Opinion on Metropole

[Twitch]

Hi Patosan, when the dust settled, what was the gross margin you achieved (based on valuations to actual costs incl. holding etc)? Was it less or more than that in the feaibility?

cheers

We used Metropole as project manager for a 3 TH development on our site. I was to start a thread on it ... over a year ago ... but just haven't got around to it . Here are some points, I've put the bottom line at no.1.

1. Metropole are good guys - this point cannot be overstated.

2. Michael Yardney - is supremely experienced and helpful, a good guy.

3. Michael Yardney is a salesman to the core - a bit strong for some, but not under-handed.

4. You'd almost certainly not be dealing with Michael - he may communicate at times. he will always answer your emails - nice.

5. Metropole staff are generally on the ball and very approachable.

6. Their fee is certainly not cheap - but it's not hidden at all, so you decide with eyes open.

7. They only show feasabilities - don't work to a "budget", possibly wise risk management on their part.

8. The concept that they handle everything for you to be an armchair developer potentially numbs the client to the risk.

9. Understand that their contract ensures that the client will carry ALL the risk - this is probably how things should be - just be aware.

10. I thought that they would've had contigency plans for problems or unexpected delays by their sub-contracted professionals - once again their contract removes them from this responsibility.

11. Many of the people they sub to are virtually on Metropole payroll - guess this happens when you use someone who does a good job or charges a low price over time - it does however blur the independence and validity of the tender system or searches for best professional for your job. Some have said you are effectively dealing with a single building Co so the cost should be much lower. If Metropole were a total package building Co then they couldn't shift anywhere near as much responsibility and risk to you - an experienced and wise move by Michael.

12. Our project had its ups and downs, I assume all do - yes I had frustrations with Metropole at times, but the end result was good.

13. Assessing the result is dependent upon some market forces - well out of control of you or Metropole, especially when the end is more than a handful of months down the road - think years not months.

Hope this helps

 

[Patosan]

Hi Patosan, when the dust settled, what was the gross margin you achieved (based on valuations to actual costs incl. holding etc)? Was it less or more than that in the feaibility?

cheers

Sorry for the delay, I had to dig up the files on all this.

Feasability Projection .. 1,750,000 ... initial feas had 1.95 mill ... I pushed for a more realistic figure
Final val'n ................. 1,480,000 ... independently, using recent comparable sales, 3 months after completion

Site Value ................ 600,000 PPOR ... thus not really part of develop't costs
Planning Permit ........... 17,604
Build permit ................ 16,044
Demolition .................. 10,300
Construction ............. 663,858
Const extras ................ 5,285
Project Manag't .......... 49,500
Finance, legals, etc ..... 71,290
Project Total Cost ... 1,433,881
Develop Cost ............ 833,881

Profit Margin ................ 46,119 or 6% of Total Develp Cost (not incl PPOR) ... of course less than 33% in feasability

This all started back in Aug 2002, in heat of boom, finished Jan 2006, after prices had declined somewhat.
Prior to develop't the site rent was only 14,560 pa ... only 2.4% of site, now rental is 69,680 pa or 4.7% of current site value.
I consider this to be acceptable since we are holding long term. With respect to the boom, timing was terrible but long term this is totally irrelevant or meaningless. Now we have quality houses in a blue chip area with rents increasing further. So I feel the result is good.

The project taking well over 3 years means that other invest opportunities had come and gone ... stock market would've been a much better place to invest similar money in 2005 ... but you do what you can at the moment.

Most costs were extremely close to the feasability report with the only dispute-able figure being the projected value of completed project. Metropole was using figures I believed to be far too high. So I pushed for lower estimates which after the boom were still too high, though the estimated rents were fair and achieved.

 

[WillG]

Hi Patosan,

Thanks for the great information. It is always good to see some real numbers.

May I ask what valuable lessons you have learned from your development ?

How important is timing ?

How was the Feasability Projection calculated ? What capital growth was it based on ?

Is it common for a development to take 3 years to complete ? Had you anticipated the development to take 3 years ?

Cheers

 

[traveller]

Patosan,

Thanks for posting the detailed figures, However I will note few points there:

1: Since you had the site already you didn’t include the Stamp Duty amount which on 600K alone will be approx 35K in 2002. If we source this site through their buyer agency then another 12K buyer agents fee.

