Property Hub - Investment Insights & Inspiration - Realty Talk: Why half sell up in under 5 years

Episode Date: August 19, 2023

This week in the show we turn the spotlight on successful investment and alarmingly we have learnt that a very small percentage - 5% or 1 in 20 - property investors achieve sustainable success.   John Manciameli also tells Bushy how many investors sell up within 5 years.  John will reveal what separates the best from the rest. Also in today’s show, Bushy talks to Matthew Aflitto about the investment opportunities emerging in the commercial property development sector, driven by funding gaps and short falls.  NEW – Join the Property Hub community on Substack! Sign up to get Australian property news, opinion, and episodes in your inbox: https://propertyhubau.substack.com/ Subscribe to RealtyTalk on the Property Hub channel: Apple Podcasts | Spotify | Google Podcasts | Email Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media. Business and partnership enquiries: [e-mail] omnystudio.com/listener for privacy information.

Today, find out what separates the best from the rest. With those property investors who have gone on to becoming successful, they don't focus so much on the outcome, but they identify themselves as a property investor fundamentally to their core. Hi, I'm Kevin Turner and welcome to this week's Realty Talk show. That was John Manciamelli who tells Bushy today how many investors sell up within five years. So why is it that a very small percentage, 20% in fact, or one in five property investors, actually achieve sustainable success?

John and Bushy discuss that shortly. Also on today's show, Bushy talks to Matthew Aflito about the investment opportunities emerging in the commercial property development sector, driven by funding gaps and shortfalls. And that's an area that we at Jamieson TTB are really focusing on because it really offers some really good quality returns. That'll be first up in the show in just a moment. Realty Talk is one of the shows on the Property Hub distributed by DM Media. You're going to find us on all podcast players and through the Southern Cross Austereo Network. Realty Talk is Australia's longest running property podcast with over a decade of presenting property investment insights, inspirational stories and unbiased advice. If you like the

show, make sure you hit the subscribe button and help us to continue to bring you the best guests. We'll be back in just a moment as Bushy kicks off this week's show. Property deductions can save you thousands of dollars each year. To make sure you maximise deductions, you need to work with the most experienced quantity surveyor in the country. BMT Tax Depreciation is the leading specialist in the industry. They've completed over 700,000 tax deduction schedules for residential investment and commercial properties Australia-wide. BMT guarantee to find double your fee in the first full financial year deductions. Call BMT on 1-300-728-726 today for an obligation-free quote. Realty Talk and your host, Bushy Martin.

Now, the dual impacts of rising costs and rising interest rates are creating some challenges in the commercial real estate space. Property developers are facing steep increases in costs, and at the same time, primary banks and senior lenders are reducing the availability of project financing, creating funding gaps and shortfalls, which is actually opening up some very interesting investment opportunities. To discuss this, we're joined by Matthew Affleto, Distribution Director at Jamison TTB, an Australian independent funds management firm specialising in alternative assets with a focus on Australian real estate and private equity. So welcome back to Realty Talk, Matthew. Thanks again for having me, Bushy, and appreciate being here.

Yeah, it's another great topic to be jumping in because the normal perception of this particular arena particularly around the property development space is caged in perceived risk but as you and I know where there's risk there's opportunity you just need to be a bit creative about it so just to kick things off can you give us a little bit more detail on the funding challenges that developers are facing in the current environment and why that might be the case? Not a problem at all Bushy so we speak to developers obviously on a daily basis and what we're observing in the market at the moment is the availability of of debt funding is not what it was say 18 24 months ago when conditions were you know i suppose less benign you know we had lower interest rates we

were in the midst of a pandemic admittedly but uh there was this perception i think that the central banks would underwrite the entire economy um and what that led to in australia was this overwhelming influx of of capital into the real estate private credit space chasing returns at a time when cash rates were at all-time lows um what we're seeing now is a reversion or a reversal of that where capital is now leaving australia and leaving this space of the market and going to cash where you can get a decent return on your money nowadays um so what that means is that the availability of debt capital um is not what it used to be say 12 or 18 months ago at the same time uh the ability to raise equity which is also a key component into funding property projects

