Wholesale and sophisticated investors are generally the most diversified investors in Australia^. As such, they’re looking for various asset classes with differing degrees of risk. Investing in property developments is an area many want to tap into, but a core issue is the time and experience it takes to complete due diligence on the developer and project.
Investors will often turn to their trusted advisors — accountants, financial advisors, family office directors, and so on — who can help in assessing both a fund’s viability and the potential for certain projects’ success. They typically also won’t have access to the deal flow, another barrier to deploying their funds toward good opportunities. Advisors are also typically restricted to working with a local purview, looking only at potential projects in areas they know and understand.
Marketplace lender CrowdProperty provides finance for small-scale residential developers and investment opportunities to wholesale investors. By efficiently matching a need for capital with a desire to invest in property projects, the company solves a major pain point in Australia’s small-scale development sector — simple access to specialist finance to build more sorely needed homes.
The key to the company’s success in attracting a diverse mix of capital is the rigorous due diligence its specialist property team conducts on every project. They do the time consuming work so the investors don’t have to.
This means investors are no longer restricted to investing in projects they can walk past and instead can take advantage of different locations, project types, and investment terms to spread their risk and diversify their portfolio.
A partner in your corner
Daniel He, property director of CrowdProperty Australia, said the company has a proprietary 57-step due diligence process in place to assess project loan applications.
Daniel has been directly involved in over A$45 million worth of property deals, including small to medium-sized residential developments across Australia, over the past 15 years. And, like many of his colleagues, he’s also an active property investor in his own right.
“By nature, property development is full of problems to solve. It’s about navigating through the problems and learning from the developments you’re involved in,” Daniel said.
“We empathise with what property developers are going through when seeking finance — something they can spend up to a third of their time doing — and we understand what they are trying to achieve. In a lot of ways, we look at a project and de-risk it by applying our criteria for assessment or by actively asking the right questions. It’s really a partnership we have with developers.”
Putting safety nets in place
CrowdProperty financing sits in the most secure place: first mortgage security (or senior debt). That means if a developer gets behind, CrowdProperty can step in and ensure the project gets completed, and capital and interest is first paid to its investors.
CrowdProperty also seeks to sign tripartite agreements for the rights to the first mortgage on all its projects.
“That gives us the best chance of getting the money back from the project. It’s pretty hard to sell a half-completed house,” Daniel said.
In addition, all CrowdProperty’s projects operate on a payment on arrears basis. “That means they are completed to a certain point. We then send in our quantity surveyors to check if they have met their targets. We don’t prepay any part of the construction,” Daniel said.
A multifaceted project appraisal process
Daniel detailed a long list of items CrowdProperty examines when appraising each project on a deal-by-deal basis.
On a suburb level, these include transaction volumes and values, how much stock is turning and what prices properties are selling for.
“We look at this by property type. For example, it’s very different to compare a unit to a terrace house or to a townhouse,” he said.
CrowdProperty also scrutinises maps and overlays to ensure the project won’t get caught in bushfire- and flood-prone areas.
“If over the past 10 years there’s been a drop in prices of over 10%, that’s a red flag,” he said.
The percentage of renters versus homeowners in a suburb is also important.
“If the development is targeted at family owners, we would far favour an area with a large number of homeowners,” said Daniel.
“If the development targets investors, we might look at the number of inner-city renters.
“In case we hit some headwinds, we also ensure that we are in a deal which can take the reduction in end sales values. We’ll have a look at things like incomes and demographics right down to the street level, not just the suburb.”
CrowdProperty also gets third-party valuations on every project to verify that the deal ‘stacks up’ from the valuers’ perspective.
“They look at the valuation as-is before development and the valuation as-is once it’s completed. They even look at things like rentals in case the developer wants to hold those units,” he said.
CrowdProperty also adds an extra layer of security by doing detailed due diligence on the borrowers themselves, looking at things like how long ago they bought into the project, their credit ratings, experience, project team and more.
It also requests financial statements for their builders, usually from their accountants, to ensure they are operating with enough cash flow and appropriate buffers in place.
An important question is why they are doing the project — for example, to hold or sell. The intention is to ensure there is a good market fit before they enter the program.
Daniel noted that good projects have enough contingencies built into them for market swings and there must be enough profit-on-cost in the deal.
“Let’s say a developer starts with a 20% profit and the market swings, that may come down to, say, 14%, 15% or 18%. That’s not a big deal. But if the project starts with very skinny margins, that could turn into something very different,” he said.
Only the best projects qualify for finance
After it’s collected all this data, CrowdProperty’s investment committee will manually review all of the red flags that have come up in its appraisal. The committee is made up of the specialist team in the Australian and UK companies. Between them, they have over 100 years of property development experience.
Every project is different. The aim is to individually assess each project by its merits, its opportunities and risks.
Out of all applications, Daniel said about 70% of borrowers are rejected after making their first application and only 4.2% ultimately progress to receive financing.
To find out more about CrowdProperty as a robust investment option for your clients, click here.
