properly. And the water went everywhere because he didn't weld it properly and it was sabotaged. So they literally had to dig it all back up and fix it up and backfill it. So my point is that with construction it's all visible. That's why it's a lot more easily inspected and approved. Where subdivisions, 99% of it's underground.

20:37          And for example, even bitumen on the road, once you put the bitumen down, you have to test it to make sure it's at the right compaction because within a month if it's not right, it'll all come up. And then potholes and things like that. So it's a different kettle of fish and not to scare people but at the same time give them a reality check that  this can be serious business. Because if you don't get it right there's problems, long term problems down the track because you're building a building and if the buildings are on bad soil and hasn't been catered for or the pipes haven't been installed properly, then they say the sewers, you know, not connected. You've got a blocked toilet and that's not fun.

Coming up after the break we will delve into why subdivisions are a little bit harder than building townhouses...

I'd say subdivisions in some ways is a harder game to play from a marketing point of view.

Tyrone Shum:
How the property market drastically changes over time and the impact it can have on your investment...

Nhan Nguyen:
So if you started in 2014 and came out in 2019, which is where we are now, the market's dramatically changed and you've got many, many millions of dollars at stake.

Tyrone Shum:
We hear an amazing story about one of Nguyen’s mentors...

So, you know, there are some big banks out there, but that's why it's definitely a big boys and girls game and experience is important.

Tyrone Shum:
So that’s next and you’re listening to The Think Big Property Podcast.

21:20          So this is so crucial when we're talking about this. It's the foundation really and foundation people can't see, it's like a high rise. People don't see that. They spent maybe 6 to 12 months digging down deep into the ground, laying all these rods and so forth to build the foundation and the concrete and all of that. And then as soon as that is done, the high rise just goes up in like literally like less than 6 months. And it's just crazy how it's so visible and fast. But that foundation is so crucial to ensure that it stands up high.

21:52          I know the last two things we've got there on the ladder of complexity. Just talk about, you know, three-storey construction with apartments and then more than three-storey, you know, Mascot Tower, I know it's been on the news a fair bit. I'm sure you know, being in Sydney there, you've probably heard more of it than I have, but that's a really good example of risk in a situation where you've got multiple dwellings and it's 10, 20, 30 storeys high and they just haven't done a proper job of the engineering and the inspection. That's all dodgy. And now it's costing people 5-$10 million dollars to fix something. And it's just a really, really bad situation because, you know, it's not like one house. Let's say you've got 100 houses and one of them's been dodgy. Worst case scenario, $300,000 to build, knock it down, insurance claim or you back fill it or you basically pour some concrete into secure the slab. You can fix that. But something that's so big, it's just so gargantuan and the infrastructure, if it's not done right there's just so many problems and to fix it, fixing these things are very expensive as well. 

23:12          At this stage, you know, the stuff that I've done, a two-storey I've done, I built a lot of houses. I've got a handful of townhouses. And you don't need to get sexy. You don't need to get overly complicated to make a lot of money. And you know, even with the 30 lot subdivision that I talk about, it might sound sexy. It is definitely challenging for me how I've broken down the risk of it financially and emotionally as well as broken it down to 2 stages. That's what other things you can do to reduce risk is break it down. Stage one is about 16 lots and stage two is 14 lots. So the fact that it's not just all in one go. It means that I can stage it and financially I don't have to capitalise or come up with all the cash for the whole project at once.

24:04          It's just this one stage at a time. Then what happens is you get the profit from stage one, it helps you bankroll stage two and the banks are really happy then as well because they know that all the valuations that you've talked about stack up. There is a market for what you're selling. People want to buy it. You're making money. The bank's making money, your investors are making money and everybody's profitable and it's creating a product that people want. And then stage two, you know, you've got profit, you've got the marketing channels, you've got the exit strategy and then the bank is a lot more happy to fund that as well.

24:38          That's the great thing because once you've got a proven track record that the first say 16 lots have sold. The next stage, when people look, Oh hold on, 16 lots have sold there. A lot of investors are happy or moms and dads are happy, then the people would buy the next lots. There's a boost of confidence that they can buy the next ones quite comfortably because it's already got a proven track record. And that's what I love about hearing stories like that. Like the bigger developments, obviously they do them multiple stages. You know like we've had, for example in Sydney, The Ponds section, they had stages. I think it was at least 3 or 4 different stages that they had to go through. But that first release called The Ponds was released with a nice big development. And then after that people were really happy. So they released the second Ponds, which is called the Second Pond. It's very similar across the board with a lot of developments I've seen as well.

25:30          It creates social proof as well that you have the people who are going in, they're decent people, they're working class people, there's families in there, it's going to be safe. The buildings look good, the landscaping looks good. So I completely get that. It's just that social proof that people need to be comfortable with that project. And sometimes at the first stages is the hardest, but you've put a lot of energy and that builds up momentum and very approachable with the marketing and give them a good deal where you can, you might give them a small discount of a couple of grand, 5 grand, something like that, just to move the stock down the track. We can talk about potential tips and tricks on how I sold land in the GFC cause I think that's really relevant to the current market.

