Investing in shares for development projects.

[Ace in the Hole]

Does anybody have experience in purchasing shares in property development projects?
We're the returns close to expected?
Would you do it again? Why or why not?

This is purely for a cash flow play, not looking to accumulate more property?
Basically it's a way to get committed to larger development projects without having to be involved in the structure, simple cash in cash out transaction.

Keen to hear any feedback, thanks.

 

[Paul@PFI]

Very few developers issue "shares". This implies the entity is a company. Which means the Directors determine if and when a dividend is paid....High risk. Shareholders cant demand anything. My tip is the only shares worth owning are public companies listed on the ASX. You can always sell those.

Many developers do form closely held unit trusts with under 20 investors (any more its illegal without ASIC compliance such as a prospectus !) each with a fixed share ie 15 unitholders each invest $500,000 and are issues $1 units. Trust has $7.5m. Unitholders then have a fixed share of income etc (6.66% each). Problems with voting etc pose a lack of control especially when the "manager" and his cronies outvote all as they own 53%

These trusts are used for the financing of the dev. The builder still gets his profit and the investors get theirs. Perhaps a fixed share, perhaps a defined rate of return. Depends.

In my experience there is very high risk. Cost overruns. Financing can delay build etc. What profit does the builder get ?? Some builders use these trusts as a way to avoid bank finance or use the trust as a lender of last resort. So if a bank declines the loan why would you finance it ?? These trusts can be used to bypass the usual site requirements that banks impose. So it can be a concern.

I have had clients get stung and others do well. Just remember its an unsecured loan at end of the day...No capital guarantee. Higher risk and you cant opt out. What rate would you want for those aweful investment conditions ??? Had a client do one at 12%. A year later the builder couldn't pay the interest or the capital. It was the compounded at 8% and repaid in full after 2.5 years....That makes no sense. If a bank wont lend to them why should you ?

The clients that have done well tend to be introduced through others they know.

Caveat emptor.

 

[antistar]

Hi Ace

Have a look at A-REITs / Property Trusts.

They are publicly traded so there is your easy in and out transactions.

Keep in mind that the unit valuations are speculative and not necessarily linked to the value of the real estate owned and distributions can be dilluted due to layers of management in the structure.

It's a good and simple way to benefit from AU's overall real estate growth - the only thing is you do own units (paper assets) and not property.

Cheers

 

[roe]

There is a company on ASX (FRI) that purely do development (buy land, build, sell) with reasonable profit it is around 370 Million market cap.. just an idea to explore ..

 

[Ace in the Hole]

Thanks for the replies, will consider these.

 

[redwing]

How about Unit Trusts when doing a development/JV