2: 2002 was not really the peak of the prices in the areas that Metropole operates. It was more like late 2003. What I am trying to say is that if the site was 600k in 2002 I will safely assume that it will atleast be 630-650k in 2003. So you would have had that equity even if you didn’t proceed with the development.

3: Since you said that the Dev. took close to 3 years. This will blow out interest costs for a normal developer who will also have interest to be paid on the 600K site value which may be you didn’t. That alone will add close to 120k in interest costs on the Land loan alone.

Taking the above things in consideration I would assume that if a person took a similar development project and bought the site as well through them then the net result would have been more like:
Your profit = 46000
Additional Stamp Duty = -35000
Additional interest = -120000

Net Loss = 110000. Opportunity cost of that money i will leave that alone for the time being.

Another issue i have with holding these types of development is that a huge amount of money is concentrated in just one property. Whereas a person could have bought 3 different properties at different times and different areas going through different property cycles. And dont forget the stress and effort that such a development brings in even with a Project Manager copmared to buying a normal existing house/unit.

Patosan, i am not being critical of your development and on the other hand appreciate your sharing of information with us. However i have just used your figures to determine the appropriateness of the approach mentioned to a normal Long term investor.

It might have been apporpriate in your situation where you already had Development site under utilized. However if a person goes on to specially buy a site for this purpose then this may not stack up.

thanks-

 

[Patosan]

G'day WillG,

May I ask what valuable lessons you have learned from your development ?
Go with the gut feeling.
Seek out reputable builders and do a deal directly for a package.
How important is timing ?
This depends on your intent.
How was the Feasability Projection calculated ? What capital growth was it based on ?
I don't know exactly, but it was boom times so I guess same as residex does ... assume continued growth (boom) rate.
Is it common for a development to take 3 years to complete ? Had you anticipated the development to take 3 years ?
Ours was 3.5 years, council took a year to approve the planning permit ... this varies with councils. Builder avaiability, esp in booms, family troubles of architect and others are some of the unexpected delays. Think I also wasted a month responding about plans early on. I'd be surprisewd if many developments are completed under 2 years though.
Especially in the construction phase it's very frustrating to see the site idle for 80% of the time. When buiders actually get to work the construction time is short but there's weather, subbies availabliity, delays of materials, etc and the list of reasons for downtime is endless. Oh yeah the banks wasted an awful lot of time too ... the builder and I were both fuming. This is where using a builder who has his own staff rather than subbing could save heaps of time. I had expected that having a PM would've had the same effect ... wrong. The PM does do a lot of coordination but ultimately they are subbing out so delays are unavoidable. It's all the more frustrating when in Japan I see houses completed in 3 months or under.

 

[Patosan]

Patosan,

And dont forget the stress and effort that such a development brings in even with a Project Manager copmared to buying a normal existing house/unit.

It might have been apporpriate in your situation where you already had Development site under utilized. However if a person goes on to specially buy a site for this purpose then this may not stack up.

Believe me my family and I will NEVER forget the stress involved with that project ... this was unexpected since the aim of using a PM was to reduce it to a minimum.

You are right ... if we didn't already have the site and it wasn't under performing the whole exercise would've been folly. It has pretty much put me off developmemnts in the future, even put my wife off property altoegther.

 

[traveller]

I agree here. Managing a Manager is a job in itself.

I am experiencing that with my Property manager and am really contemplating doing the Property Management my own self esp. as the IP is only 2kms from where i live.

 

[Dazz]

Believe me my family and I will NEVER forget the stress involved with that project ... this was unexpected since the aim of using a PM was to reduce it to a minimum.

together with....

Understand that their contract ensures that the client will carry ALL the risk - this is probably how things should be - just be aware.

10. I thought that they would've had contigency plans for problems or unexpected delays by their sub-contracted professionals - once again their contract removes them from this responsibility.

.....makes absolutely no sense to me contractually whatsoever.


As the client you pay them a large chunk of money so that contractually you carry all of the risk ??? Hmmm. metropole's solicitors who have drafted that "standard contract" really have done a marvellous job.

But then....you did say ;

I've put the bottom line at no.1.

