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Who can up-and-coming developers turn to when finding their feet in this challenging sector?
From the intricacies of construction to applying for finance, there’s much room for partnerships in which established players can help new developers succeed in the bigger leagues.
Pointers for starters
During a recent Estate Living webinar, CEO Louise Martin introduced a panel of experts who provided guidance for property development newbies keen to enter the market and start building a track record.
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Mothusi Letlaka and Sias Scott represented Urban4Site, which is primarily based in the residential sector, albeit with some fingers in the medical, retail, and related pies. Also on hand were Benjamin Moses of SA HomeLoans’ Property Development Fund and Karl Bishop, then head of Santam Real Estate.
According to Scott, few people share the same vision in business. ‘Find someone to share your vision. If you believe in your project, continue to knock on doors, do skills transfers, and prepare to enter the game.
‘Everything starts with identifying a project; define the need and find the land where you can fill that need, either buying or transacting with the landowner.’
Five steps to success
Letlaka says it’s essential to first find the right team: ‘Ensure you have the best advice in terms of tech, regulatory aspects, service providers, and community liaison – the latter is often overlooked, but can make or break your project.’ Members may include mentors, service providers, or co-developers, he adds.
‘Secondly, and especially important for emerging developers, is understanding where you need to focus in terms of sector. Whether it’s medical, retail or residential, be sure to partner with the top specialists in that sector.’
A third step is finding the right development and, says Letlaka, research is critical to this process, but pure market research should not be the final word. ‘Investigate the area of your development and understand all aspects such as suppliers and transit routes.’
Fourthly, Letlaka urges new developers to fully understand what financiers require. ‘You’ve made commitments to service providers and potential buyers, but what are financiers’ funding requirements? In terms of commercial banks, check what the Big 5 offer, and don’t hesitate to ask questions.’
Finally, think equity, equity, equity. ‘This is one of the biggest stumbling blocks. As PDIs (previously disadvantaged individuals), many emerging developers do not have the luxury of an uncle with a big bank account. If your bank requires a 10-50% contribution, how will you muster that equity?’
Eye on equity
In the property development context, equity is the value of an asset less any debt, such as loans or mortgages against it. It could also be the cash sum a developer puts in to a project to acquire and develop it.
Alternatively, equity could be value created (less debt) by a planning uplift. Most developments would require a development finance loan to make up the difference between equity the borrower contributes, and total project costs.
As well as the borrowers’ own funds, sometimes third-party equity is needed from an investor, particularly if the borrower does not have enough cash to make the finance package work.
Equity investment is often contributed in return for part ownership of a project. This could be shares in the company or profit share with a priority return on the funds invested, thus allowing the developer to unlock finance for the project.
Show something
Santam Real Estate looks at different types of funding, but Bishop says solutions are generally based around equity, whether you’re experienced or not. ‘We’ve designed guaranteed products in which a portion of your equity goes to the financier, facilitating a higher level of funding.’
He says this funding takes the form of “pure equity” or a presale top-up option, the latter applying when hiccups arise within residential development space.
‘If 40 units must be sold, but you only have 30, a guarantee equalling 10 units is offered, allowing you to access funds to start building. People like buying what they can see.’
Get in the zone
Moses says SA HomeLoans looks at developments from the post-zoning stage only. ‘Zoning processes are rough waters to navigate. Once attained, we get involved with acquisitions of land, bulk and internal services, top structures, and sales processes to end users.’
Rep is everything
Letlaka says his team pursues innovation through various partnership and solutions. ‘The property sector is actually very small, so whether you engage with financiers or co-developers, be cognisant of how you manage those relationships.
‘Honour your commitments and don’t extend yourself too far in terms of promises. A bad reputation will come back to bite you.’
