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CO-DEVELOPMENTS
Maponya Apex in Johannesburg is a project created in partnership with FWJK and Maponya Development.
MANY POSSIBILITIES
WHAT’S THE
Co-development is an exciting way to invest in property. But it has its risks, writes JAMES FRANCISAPPEAL?
Property investment can bring terrifi c 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 signifi cant 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 profi t while FWJK undertakes the professional services on the development”.
In other words, if you need R40-million, you could fi nd 40 investors with a million each. The balancing act is managing such a project and keeping everyone on the same page. According to Kaempfer, the developer/ project management company is often also a co-investor, taking a nominal fee for professional services and banking on the same payout as the other investors.
KNOW THE RISKS
“Investors should not see the approach as equivalent to a turnkey procurement method, where the price to acquire a property asset is fi xed and investors simply receive keys to the property at the end of the development,” comments Kaempfer. “Co-development exposes investors to development risk, the co-developers’ reward for bearing this risk is in the form of developer profi ts.”
Co-development at cost doesn’t provide the safety cushion given by a fi nancial institution. The upside is more profi t, explains Howard Matheson, director of Sinai Developments. “One of the ways to avoid the raising fees, which is effectively just pure profi t 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 profi t more generously.
Klaus Dieter Kaempfer
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 project will entail. Matheson points out that zoning, pre-sales, and building codes can signifi cantly impact a project’s deliverables.
Could this model appeal to austere South Africa? Kaempfer says that since the model spreads risk across more co-investors, it can mobilise more capital for productive purposes, benefi tting job creation and the economy at large.
Matheson agrees: “As a developer, I’m limited to my resources. So I can only do ‘X’ number of developments annually. If I had access to co-developers, I could potentially increase the number of developments that I’m doing on an annualised basis because now the next project is funded through my co-development arrangement as opposed to my resources.” my resources.” However, he adds, arranging such projects isn’t easy and such projects isn’t easy and investors – often due to lack investors – often due to lack of experience – can get cold of experience – can get cold feet. More can be done to feet. More can be done to connect potential investors with connect potential investors with developers. “This is something developers. “This is something that’s evolving. For example, that’s evolving. For example, property investment networks property investment networks should start building pools of should start building pools of investors that feel comfortable investors that feel comfortable with development and could make with development and could make money out of the exercise.” money out of the exercise.”