1. Metropole are good guys - this point cannot be overstated.

Where I come from, this looks more like the bottom line ;

Profit Margin ................ 46,119 or 6% of Total Develp Cost (not incl PPOR) ... of course less than 33% in feasability

Why 'of course' ??


From sitting here on the sidelines, with no money at risk....always a privileged position to comment from.....it very much appears there is an over-emphasis on the marketing and personality side of things with this "good guy" thing.....and not enough attention to detail about the hard-nosed contractual issues at an "exact wording" solicitor level.

Paying someone money for a task, and them assuming zero risk for their action....and them qualifying through the wording of the contract to still be paid their fee regardless of the outcome.....well.....that maybe the contractual definition of "armchair" developing, and as a business model he and his soliciotrs who set it up must be congratulated.

As a client or customer, being on the receiving end of that contract arrangement.....wouldn't touch it with a barge pole.

As an overarching comment, the more we learn about the contract / legal / monetary side of a Metropole development from the client's perspective.....and get away from the personality / good guys type image portrayed so heavily.....well, I've said enough. My conclusion has been made.


Mods....feel free to scrub this post if it causes disharmony amongst the forum. I know Michael is popular here on the forum and seeing as though I'd never enter into a contract such as one being described, my opinion doesn't really matter.

 

[Ausprop]

Hi Patosan,


Is it common for a development to take 3 years to complete ? Had you anticipated the development to take 3 years ?

Cheers

I would say that 3 year developments are rarely anticipated yet very common. I am a minority stake holder in some ridiculous syndication I got involved in (to my peril) that has now been dragging on for 3.5 years I think it is with no end in sight. Original 'prospectus' if you can call it that promised 12 months. the proj manager is actually arguing that because it has taken so long and so much effort that they are entitled to their fee more than ever.

being a minority stakeholder my vote is meaningless but at least there is an anchor stakeholder who is very forceful and switched on. Without this person, the project would have been a foundering financial disaster.

some lessons: (first one I learnt myself before this project) (1) stick to single level developments (2) can do the job better myself (3) and this is one of the most important lessons in my life... never invest your money where the result is you are just a minority stakeholder. If you cant control the entity, go do a smaller project or business where you can (4) the only person that really cares about your money is yourself. be it lawyers, accountants, project managers, financial planners whatever, they are just retailing a service at the highest price for the least effort.

 

[see_change]

We're nearing completion of a dual occ on Sydney's North shore.

We'll do ok , simply because the site we bought wasn't anticipated to be a development site , so we paid only marginally above what would have been the cost for a normal house, for something that we were able to subdivide ( 3000 M2 ) in an area where there is a high land value.

We're over three year , but we didn't push the process that hard initially because we were busy buying and selling in Q'land.

The biggest downside to this process , which Patosan mentioned has been the lost opportunities elsewhere , because we didn't want to over commit our resourses in order to keep our SANF under control.

We didn't invest in WA and we also didn't put much money in the stock market . Both of these were things we considered , but decided against .

If I was 25 without a family etc I would had gone ahead , but the reality is we're doing well any way and over committing at that stage wasn't a risk we needed to take.

We certainly won't do another development while we're living on the site ...... and at this stage my thinking is that we don't need to do further developments in order to achieve our financial goals , but we might change our minds later on .

My observations are that you can make the more than enough money by timing the market ( and I don't think it's hard to do ) and it's a hell of a lot less stressfull.

Cliff

 

[Patosan]

Dazzling you raise some fair points.

I say they are good guys since I still believe that they try their best to achieve the desired outcome for the client. There must be many businesses out there that really don't give a rats ... about the client.

The contract side is an issue that was somewhat of a shock to me at the time ... probably due to my inexperience with contracts and building in general. I spent too much time and money on solicitors trying to better my position by adding clauses to the contract. If I'd simply gone with my "gut" and trusted Michael more we could've saved several　months and over 20,000 in solicitor fees.

Michael Yardney is very experienced and much of this came from weathering a tough time a few decades ago when building, developing and property in general went sour. He survived when others didn't but he learnt from it. So my take on it is that rather than running a building Co where he was and in the future would be exposed to large risks, he came up with the idea of doing essentially the same thing but removing the risk by only "managing" projects. For him and his I think it was a wise move which I can only applaud.

Essentially I guess you could say they do their best while covering their asses too. I don't see anything wrong with that.