is also harder to raise because of increased interest rates and um less availability of capital from equity providers so um what we're observing in the market is that um because you've got uh equity capital receding and debt capital receding there is this space now in developers capital stacks it's typically about five or ten percent of the top total project value which is starting to open up and that's an area that uh that we at jameson ttb are really focusing on because it really offers some really good quality returns for the relative to the risk that you're taking on so the question that i get a lot from investors is you know how can you charge a developer 18 interest rates or 20 interest rates and the answer to that question is because

it's only a relatively small part of their total funding mix we are able to charge higher levels of interest rates and from a developer's perspective getting getting that capital and raising that capital from the likes of jameson ttb and others is the difference between realizing a profit on a on a property project and not absolutely it's a go no go uh funding opportunity pretty much from that perspective so i i understand the merits of what you're suggesting there so like i can see where this is going but to to spell it out what opportunities is this creating yeah so um there's a number of opportunities that have been created in in the past uh in the past sort of 12 months as interest rates have increased obviously the incidences

of these what we're terming shortfall funding gaps has increased which means we're seeing a lot more deal flow in this space and that's good because it means that we can compare deals that you know one deal to another deal and really cherry pick the best opportunities so that's that's one opportunity that's arisen the other one is that because of increased base rates so because the cash rate domestically has gone from 0.1 to 4.1 as we speak today although that may change in seven minutes time that's right um the the benchmark return that you're getting on your money is now a lot higher than it was 12 or 18 months ago throw on top of that risk spreads or credit spreads have widened um because there is this perceived risk in the property sector

it means that you're able to get some really really you know good returns on your money so long as you choose you know good quality projects to uh to to uh to to send your capital to effectively um and what we're observing is you know there is a lot of doom and gloom out there in the marketplace at the moment and in the media but there are still some really good real estate projects that are coming across our desk i could think about the last two that we've funded where the developer is effectively achieving a margin of about 15 to 20 percent on their equity that they're contributing to the project so the key in this space is just to be very selective on the deals that you do and and that's a key a key way in mitigating and reducing risk

Well, 100%. I guess the level of due diligence that's attached to that becomes absolutely critical by a team that really knows what they're looking at in that context. But we'll touch on that a little bit further along. And again, you've touched on this a little bit already, but what levels of returns are achievable and what other investment incentives can be incorporated to make it more attractive? Yeah, so the sort of returns that we're looking at in the senior debt space, I'll just touch on this very briefly. In the senior debt space, it's around 10% to 12% in the current market per annum. In the mezzanine debt space, so if you're taking on a little bit more risk, it's high teen returns. So you're looking at sort of anywhere between 16% to 18%, potentially upwards to 20% returns.

And then if you're taking a structured hybrid arrangement, you would expect to receive sort of an interest rate of about 18 to 20 percent as your baseline return with the potential to share in the upside from from profit shares so if you look at those sorts of structured vehicles you're looking at north of 20 percent sometimes into the 30s depending on how much of the profit we're able to negotiate with the developer to share with us and on top of those profit shares when we actually lend money out the door to developers typically we charge the developer a two percent establishment fee and that two percent fee is is charged based on the total amount that we're lending we also commonly share that establishment

fee with our investors to sort of boost up and turbocharge returns which is something that not all fund managers do but we accept that you know we can't get deals done unless we have investor capital and in situations like that we're here we're happy to share in the in the economics of a deal very attractive sorts of returns let's circle back because as we've said already yeah there's always a risk return ratio where that's right you expand a little bit on what are the risks and and how these can be best mitigated yeah so you know investment is inherently a risky activity but when you're investing what you're trying to achieve is the maximum amount of return for the least amount of risk and that's something that we're very conscious about