26:15          Because there's so many different ways and elements to it. It's one thing to build townhouses. I'll come back to this, coming back to number 10 where we talked about building townhouses and units. I'd say subdivisions in some ways is a harder game to play from a marketing point of view. And that's why I've actually made it number 12 versus number 10 which is the townhouses. When you build townhouses, the difficulties of finance, like I mentioned, construction risk, design risk. But when you finish the townhouses, the product is relatively easy to sell versus a vacant block of land. If you've got 10 vacant blocks of land, it's very hard, like you said before, for people to see what the finished product is. Like The Ponds there, because people haven't moved in and they don't know what the house is going to look like, what the estate is going to look like, their neighbours, et cetera.

27:54          We’ll definitely be talking about that in a future topic because I think that's really, really interesting to sort of unpack as well just to understand the psychology behind it too. So I'm really excited to hear about that. So let's wrap up the last two and I think just to sort of summarise on that one, the complexity for 13 and 14. Basically 13 is building units, townhouses, so basically 5 to 10 dwellings and that's like a maximum of three storeys. And we've kind of talked a little bit about that. And then finally the top of the ladder is building units and townhouses, which are multi-dwelling but three storeys high and greater than 10 dwellings. And you know, things start to change as we discussed earlier, saying that once you start heading past say 3 or 4 dwellings, it starts to move on to commercial and then like commercial financing, commercial rates and so forth. And then once you go even higher when the big guys are playing the big game, there's a completely different way of mindset in the way that they're developed. 

28:52          The higher you go up on the ladder of complexity, obviously we call it that because it does get more complex. There's more moving parts that can go wrong. Also, there's more of a need for financing, whether it's investors, whether it's presales, whether it's just general funding. So general funding as you get above the $5 million mark gets very, very difficult. And you know, the banks are not a fan of it and necessarily. If you looked at APRA in the last five years or so, they've definitely cracked down. They pushed the [inaudible] down because they want, you know, people to put up more deposit and why people will put up more deposit because I think it's more of a risk to them. And so my point is that, anything more than three-storeys and more than 10 dwellings, you start to become professionals.

29:42          If you look at Meriton, you know, he's doing buildings of 200 and 400 and he's definitely the master of the game. When you've got buildings that big, you've got a lot of cash outlay, you've got a lot of finance at stake and your holding costs are phenomenal and astronomical. So my point is that, the reason that's right at the top is all the things we've talked about in the past, design risk, building risk, finance risk, a project like that could take 2 to 3 years to get approval and then 1-2 years to finish off. So we're talking about a 4 to 5 year project and it's not just 5 blocks of land or 10 blocks of land. We're talking about 200 apartments. So in the 5 year cycle, if you think about the property market goes through 7 and 10 year cycles.

30:33          So Sydney as a good example, 2012 to 2017 was really the run. So if you started in 2014 and came out in 2019, which is where we are now, the market's dramatically changed and you've got many, many millions of dollars at stake. You know, a site like that, he's gone out and paid 10, $20 million for sites. So you've got that money sitting there, being waited on in land tax while you're getting approval, and then you're going to spend another 100, $200 million to build buildings. So my point is, it's not for the faint-hearted. I've known several people who've been able to make really good money on it, but I've heard of a lot of dramatic stories where the market's changed, dropping by 10 to 20%. And then the construction costs have gone up by 10 to 20%. So essentially you've lost 20 to 40% of your margin at the top was 20%. Your 20% behind. 

32:17          Definitely just curious since we're sort of on the topic of talking about say like a Metricon or Meriton or any of those large companies, Stockland builders and stuff like that, for them to actually start to go through that process of purchasing a block of land and then building and so forth, do they usually go out to get funding for these through private lendings or the banks or even just through investors? Is that something that they would potentially do or is it usually funded in other means?

32:47          Generally they'd go to first and second tier lenders to do that, and because their cash flows in their balance sheets are quite strong, they're able to do that. So generally they'd go like a 65% LVR or even lower, like 50% LVR with some of their own equity that they've got in their projects or in their bank accounts in the balance sheet. But they definitely go with a stronger and a lower interest rate to our lenders. From my experiences just simply because of a project that big paying 12%, 15% interest is very, very risky. And for them, you know, that they'd rather even just float a project. They might even go to the stock market and go raise 5-$10 million as seed capital to get a project out of the ground. And then, you know, because if they can show, let's say 18% or 20% return and they're giving a proportion of that to their investors, it's a lot less risky than even, barring the 12%, 15% fund as you can see, if you're borrowing 12 to 15%, if the project takes longer, then they're in trouble.

34:59          Definitely another topic for another time where we talk about joint venture models there. There's so many different models you can run. I've summarised it pretty much down to two fundraising models and it's very much relevant on how you can do it on a bigger scale. The other way that they can do it while we're talking about it is sometimes our joint venture, sometimes a public company will do a joint venture with other public companies. I'll give you an example. Let's say one public company secures the property and puts up the cash for the land and pays cash debt free for the land. Another public company or another entity might come in and will guarantee the debt on the construction. So it might be a joint venture with a builder, but it might be a joint venture with another property developer whose expertise might be in construction as well as apartment sales.