 

[Michael Yardney]

Hi

A few have asked why I have been avoiding getting involved in this thread - mainly because I only have a look at he forum once every week or 10 days - just too busy lately.

Metropole Projects currently has over 90 development projects under management. Only one or 2 are obviously for members of this forum otherwise the discussion may have been different.

One of the critical elements in a development's success is the timing of the project - it's hard to make development's work in a flat market as we have had over the last few years. But anyone who did a project 2 or 3 years ago and held on has made a huge profit.

Another element that has been left out in this discussion is that the investment return on a project is much more than the development profit.

Sure development profit is nice, in fact it is critical, otherwise you would not take the risk. But it's a one off thing and not the most important component in assessing a development’s success.

I feel a more important element is how the final product will perform in the long term as an investment.

So if when you finish a new development it:

1. costs less than market value and
2. you get good rents (as the tenants pay you rentals based on it’s retail value – not what you paid for it) and
3. The banks finance 80% of the retail value – not what it cost you, plus
4. You get tax benefits form high depreciation allowances.

All this leads to a top performing investment that is relatively easier to hold on to as you get high returns and good tax benefits.

I remember Bill's development well as it is the only JV that did not proceed. In fact it is the only development where I believe clients did not make a profit.

They would have made a substantial profit if they had held on and proceeded with the development. I know this because the person who bought the project did well out of it. There were just some issues with the joint venturers that stopped it from proceeding.

Without going into others financial details I will just correct a few inaccuracies in Bill's comments.

Metropole did not buy the land and then on sell it to a JV. That is not the way we work and doing it this way would have incurred stamp duty. So there was no profit in it for Metropole.

But Metropole did find the site and get a finders fee for this. And some cost were spent of architects who drafted working drawings.

The JV was put together under the guidance of a firm of solicitors – who acted for the JV not Metropole. Each JV member was asked to get their own independant advice and signed a form stating they did this.

Yes the development cost of the project blew out and the JV was given the options of putting in more equity to allow the development to proceed or to sell the land.

The problem was that one of the JV partners had become pregnant and another had changed jobs and a few had difficulty finding more equity.

If they had proceeded with the development - now 3 years down the road those properties would be worth 30%-40% more.

We do not like disappointing clients - we have a prominent position in the industry and I think everyone so far has admitted that we are not out to take advantage of clients.

With the disappointing results of the Box Hill development all clients involved in this project were offered to have any future project management fees discounted by any fees that they had already paid Metropole - so in effect they would get their money back.

With 30% of our current development clients being repeat clients (many on their 3rd development) or referred clients, I am satisfied that on balance my team does a good job.

 

[yo yo ma]

I remember Bill's development well as it is the only JV that did not proceed. In fact it is the only development where I believe clients did not make a profit.

Always_Learning also seemed to make a significant loss ($50k++), in the second post mentioned in this thread. Also, you should not have the words "I believe" in a sentence starting with "in fact"... It is either a fact or it isn't.

They would have made a substantial profit if they had held on and proceeded with the development. I know this because the person who bought the project did well out of it. There were just some issues with the joint venturers that stopped it from proceeding...

The problem was that one of the JV partners had become pregnant and another had changed jobs and a few had difficulty finding more equity.

Sounds like serviceability issues... you would need all six to agree to proceed & at least four couldn't come up with the additional $.

If they had proceeded with the development - now 3 years down the road those properties would be worth 30%-40% more.

Couldn't have happened because of the above issues... Irrelevant, as they couldn't service the loan.

With the disappointing results of the Box Hill development all clients involved in this project were offered to have any future project management fees discounted by any fees that they had already paid Metropole - so in effect they would get their money back.

Have any of them taken you up on this offer?

From the post with Always_Learning, it appears AL was treated very harshly... I am not saying that Metropole should be completely accountable because of what happened with the market at the time. But they should have been fully accountable for the problem with the soil tests. This was part of the DD that Metropole was being paid to do... I am sure this has now changed
Steve

 

[Michael Yardney]

Always_Learning also seemed to make a significant loss ($50k++), in the second post mentioned in this thread. Also, you should not have the words "I believe" in a sentence starting with "in fact"... It is either a fact or it isn't.

Steve

Interesting that you mention this...

