Why developers are buying their own stock – Jo Chivers

In today’s show we talk to Jo Chivers, who is the CEO of project management company Property Bloom, about developers buying their own stock and why that should be a concern to you and I.


Kevin:  Inside the latest Australian Property Investor magazine, there’s a great story written by Kieran Clair called “Keep and Reap.” Basically, it deals with small developers potentially keeping some of the stock for themselves.
Jo Chivers, who is the CEO of project management company Property Bloom, has a view on this.
Good day, Jo. How are you doing?
Jo:  Hi, Kevin. I’m well, thank you. I love that title: “Keep and Reap.” I think it’s fantastic. It says it all, really.
Kevin:  Yes, it does. I’ll get you to explain it in a little bit more detail, but basically, it’s where a developer can develop a complex and then maybe hold onto a couple themselves. It’s nothing new, but it’s a very good strategy.
Jo:  Yes, that’s right. We found that with out clients, Kevin, that when they do build and develop property they do like to hold on. Really, a lot of their purpose and objective behind developing property is to boost and grow their portfolio, so yes, most of our clients are building to hold.
Kevin:  How do banks feel about this?
Jo:  The banks are fine, but it depends on the size of the development, of course. If it’s a large development the banks do want presales, so that’s definitely something you need to consider with something probably over four units. We tend to work under that threshold because it’s easier for people to finance. We’re mainly dealing with dual occupancies and three- or four-unit sites. Generally speaking, the banks won’t ask for presales on that size development.
Kevin:  I can understand why it’s a good thing for developers, because they’re obviously selling out their own development but they’re also giving themselves a bit of a portfolio. What about the other buys in the complex? Let’s have a look at that. Don’t you think it gives a false indication of interest if they don’t know that, in fact, the developer is holding some of the stock themselves?
Jo:  Yes, I think in a big development, where you are doing a big strata development of maybe 10 or more units, that would probably be a concern for people buying in. They will look at the holdings. They’ll do their strata report and searches, and they’ll see who is on the strata management committee. That may deter some buyers. Yes, that’s a good point to raise.
Kevin:  Buying off the plan, though, you probably wouldn’t necessarily know who the other purchasers are, would you?
Jo:  That’s correct, actually. A lot of the larger developers who are building that size development will actually hold on, because they’ll want to reap some of the rewards of future capital growth. So it is a bit tricky when you’re buying off the plan.
Kevin:  I can understand, too, if you’re buying into a complex, and you do the searches, as you indicated, Jo – and you should always do that – this is an established development and you find that the developer is holding two or three of the lots, you’re also giving up a bit of control to the developer in terms of what can happen in the body corporate?
Jo:  Yes, to a degree. But you have to remember that the developer is going to want things to go smoothly, as well. At the end of the day, the people who have bought in are his clients or purchasers.
I haven’t had any experience where the developer has overridden certain things. I’ve bought off the plan myself and been that situation where the developer has held the majority of the units when they were completed. We didn’t have any trouble, so I guess it does come down to what would be the issues are could come up, that could be raised? Really, everyone is in the same boat. Everyone wants the complex to be well kept, that kind of thing. I don’t think it would be such an issue.
Kevin:  It think that’s a good point, too. You’re very right in saying that the developer would want it to be successfully run, they want the development to continue to look good, so they will maintain it. So that point is quite well made.
What about if, further down the track, the developer decides to sell off those lots at less than what he purchased them for? That’s going to depreciate the value of all the other lots, too, isn’t it?
Jo:  Yes, and that can happen depending on what the market is doing. Everyone is talking about an oversupply of units coming onto the Sydney market in a couple of years, when they’re all finished. That is an issue. You always have that in the back of your mind when you’re buying into big, massive complexes.
I tend to like small, boutique developments. If I’m purchasing myself, I always go for very small, boutique developments where hopefully that won’t become an issue.
But that’s a very valid point, particularly when there’s an oversupply in the market. In that case, when that happens, if you can hold on, because otherwise you’ll end up selling at a loss and you might kick yourself. At the end of the day, if they’re well located… This happened in Sydney, in the Darlinghurst area in 2003. There was a massive oversupply, but if you held that unit now you’d be enjoying some fantastic capital growth.
It’s definitely something to consider, what’s happening in the area, if there’s a lot of building work going on, you’d need to come back to location, location, location. Have you bought into a really good location that’s going to have future growth? If you can, buy into the smaller complexes, because I think the bigger the complexes the higher the risk of that happening and people having fire sales.
Kevin:  It’s always good talking to you, Jo Chivers. You make so much sense. Jo, of course, the CEO of property management company, Property Bloom.
Thanks for your time, Jo.
Jo:  You’re welcome, Kevin. Thank you.

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