35:52          So therefore, they'll come in and say, you put up the $10 million on the land, we'll guarantee the loan for the $100 million dollar facility. And from a cash flow point of view, we'll guarantee that and we'll push hard to get this out. So it comes down to confidence, experience. I know in the past, one of my mentors, his project was I think, off the top of my head, over 200 apartments and they went to the Bank of Scotland. This was about 10 years ago. And in the end they didn't make a lot of money at all because it just took so long. But because they had the experience, they had the expertise, they had the teams, they were still able to exit on the project. In the end they handed over the apartments to the Bank of Scotland. The Bank of Scotland had enough to pay off the debt and then use the rest of their sales just to pay off any interest that was owing. So, you know, there are some big banks out there, but that's why it's definitely a big boys and girls game and experience is important. And also having a lot of collateral in terms of your balance sheet as well as cash flow. It's a good thing to aspire to. But it's one brick at a time. One deal at a time.

36:58          I just mentioned one last thing I have heard and seen happen already as you've mentioned, some joint ventures like Lendlease and Stockland, pretty common things. They did that for The Ponds. You know, I knew that they did joint ventures all across there. So that very, very fascinating now that you mentioned it, because just that realisation just kicked in and going, they do it all the time, but we just don't see it until you unravel it.

37:24          For example, Springfield was a really good example up in Queensland where, you know, Maha Sinnathamby and Bob Sharpless, for those who don't know, Maha Sinnathamby's in the BRW billionaire now. He was a negative millionaire in a lot of debt and a lot of trouble, but he was able to sort that out and move forward. The point is that, like you mentioned there, Lendlease in joint ventures with them where essentially, from my understanding, superficially anyway, that let's say Springfield land corporation put up the land and just vacant land, they would have gotten their own approvals in conjunction with the council there. And then Lendlease let's say, would come in and put the civils in, curb and channel, sewer water, infrastructure in, and then Lendlease would be in charge, for example, of selling the land.

38:19          So Lendlease would put up the capital hypothetically to develop the land and then from the sales, the income would pay back Lendlease their contribution. And they, for example, would do either profit share or based on a fixed price that Springfield would sell to on a per lot basis. So that can be very, very lucrative in the [inaudible] scenario because let's say you might do 20 lots at a time, 20 lots from a costing point of view, it might cost them, let's say $2 million for Lendlease to put in the roads, infrastructure, et cetera. And then after 20 lots have sold, the profit comes back to you in the capital, comes back in and they can recycle it and go again and again and again. Lendlease if they are smart, they might have a building team and they might make a profit on the build as well. So they might, you know, jointly make $50,000 on the land and they might make 30,000, 40,000, $50,000 on the build. So every house and land, they might make somewhere between 70 and $80,000, let's say as an example. And then they can get rolling through that joint venture scenario where Springfield, they're just putting up the land, they're not contributing anymore funding and then Lendlease just keeps project managing it and rolling it out and rolling their money over and over and over again.

41:13          Let's wrap up this session or this episode, I thought it'd be really good for our listeners out there to probably get an action task in this assignment. They can actually go through and maybe just apply the ladder of complexity that we've talked about. So what do you think we should provide for them today in terms of the assignment?

41:34          I think an opportunity for people, we've talked about a lot of open homes and open for inspections and new homes and things like that. My suggestion for this assignment is for you to go and inspect some new dwellings so you can go and have a look at, you know, on the weekend for an open for inspection. Look at those specifically new dwellings. You could even go to a display village. If there's a display village near you or if there's a block of apartments that are just finished and that hit the market, I reckon you open the newspaper and go to www.realestate.com.au and look at something, go observe and study the specification on those dwellings. What I mean by that is study, what kind of bench tops are they using? How high are the ceilings? How big are the bedrooms? 

42:17          Dimensionally collect the information that you have. The pamphlets and things like that. What color are the buildings? Are they gray? Are they black? Are they white? Start to study and compile a set of information so that you go, okay, down the track, how can I use this information? I know I mentioned things like ceiling heights and even floor coverings. Sometimes you can duplicate that in a renovation. How big is the kitchen? Is it a stone bench top? Is it a laminated benchtop? How big are the tiles in the bathroom? Those things after a while become important, especially when you're building your own specifications, a spec home, or you're building townhouses that you can either out-compete other people by using bigger tiles, tiling up to the ceiling as opposed to just a one around the bathroom, glass splashbacks, there's so many different bits and pieces that you can learn just by starting a project that someone's just finished.

Coming up on the next episode of The Think Big Property Podcast we’ll be delving into cosmetic versus structural renovation...

The thing with renovations that people like is that they can do a lot of it themselves and they can do it very, very quickly.

Tyrone Shum:
We talk about the best way to learn about renovating...

I think cosmetic renovations are a really good place to start to cut people's teeth in on the process, on what works and what doesn't work with renovations.

Tyrone Shum:
The level of risk with structural renovations...

Like we've said before with the ladder of complexity, increasing budgets and increasing complexity of the renovation makes it more risky simply because you've got more moving parts and things are taking longer and you're removing things.

Tyrone Shum:
And that’s next time on The Think Big Property Podcast.