Only 5 days ago I received an email from his JV partner who said he now really regrets having sold his unit in this development - big, big mistake in hindsight

There were personal and other factors that effected Always_Learnings development which I have not brought up. These made him sell, but had nothing to do with the development or the market at the time.

As for Always_Learning - he is still owns one property in this project and is still a client of Metropole who manages the property for him.

By the way - I understand that he has never seen the property which remains a trouble free long term investment.

I believe an important lesson from this thread is that property development is a great way to end up with high performance investment properties at a fair and below market price.

Property Development is a risky way of making a quick profit.

That's why Metropole has always recommended that before entereing into a development project all clients have the ability to hold on to their investments in the long term and should not sell. Having said that - life gets in the way and circumstances change.

Amature property developers should not be in the business of making development profits, they should be in the business of manufacturing some equity in their long term investment properties.

 

[always_learning]

From my point of view I lost money on the completed development and have continued to do so for the last 5 years of ownership of the unit I kept. Given current values of the area the property apparently still worth less than it cost me to build. So from my point of view it is a very under-performing IP given Melbourne's asymetrical increases in the last 5 years. In comparison a single fronted home in Seddon/Footscay could have been purchased for around $320K at the time with a value now of around $500K.

There is no getting away from the fact that when the project went past it anticipated completion date of Nov into the new years (completed Apr), with fully loaded costs increased $80~100K then a "debatable" quality report by a builder friend, and with property prices falling and I was sitting on a growing pool of negative equity, under these deteriorating conditions my wife pushed the panic button and under daily threat of the big "D" demanded liquidation at market. In the end I got push to sell another IP in Seddon at subdued prices...its now worth over $500K. A horrible lesson in how to convert a crisis into a financial disaster. So retirement for me is now further away that it was 5 years ago.

In hindsight I concur with others, 100% of total development risk is owned by you. Additional costs, delays and losses can crystallize like snot in a sandstorm, I am reminded of the quote "There are two types of problem in the world, mine and not mine", when you are doing a development there is not a single problem that falls in the "not mine" category . The financial and emotional pain I experienced from the development and the resulting fallout still burns strongly today.

For what its worth Metropoles rental management, has been timely and professional for the last 5 years. But I wont be waiting in the queue for my 2nd managed development by Metropoles development arm.

 

[Bill.L]

Hi AL,

Great to see you back, hopefully for more than a cameo. Your opinions are missed by myself and I'm sure many others.

In hindsight, how would an investment in that property of yours gone if you had not developed it, ie just kept the fixer upper with the land content??

I know a property you asked me about in Mulgrave, across the road from where we owned, has gone from $250k in 2005 to about $400k not so long ago.

bye

 

[Ausprop]

sounds a bit like a managed syndication I am in here in Perth... the project is running 4 years late and we are still some way off a final exit from the syndication. We would have been WAY better just holding the 2 original houses that were knocked over and just reselling them. Smartest move tho would have not to have been dazzled by smooth marketers that purport to know more than others.

 

[yo yo ma]

In hindsight I concur with others, 100% of total development risk is owned by you.

Hi AL & welcome back
I agree that the risk of the development must be taken on by you. However, I still stand by my post above, that states Metropole should have been fully accountable for the problem that occured with the soil testing...

I am not saying that Metropole should be completely accountable because of what happened with the market at the time. But they should have been fully accountable for the problem with the soil tests. This was part of the DD that Metropole was being paid to do...

 

[Pete]

An interesting thread.

It seems to me that if an owner/developer engages someone to manage the project, then yes the owner will have all the risk.

(I see others have posted since I started typing. I'm a bit slow...)

If the project manager had some equity or was somehow part of the syndicate or a joint venture, part of the risk would be with them - depending on the contract. This is not the situation we are discussing AFAIK.

The project manager will be managing some risks but not 'owning' the risk.

regards,

 

[Pete]

some lessons: (first one I learnt myself before this project) (1) stick to single level developments (2) can do the job better myself (3) and this is one of the most important lessons in my life... never invest your money where the result is you are just a minority stakeholder. If you cant control the entity, go do a smaller project or business where you can (4) the only person that really cares about your money is yourself. be it lawyers, accountants, project managers, financial planners whatever, they are just retailing a service at the highest price for the least effort.

Thanks for valuable comments (last year!), Ausprop.

regards,