jameson ttb so whenever we go into a deal you know there are there are these you know known unknowns um if i'm if i'm allowed to quote donald rumsfeld um so we go into projects and there are there are things that we know may happen over the life of the project um and it's typically common to a lot of projects um but the key from our perspective is if this event happens how do we reduce or mitigate the impacts of it and that is all done through the due diligence process as you touched on earlier bushy so for example we've just settled a deal um in mid-july actually where we were working with the developer for a period of a year undertaking due diligence on the project before we actually took it to our investors

and at the start of that project the developer didn't have ability a builder appointed they didn't have the property leased out on completion uh and a number of other risks to our investors so what we did is we worked with the developer over a period of that year to get in place leases at completion to put in place a fixed price fixed time construction contract to push the risk off our investors and on to the builder um so you know it's key to identify the risks from the outset and then work with the developer to mitigate and reduce those as much as possible. And in investment, you're never going to reduce

that investment risk to zero, but what you want to do is reduce it to an acceptable level or a level that is as low as possible so you're really sort of, you know, juicing the returns for each unit of risk that you're taking on. Yeah, I love that. One of the sort of servicing risks right across the board, particularly when there's construction involved is obviously the time delivery risk with timeframes

being blown out. In the context of the work that you do in that sphere, how do you help to control and mitigate that time delivery factor? Yeah, so one of those is done through the legal channel, which is entering contracts which specify from the outset a fixed price and fixed time contract. The way we've also mitigated the construction risk on that project that I was referring to earlier is actually partnering up with a sponsor who gets property development so the fellow who we've partnered up with has over 20 years of construction and project management experience and in an unlikely event of the builder failing he can easily jump onto the project and see it through to completion because he has those necessary skills the other key thing to note is

that the failure of a builder is not a terminal uh is not a terminal thing for a property development so in my three to four years in the real estate private credit space during the depths of the pandemic um you know i've seen a handful of builders go under and i'm still yet to see from any of those projects investors in real estate private credit actually lose a dollar of their money because there is a process when a builder fails um it's an inevitable risk of property development but as is the case with anything it's how you respond to those events and just for your listeners benefit what typically happens in those situations is the builder fails the developer then retenders out the project to see the project through to completion which is typically takes

takes a time of about four to eight weeks a new builder comes on and then pushes the project through to completion but that builder is ultimately responsible for all of the work through to completion so even though they didn't complete the previous builder's work they still have the liability to ensure that it is up to scratch and are responsible for any rectification works. Yeah I'm assuming there that the additional costs that come out of a premium associated with a new builder taking on someone else's work is handled through the rest of the funding package and doesn't then impact on the private credit investors. Yeah correct and what we do from the outset is typically build in a contingency of anywhere between five to ten percent to allow

for unexpected things to happen or unexpected cost increases um and that that is just designed to protect investors because what we want to do is when we're talking to investors is disclose the maximum loan to value ratio that they and that's the risk that they're taking on inclusive of any you know inclusive of that five to ten percent contingency yeah um because what we don't want to do is go back to investors and say you know that 70 deal that 70 loan to value ratio deal that you signed up to well it's now 80 you know that's just not a good outcome for us as fund managers and it's not a good outcome for investors yeah i love the due process that you're putting the opportunities uh through matthew so we're some very exciting opportunities there what what's the

minimum level of investment and how can investors get involved in this then yeah so we're quite flexible on the minimum investment amounts to be honest um from our perspective we have a wholesale license with ASIC. And that requires us to only accept invested capital from investors who qualify as wholesale investors. And under the current framework, that means that the end investor must have greater than $2.5 million of net assets or have earned $250,000 of gross income in the past two consecutive financial years so um because because real estate private credit is a relatively unknown and you know sort of new asset class for a lot of people what i like to do is sit down with investors and and allow them to put in a relatively

