If you’ve clicked on this article, it’s probably because you’re on the fence about whether or not you should invest in a project development project.
It’s an increasingly popular investment strategy because it provides investors with exposure to the lucrative returns of real estate development—but you don’t need to manage it all yourself.
But there are many important pieces of information you need to make sure you understand about an investment opportunity before you decide to proceed.
- What exactly is being offered to investors?
- When do investors get their distributions and capital returned?
- What are an investor’s exit options?
- Where is the development site?
- What are the project’s deliverables?
- What projects has the developer and/or project manager undertaken previously?
- Will the project be profitable?
- What are the risks involved with the project?
- How does someone invest in the project?
- What happens after I invest?
What exactly is being offered to investors?
This may sound like a silly inclusion; of course you’re going to find out what the return is. But vague language may lead to misunderstandings about what level of return you’re entitled to. As an example, we’ve seen other companies run ads proclaiming “50% return” when what they actually meant was that 50 percent of the project’s profits would be divided amongst all investors. This is far less than the 50 percent return on investment that the ad implies.
It’s also important to understand whether the advertised return is targeted or fixed. A return cannot be guaranteed (because it’s illegal to advertise a return as guaranteed), but a fixed return will generally be far more reliable than a targeted return.
So make sure that you understand exactly what is being offered. Ask for specific examples: “If I invest x amount, what will my return be?” If the offered return is variable, ask for examples at varying percentages. And check for any fees which are charged to investors that may lower your net return.
When do investors get their distributions and capital returned?
Property developments almost never go exactly according to plan. There’s just too many variables to control. That’s why it’s important to understand when distributions will be made and when your capital will be returned.
The capital you invest in a property development project is used to fund the project in some way. Most commonly, to purchase the development site. This means that your capital is illiquid and the only way to get it back is for the project to be completed and sold. Early withdrawals are not possible, so you need to be comfortable having your capital illiquid for the duration of the project, which may be longer or shorter than expected or advertised.
Distributions are also typically made at the end of the project, but not always. Some projects will make regular distributions throughout the investment term. This may be of interest to those interested in supplementing their income. Ultimately, you need to check what each specific opportunity is offering.
Once you have this information, you then need to ask yourself “Does this align with my investment goals?” If you need your capital back at short notice, property development probably isn’t right for you.
What are an investor’s exit options?
As mentioned previously, capital invested into a property development is typically illiquid until the project is completed and a sales threshold has been met.
This usually means that there are no early exits or withdrawals from the project. However, ensure you read the information provided with the project to fully understand your options for a particular project.
Where is the development site?
Once you’re happy with what is being offered, you need to look into the project’s viability—a development project has to be good enough to actually deliver what is being offered. The first stage of your due diligence is to look at the development site itself. While there’s no universal list of ‘best things’, promising indicators include:
- Population growth and migration;
- Existing infrastructure and planned improvements;
- Employments hubs such as office buildings or shopping centres;
- School catchment zones;
- Other private developments.
The main takeaway from your research should be that you are comfortable with the area, what is being built, and that demand from buyers will be there.
What are the project’s deliverables?
If the location is good, next you need to look at the proposal for what will be built. Again, there is no universal list of what is best, but some things to keep in mind are:
- Does the project already have plans or permits? If yes, the project has significantly less risk.
- Will the final properties be desirable?
- Do the properties match the neighbourhood? If not, there will likely be problems getting Council approvals.
- Is the site overcrowded?
- Is the architect reputable?
- Has the developer engaged a town planner or other expert?
Property development relies on the sale of the project to fund the returns to investors. So if you don’t think a project will be sold and achieve a profit, you shouldn’t invest in that project.
What projects have the developer and/or project manager undertaken previously?
While it’s not a guarantee of success, knowing that the developer/project manager has successfully completed other projects is an indication that they know what they are doing. The more projects they’ve completed, the more likely they are to also complete the project you’re investing in.
If any of the developer’s completed projects are local to you, you may want to go and visit them in-person. You won’t be able to get a full tour (it’s someone else’s home, now) but just being able to look at the exteriors will give you a sense of what the developer is capable of.
Also, consider the style of the project you’re considering investing in. For example, if a developer is working on a high-rise of 100 storeys, but their previous work is all single-storey homes, that experience isn’t necessarily transferable to the new project.
Will the project be profitable?
As a layman, this is the hardest question to answer. If you were the expert, you wouldn’t need someone else’s help in the first place. But here are some things to look for when investigating the project’s feasibility study:
- Do the sales prices seem appropriate? Are there comparable sales to support these figures?
- Does the list of expenses seem comprehensive?
- Is there a contingency amount listed?
- How much net profit is there?
- What is the profit margin on equity?
If you are able to answer these questions, and not raise further questions or alarm bells, then that will provide even more confidence with the project.
What are the risks involved with the project?
Like any investment, the documentation for the opportunity should outline the risks that are involved with the project and how those risks are being mitigated.
Make sure you review any documents (such as an Information Memorandum or Product Disclosure Statement) thoroughly to gain an understanding of the specific risks that are involved with that project.
If a developer can not provide, in writing, that they have the understanding or capacity to mitigate the risks, how can you expect them to deal with them if one might occur?
How does someone invest in the project?
This question has two components.
Firstly, what is the legal structure that is used to facilitate the investment? Is it a fund, a joint venture, a property syndicate, or some other structure?
Secondly, how do you go about expressing interest in the project, signing up, and transferring your capital. How easy is it? How much paperwork is involved?
The website or documentation of the project should provide specific (and hopefully) easy steps as to how an investor can get involved in the project. If the steps or instructions seem overly complex, or don’t give an accurate representation of the process – you might want to ask more questions or consider your options.
What happens after I invest?
Investing in a property development isn’t a short-term commitment. So it’s important that you understand what happens after you invest. What sort of documents will you receive? How will you be updated and how often? What do you need to do if you need to ask questions or get in contact?
Depending on how your returns are distributed, you may also need to ask about how distribution statements for tax purposes will be sent to you.
Lots of companies are happy to take your money and then forget about you. You need to make sure that the lines of communication will stay open the entire time you’re invested.
If gone through the full checklist and you’re still confident about the investment opportunity, that’s a strong indicator that the opportunity aligns with your investment criteria and objectives.