Hanging on in the big surf...

[Real-istic]

Hi all,

I have been floating around the forum for a while but I have finally decided to post.

I was wondering what strategies you experienced SS'ser have (if any) to help with the waves of investing. Namely for us we have quite a few IP's and some that we were planning to develop and equity growth has been very kind to us in the last few years to enable us to keep growing but we have found with the banks changing lending criteria and LVR's it has been harder and harder to keep moving forward with our original goals.

We found it pretty tough when we got knocked back for our 'standard' buffer refinance and were truly shocked at the valuations that came back to us. Some of the properties were fairly severely negative so our overall LVR took a real hammering. It seemed the main change was that as we were part way through sub-dividing the land etc in the past valuers seem to take into account approval (WAPC in our case) but in recent days they are only interested if the blocks have all site-works completed and seperate titles issued.... pretty huge cashflow difference as if they will not lend to assist you complete the process. I suppose it isn't helped by others offloading development blocks for the same value as singles due to the *fear factor*.

I suppose this means this is the first time we have really had to look at our holding costs... without buffers. We are very happy with property and feel it is a really superior asset class so we are committed to making it work out and hold on to our portfolio unless forced to do otherwise. Being self employed this is also the first time we have really noticed that cashflow is king and that even though we have upped the amount of work we are putting out there in our business there is a pretty significant time lag between that and payment..... and banks dont like to wait for repayments! (even though they have to at the moment)

Other creative means we are thinking of is upping our yield from the properties. Some that were on long term rent we have now furnished and are putting out for short term lease, much improved yield (although greater vacancy risk and of course more risk of damage as more *stuff* to get wrecked)

In terms of development we are unsure whether to use what valuable cashflow we have left after the above to try and move forward or just hold on until the general property environment moves in a more upward direction.

Are there any others out there facing the same dilemmas? We are very pleased with the growth we have had in our investing journey so far and even though we view this stage as just an "opportunity to consolidate" it can get pretty tough trying to make long term decisions whilst juggling the month to month stuff. We think this downward or flat cycle (in Perth mainly) might last up to another 2 years or so and maybe that is the time to keep pushing on because we would hate to risk our portfolio on developments that might not be as lucrative as we first thought.

Love to hear others ideas and strategies...it all helps!

Thank you all

 

[Player]

Hi Real-istic,

welcome, and great first post by the way. I believe you raise some interesting points and questions that concern numerous others here, myself included.

Personally, I am also sitting on some decent land content properties that would be ripe for subdivision and development. I'm thinking that in this environment, I would prefer to hold and wait for sentiment to improve ( and perhaps some downward rate movements)before upsetting any of my fixed rate loans on these properties.

Whilst I am not intending to ever sell any of my developments and I don't have any servicability issues, I'm feeling that right now the credit situation and LVR's may see some tightening as far as lending criteria go.

For what it's worth, I'm sitting tight and watching with eyes wide open for some more opportunities that will likely manifest over the next 12-18 months. I will start developing as the next up-cycle is underway and the perceived risk to the banks is lessened by more bouyant sentiment, and a more generous attitude as they once again start throwing money at people.

 

[Real-istic]

Thanks for your input Michael

I am grateful that we did not demolish some of the houses on the development blocks as at least they are now tenanted. We are still holding quite a lot of vacant land though and of course it has no return only outgoings. We had a plan to develop and hold all properties but with the changing credit market it seems LVR's are set at 65% of end value for contruct or 80% of land value whichever is the lesser. We have looked at commercial rates but they are pretty scary and may affect the profitability of the projects if there were delays in the contruction and subdivision process and we capitalised the holding costs. The other option is to fund through earnings part of the construction and the hold costs and revalue once complete (to 80% LVR to include some buffers) but in the current market there is no guarantee that values will come in above cost (or replacement) value. We have paid for some feasability work to be done but it is pretty inconclusive (..and it should be called Fees-ability!)

The upside is that rents are on the increase (over in the west anyway) and if we see a rate drop we could be well positioned to see some neutral if not cashflow positive returns upon completion. Of course if we see double digit interest rates come and stay for a while it could get pretty ugly. We have a family so assessing these risks is a lot tougher these days. Back when we were single I dont think we would have thought twice.... ahhh my husband used to have this saying "Bite off more than you can and chew like hell"..... I guess nowdays we are trying to be more *responsible*

Now if only I could find that crystal ball.......

 

[Player]

As you've stated (gratefully) you've not ground zeroed them all, so you've got some rents supporting you. Holding costs for land is a tough one.

Could you "test the waters" and develop on part of the land sites? viz: a few dwellings at a time (assuming they're houses or town houses and not apartment blocks you're developing), that way mitigating your risk and exposure if the market is not there in the next 18 months or so. Obviously doing it like this affects economy of scale as far as buying power with the builders, materials, etc, but may be a way of keeping your plans ticking over slowly without over-commiting.

 

[Real-istic]

Great idea Michael. I don't know why we didn't think of doing that, probably because of the subdivision costs initally but the value of the remaining blocks plus a couple of houses might be worth while. I have one site I am thinking of which we bought last year but was recently revalued at 70K less than we paid, without settlement costs. The subdivision will probably cost about another 40K to make 3 blocks but maybe developing only one of the blocks (and leaving the existing house) might mean the 2 houses and the block once the final subdivision is complete (driveways, sewer connections, power etc) bring it back to a neutral proposition sooner rather than later.