small amount just to dip their toe in the water to get comfortable with it and and what typically happens from then on is they typically have a really good experience and and their investment amounts increase as a result after that so word the magic number what's what would be the the dipping the toe on the water figure that uh is palatable yeah so i mean i've spoken to investors in the past who have put in 25 000 for example but you know it's a case-by-case uh situation i suppose bushy where we we can reduce that um depending on the situation um but ultimately is just key to have that conversation to say how much you know here is the opportunity how much are you comfortable with investing and then you know progressing that conversation through uh to an

investment if if that's what the investor ultimately wants to proceed with yeah brilliant work well look i really want to thank you for opening your eyes to these investment opportunities matthew and it's quite obvious that developer funding shortfalls are creating some very attractive private credit investment opportunities along with potential profit share and equity upside incentives that you've talked about as long as the due diligence is done to mitigate the risk so i want to thank you for taking the time to draw these to our attention on realty talk today thanks matthew thanks a lot bushy appreciate the time cheers successful property investment is a game of finance do you have the right team and the right game plan realty talk is brought to you by

know how property more than mortgage brokers bushy martin and his team of investment architects Set you up with a sustainable strategy structured to lower your costs, tax, risk and stress while increasing your capacity for growth. KnowHow has helped over 1,900 homeowners and investors secure more than $800 million in property wealth. So get set to live more, work less and live your legacy. Want to know how to invest in your freedom? visit knowhowproperty.com.au now back to realty talk and bushy martin over years of research and

involvement in the property investment arena we've come to realize that only about five percent of investors actually achieve sustainable success now that's about one in 20 it's also interesting to note that over half of first-time investors sell their property within the first five years Why? What separates the best from the rest? And how do you ensure that you end up on the right side of the ledger as a property investor? Well, to dive into the key answer to this quite critical subject, I'm joined again by fellow finance broker, John Manciamelli, from full service financial services company, Hunterwood Solutions. So welcome back to Realty Talk, John.

Thanks so much for having me back again, Bushy. it's um been very humbling exercise mate just listening to you and your guests so yeah thank you very on it no what real pleasure mate i've had a lot of respect for yourself over many years mate and you make a very uh big contribution to the industry as a whole so and a lot of wisdom to share on that so jumping straight in there and in your 20 plus years of experience what's been your observation between investors who successfully build a meaningful portfolio of properties versus those that don't wow yeah big topic isn't it mate um yeah there's so many things that we could talk about and i think when i reflect on the summation of that period of time both

professionally and personally uh there are some things that i've identified that comes down to habits and the outcomes that you get are based around these habits and the way i look at it is some of these investors that haven't really hit the mark and developed that property portfolio they're very much what i call outcome based and they're not identity based yeah now i know it sounds a bit a bit out there but the best way i can describe this is if you can imagine there are two people that are resisting a cigarette and the first one says no thank you i'm trying to quit and in the context of things that's a perfectly reasonable answer but in their mind they're still a smoker that's trying to kick a habit conversely the second person says no thank

you i'm not a smoker now there are some subtle differences but second person has identified and changed their mindset to identify with being a non-smoker and so in our world bush and you would have seen this with those smokers sorry with those property investors who have gone on to becoming successful they don't focus so much on the outcome but they identify themselves as a property investor fundamentally to their core does that sign of kind of make sense yeah absolutely it does because it's a completely different outlook and way of looking at the world which which starts to drive what they do as a consequence so and that that's a great example do you have any other uh illustrations of of what you mean then by the minds of investors who didn't achieve their

property goals there, John? Yeah, I've done something very sophisticated. For those of you that are watching this and not listening, I'll try and illustrate it as well. Sorry, explain it. So what I've got in front of me is three circles. And this is a typical investor who is outcome driven. So what we have, for those of you that can't see this, is we have three circles. And on the outer circle is we have the outcome and an outcome in this case might be i've got to get wealthy i've got to i've got to get fifty thousand dollars per year income and then what happens is they reverse engineer it and they start putting in processes to try and achieve that outcome so that process might be let's go and talk to our accountant let's go get a investment property

