CO-DE V EL OPMEN T S
Maponya Apex in Johannesburg is a project created in partnership with FWJK and Maponya Development.
WHAT’S THE
Co-development at cost doesn’t provide the safety cushion given by a financial institution. The upside is more profit, explains Howard Matheson, director of Sinai Developments. “One of the ways to avoid the raising fees, which is effectively just pure profit for the bank, is to create this co-development environment where we do not go through a lending institution and have to pay that enormous raising fee. The other reason why this is appealing from a developer’s perspective is that it avoids the stringent criteria that the bank imposes upon the developer before they prepare to issue the bond.” Co-development can take on different forms, but essentially it enables investors to get in early at cost, assume the initial risk and, ultimately, stand to profit more generously.
MANY POSSIBILITIES Yet the devil is in the details. A successful co-development collaboration hinges on a project management company/developer that knows its stuff, and for stakeholders to clearly understand their risks as well as what the Co-development is an project will entail. Matheson points out that exciting way to invest in zoning, pre-sales, and building codes can property. But it has its risks, significantly impact a project’s deliverables. Could this model appeal to austere South writes JAMES FRANCIS Africa? Kaempfer says that since the model spreads risk across more co-investors, it can mobilise more capital for productive purposes, benefitting job creation and the In other words, if you need R40-million, economy at large. you could find 40 investors with a million each. Matheson agrees: “As a developer, I’m The balancing act is managing such a project limited to my resources. So I can only do ‘X’ and keeping everyone on the same page. number of developments annually. If I had According to Kaempfer, the developer/ access to co-developers, I could potentially project management company is often increase the number of developments that also a co-investor, taking a nominal fee for I’m doing on an annualised basis because professional services and banking on the now the next project is funded through my same payout as the other investors. co-development arrangement as opposed to KNOW THE RISKS my resources.” However, he adds, arranging “Investors should not see the approach as equivalent to a such projects isn’t easy and turnkey procurement method, investors – often due to lack where the price to acquire a of experience – can get cold property asset is fixed and feet. More can be done to investors simply receive keys connect potential investors with to the property at the end of developers. “This is something the development,” comments that’s evolving. For example, Kaempfer. “Co-development property investment networks exposes investors to development should start building pools of risk, the co-developers’ reward for investors that feel comfortable Klaus Dieter bearing this risk is in the form of with development and could make Kaempfer developer profits.” money out of the exercise.”
P
roperty investment can bring terrific returns. Yet an investor needs substantial amounts to participate in property investment and developers often must lean heavily on banks for initial funding and absorbing early risks.
MANY HANDS MAKE LIGHTER INVESTMENT Co-development opens the doors to more participants. According to Absa’s head of Commercial Property & Equity Investments, Klaus-Dieter Kaempfer, co-development’s advantage is that it offers investors access to developments at inception stage. “But it’s risky, individual investors do assume significant development risk because they are not buying the completed end-product, but are investing at the beginning of the development and are obliged to take delivery of and pay for the end-product.” A group of investors thus join a property developer at the inception of a development project. According to co-development specialists FWJK, the co-development-at-cost model involves “gathering multiple investors (up to 40) as the ‘co-developers’, which allows them to make the developers profit while FWJK undertakes the professional services on the development”.
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“CO-DEVELOPMENT EXPOSES INVESTORS TO DEVELOPMENT RISK, THE CO-DEVELOPERS’ REWARD FOR BEARING THIS RISK IS IN THE FORM OF DEVELOPER PROFITS.” – KLAUS-DIETER KAEMPFER, HEAD OF COMMERCIAL PROPERTY & EQUITY INVESTMENTS, ABS
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2021/02/02 1:11 PM