Great tip, I will look into it. It is funny how when you look at things for so long yourself you cant see the wood for the trees but someone else can!

Thanks

 

[willair]

The upside is that rents are on the increase (over in the west anyway) and if we see a rate drop we could be well positioned to see some neutral if not cashflow positive returns upon completion. Of course if we see double digit interest rates come and stay for a while it could get pretty ugly. We have a family so assessing these risks is a lot tougher these days. Back when we were single I dont think we would have thought twice....

Maybe have a look at if the rates go above 12% and see if you can hold all the property portfolio,if not have a sharp exit plan in place,also if the start up cost factor in development is high why not try JV's with other investors it does not always pay to be reliant on income from investment to help meet cash flow reqirements,you never go broke from selling for a profit and having a cash backup in place..IMHO....willair..

 

[keithj]

Hi Keith,

Our shares date back to the 90's but they were certainly not acquired with any sense of strategy or purpose, just a few rumblings and a very ad hoc approach and they are dwarfed by our property portfolio. We had already decided that this year we would turn from property pretty much exclusively to other investments (shares mainly) to diversify

We currently have 9 properties that when development and subdivision is complete will be 24 (seperate land titles). We have been lucky enough to be pretty much LOE for the last few years but due to the current market and conservatively looking toward the future this prospect is uncertain. With current constraints on feasability and profitability due to banking lending criteria our next 12 months development funds (and LOE funds) have dissapeared under the model we were using due to property devaluation. To continue to access funds to develop we are well aware that we need to change direction. We are now looking at holding costs being funded from other sources for that time. We have definately felt the change in the credit market and perceive it to just be getting worse so we are restructuring to weather a potential storm (I posted a thread called 'holding on in the big surf) which we hope wont happen! We have 5 kids including teenagers with private school fees to support now so we have to be more diversified and open to options

If we apportion 5% of IP values to blue chip shares (then margin lend against this) do you have an estimate harking back to your experience how many years margin lending may provide assistance to holding costs of IP's. Can we hope that a margin loan could cover this until the next property upswing? We realise you can't tell us how long a piece of string is.

Thanks for your time

Hiya,

Impossible to say without lots & lots of real figures. Make up a spreadsheet with lots of scenarios.

Cheers Keith

 

[Aaron Sice]

isn;t it ludicrous that the block needs to be cleared before they'll issue new titles? then they take their sweet **** time with the approval?

it's like you have to buffer at least 9 months of holding costs just to BE at the moment.

the valuation system in WA is a joke. banks tell valuers what value they want - so why pay them to do anything?

this is the one thing putting me off developing - the holding costs with no (no matter how small) return coming in.

just out of query - this isn't the 7 units I'm doing in Bayswater is it?

 

[Real-istic]

Hi again all and thanks for the advice

Keith we are working on that spreadsheet now, The biggest problem we are having is crystal balling and deciding on what direction we want to take. We checked into the Macquarie thing further today though and it looks like it might be what we are looking for as a back-up plan (if white-knucking it gets too hard) Thanks so much for the info! now its our turn for dd!

Willair- I wouldn't know the first thing about JV's personally although we have come across them in a business environment... I guess I am just nervous about pulling someone else into our personal stuff.. I would probably prefer to wait until we could do it ourselves. I think holding costs in double digits aren't as scary as being half way through a development. I guess we are trying to decide whether to halt our journey and just sit tight for a while then keep going .

Blue-card - just be AWARE that release of titles a) takes ages and b) often doesn't change the total banks vals. It seems to us the if we had multiple blocks that we purchased as singles all over the place the vals are much higher than if you split them yourself. We have experienced in the last few months that the valulations are often the same or even lower than they were prior to us engaging all the surveyors, planners and the WAPC approvals. Bottom line is that as a valuer told us recently "they have been instructed to value Perth property at what could be reasonably assumed to be achieved within a 'month' of listing in the current market"..... as properties are sitting on the market longer they are discounting the value to price a quick sale. When it comes to land it is just as tough as they realised someone would have to develop to get a return so therefore it too is discounted. We don't want to throw any more cash at development costs as at the moment it is just dead money (and reduces our ability to keep up with hold costs) We like to have a year plus development costs up our sleeves but as the revals are so low I wish we had done our refinances about 6 months ago.

Still as it is said...we are investing for a long time, not neccessarily a good time! That is the thing about cycles, we have been pretty damn spoilt up until now and I bought my first house in 1989 with rates at 16.5 so it is not like we haven't seen it before! The only thing is with holding costs and portfolios........... size matters!

Has anyone found valuations picking up? I have heard the eastern states are doing well.... is there still a massive gap between the agents appraisal and the bank valuation? I would estimate we are still at about a 20% difference on average

Thanks all

 

[Real-istic]

Blue card- sorry, to answer your question - no we dont have anything in Bayswater. Coastal is our thing, or regional CBD, and we try to keep subdivisions to 3 per title to avoid commercial rates

Cheers