savvy mortgage broker and let's go talk to uh buyers agents or property experts or something like that yeah but what we have here is that we're missing the identity piece okay you're working outwards rather than going inwards and this can at the surface sound reasonable you know you want to you want to get wealthy you do the processes but you're you're leaving yourself to be motivated so you know you could well but three years later are you still going to be motivated once you've gone through that journey that you talk about bushy all the time this is not going to be an overnight thing you need to be in the game to master this beast and that becomes part of your identity so it's it's obvious when

people stop at one or two because they're so focused on the outcome and the process but they don't identify that as themselves i love that well let's flip that around then and and look at the opposite example of of what the mindset is of the top one percent of property investors that you've worked with over the years so here's the same thanks bushy here's the same three circles and but what you'll notice here is that there's an arrow going from the identity piece working out to the outcome so if you fundamentally have identified yourself at your core as a property investor then it's not you're not being motivated you're not listening to a podcast or read a book and then all of a sudden just going to take action it is part of your identity a bit like saying

being a mum or a dad is part of your identity you just do it every day of the week seven days seven days of the week 365 days and so what ends up happening is that your identity starts bringing in the processes as the second ring in this circle three ring circle and your processes will ultimately deliver that outcome it's a subtle difference but you're going in to out rather than outcome inwards love it love it so in a nutshell then john can you sort of kindly summarize the mindset difference of the top investors that you work with so they're the people that have got this fundamental understanding that their daily habits their weekly habits is involved in property as a business and they will see any setbacks or any shortcomings

as just part of the journey where most people might go bugger i stuffed up my first investment or i'm not getting the yields or i'm too heavily negatively geared and they will go this is all too hard i don't know bush you please tell me what you're seeing but it's those guys who see it all through and see any potential failures there's a learning curve to get better and better and better because they identify themselves as that property investor with a portfolio of properties not just two or three but a portfolio yeah i love it look good i really want to thank you for these refreshing insights, John, and this way of looking at it differently, because as you say, it's embodying yourself as a property investor, not just going through a

property process. And I think it's really reinforced that the majority of property investors just focus on the property without understanding the key underlying principles. And as we both know, true sustainable success, for me at least, lies at the intersection of what I like to call the three L's of self, health, and then wealth. And the foundation stone of all of that is yourself, what you believe, you think, what you expect, and then what you do. Because we're talking about our outlook and our attitudes that underpin our actions or the lack of them in some cases.

So what we need to do is spend as much time in the mirror as we do developing our mindset as on looking at the properties. And to help you with this, make sure you surround yourself with independent professionals like the team at Hunterwood Solutions and our Know How Property team who actually inspire and challenge you to constantly sharpen your thinking so that you too can achieve sustainable success in the long term. So thanks again for sharing all this with us on the show today, John.

It's been a lot of fun, Bushy. Thank you so much for having me on the show. Looking forward to having you on again, mate. So you always bring a different and very value-added exercise to anything you contribute, John. So I really appreciate you joining us on Realty Talk. My pleasure. Thanks, mate.

1-300-728-726 today for an obligation-free quote. This is Realty Talk, powered by realty.com.au. And that brings us to the end of this week's show. A big thanks to Matthew, John and Bushy for another great show. Hey, before we go, make sure you don't miss a single episode of Realty Talk or Bushy's Get Invested podcast delivered to you each and every week by subscribing to the Property Hub now

on your favourite podcast player or wherever you're listening to the show or watching it, in fact. Thanks to our supporters, realty.com.au, BMT Tax Depreciation, Know How Property Finance and Apiro Marketing for their ongoing support. I'm Kevin Turner on behalf of Bushy

and the Property Hub team. We look forward to seeing you again next week.