tackling market sentiment

Seems that we have market sentiment on property at an all time low, the herd mentality has taken grip of our marketplace in a similar way that it seriously affected the stock market. Probably driven by the Reserve Bank's efforts to slow the economy. Something has to give despite solid supply/demand factors. I have been working up a small residential unit development in a solid area of the Sunshine Coast and after struggling to get one pre-sale find that I am swimming against the tide to get a couple more to allow financing. My view boosted by marketing feedback is that timing is good for a recovery into 2009. Thats a judgement individuals have to make themselves.

The main considerations with this development is that timing is right, costs need to be locked in and holding is expensive. I want to continue as quick as possible to lock in costs and position for completion late next year.

I know there are a few experienced property investors here on this board and I'd like to run an idea ...if nothing else to get some objective feedback. Of course if anyone thinks this a good opportunity I'd be happy to discuss further.

Market reluctance to enter pre-sale contracts has forced us to develop another strategy as the banks are in hull down position and refuse to fund anything other than a 50% equity basis.

The background... we have recently been attempting to finance our property development based on the one pre-sale that we have quite frankly the banks are in lock down due to lack of wholesale finance and the market sentiment has been driven down by the media). A recent report on the Sunshine Coast property market by Michael Matusik who is probably our most respected property analyst supports the view that the market has leveled off, no price reductions but a 4% drop in listings, migration continuing to boost population, low supply, high demand but suppressed, high rents.... something has to give! My view...the first half of 2009 will see improvement in sales and price, second half will see price escalation. Supply and demand is a powerful factor. Now that's my opinion and of course it may be worth nothing, and of course it applies only to the Sunshine Coast. I don't think you can generalise when it comes to the property market as each region has varying issues (consider the new mining area boom as an example).

Anyway needless to say I have confidence in pursuing a property development that will hit the market around about when the sector should be thinking of getting motivated.

So what to do...banks are difficult to gain finance ...I could get high interest mezzanine finance or do a JV with others. Well here is the concept that we are considering (and I'm sure it has been used many times before)...

Firstly we as property developers discussed the issue of ROI, no doubt its quite significant to build this 8 apartment complex and take all profit (or hold units for tax purpose etc). But it has been suggested to us that we establish a property development cooperative.

The decision is that firstly we accept an overall reduction in ROI (that's a big step, but then again we are not in this to make millions we simply wish to supplement income).

Secondly we go out to a network and offer participation in a consortium established to build the 8 apartments. Considering that we now have secured the land, obtained a Development Approval and are ready to start construction this time focuses any involvement.

Involvement in the consortium involves a commitment to buy one or more of the apartments at verified cost price. This verification provided by accountants figures and a tight system of bank progress payments (using quantity surveyor approval etc). This price would be further validated by a bank valuation through a firm such as Herron Todd White Valuers. We would probably retain control of three apartments leaving five available.

The expected market price would be around $100 - $150K more than cost, thus providing a capital gain of this amount on completion. Of course participants may choose to on sell during construction, at completion or in fact hold the apartment for future growth and tax purpose. Some are talking significant % increases in property when it starts to move again particularly for well located properties such as this, so potential gains may be significant.

The profit factor calculated includes savings made by eliminating:
: marketing costs
: agents commission (unless a member decides to let an agent sell it); and
: GST

So in simple terms we are offering to build a property for participants, at cost due to the quick commencement of the project. Just like being a property developer without the baggage.

Finance arrangements would need to be coordinated through a local financial institution (probably Westpac or Suncorp) to simplify financial control over the project. Individual finance would be drawn down as the project progresses (just like building a spec home). Alternatively individual arrangments might see equity injected in for initial acquisition of % share and then on a progress basis. (a bit to be worked out there).

I have positive feedback on the concept from the banks and my financial and legal advisors.

Get the idea! This is the first time I have sought feedback on this concept and I thought that HC members are always up for some well considered comment.