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Published 26 July 2012 05:02, Updated 26 July 2012 14:12
When BRW Young Rich newcomer Jonathan Hallinan was a teenager, he was following rich property developers while his friends were admiring sports stars.
“I took a keen interest in successful property developers such as Lloyd Williams, Ron Walker, Bruno Grollo and in particular Harry Triguboff,” he says.
Today, Hallinan, the 37-year-old who last year made it onto the list for under 40s millionaires with a worth of $58 million, heads Melbourne-based BPM Construction & Development Group.
His business philosophy is based on billionaire apartment developer’s Harry Triguboff’s model. Triguboff over time became Australia’s seventh richest man (he’s now valued at $4.85 billion by BRW) by buying cheap land, developing apartments on it himself, building up equity and then using it to invest in further developments.
When BRW asked successful people for their tips on how to make money in property, we found this premise has guided most of them. Of course, each spruiked the kind of properties that they have developed and have sold, or are selling right now. But regardless of whether the property market’s booming, the one thing they have in common is they work in markets where demand is high and is likely to remain the case for some time.
This is precisely what Triguboff did. The son of Jewish immigrants, he used to drive a taxi in Sydney and ventured into the property game in the 1960s, realising Australia wouldn’t always be a nation of cottages.
In 1963, Triguboff bought a quarter-acre block of land at Tempe in Sydney’s inner-west for £18,000. He built eight apartments on it and later sold it for £26,000. He says this was his most successful deal ever.
Almost 30 years later, Hallinan, at the age of 17, copied this strategy. Instead of building apartments, he subdivided land and built units in Melbourne’s bayside suburbs, where much of the ageing population is downsizing to smaller homes.
Hallinan’s first property was a dilapidated weatherboard in Melbourne’s East Bentleigh, which he picked up for $90,000, subdivided, and watched more than double in value. “I’ve built my success by developing medium density residential property and retaining a minimum of 20 per cent of the completed development,” Hallinan says. “Using the equity in the retained stock has given me the ability to buy future development sites.”
It’s also allowed him to generate enough cash to buy development sites in uncertain economic climates when banks expect bigger deposits.
When the global financial crisis hit, most developers went into hibernation. Hallinan instead tripled the size of his property portfolio from $80 million in 2008 to now having more than $250 million under development. He also has a rental portfolio of more than 100 properties across Melbourne.
One of the newer members of the BRW Rich 200 with a worth of $215 million, Ashley Williams, is another Melbourne property developer doing well despite the stagnant housing market. His company, Evolve Development, has the backing of Melbourne businessman Ron Walker and forecasts hitting about $100 million in revenue this year. “This represents a decrease from our peak sales of about $300 million in 2010 and about $150 million in 2011,” he says.
Like the others, Williams also has looked for markets where demand is high to build up equity. The civil engineer started his career building bridges and railway projects for John Holland and other companies.
In 2003, after a stint as development manager for Michael Buxton’s MAB Corporation, he set up Evolve.
It was as early as the 1990s, when the cost of inner-city terrace housing was rapidly rising, that he realised apartments were going to be the new entry point to the property market for young professionals.
“Talk to someone in their 30s buying a property for themselves now and they talk about buying an apartment. That wasn’t the case in the ’90s,” he says. He’s made money by selling apartments in inner-city areas such as Carlton, North Melbourne and Prahran but is now focused on accumulating land in Melbourne’s growth areas.
One of Evolve’s successful developments is its 700-plus lot estate Summerhill in the northern Melbourne suburb of Epping. The company has already sold 600 of them.
“I’ve focused on Melbourne’s growth corridors that are close to infrastructure,” he says. “The Summerhill estate is about four kilometres from Epping Plaza and Epping train station.”
Investors looking for capital growth are better off sticking to inner-city areas but if you’re looking at multiple developments in Melbourne’s growth corridors, his advice is, “look at suburbs a couple of years into their establishment”.
“Don’t go too early. You want to wait until there’s some infrastructure around. You will get better tenant demand if there’s a lifestyle attribute,” he says, adding that strong rental demand ultimately leads to the property’s capital growth. “Look for properties that are one or two bedroom in suburbs that have high levels of lifestyle amenity and good access to local shops, parks, schools and public transport.”
Hallinan also agrees that the lifestyle attribute is crucial. In his early years, he tried developments on the Mornington Peninsula that at the time was more of a holiday destination and lacked decent public transport options and services.
“The local real estate market changed with higher than average price falls because the area relied too heavily on the holiday or secondary home market with soft underlying demand,” he says. “As a result, I now place considerable emphasis on researching the many opportunities from a financial, town planning, demand and location perspective.
“Of the hundreds of opportunities we are presented with from agents, we dismiss 95 per cent and buy less then 1 per cent.”
He sees potential in inner-city areas in Melbourne, Sydney and Brisbane “that are rich in culture and opportunity thanks to post World War II migration”. In Melbourne, that’s in Fitzroy, Carlton, Collingwood and Brunswick. Hallinan has just sold all but two of the 46-apartments part of his “Graphite” development at Queens Parade in North Fitzroy.
But he says similar opportunities to invest exist in Brisbane’s West End and Milton, and in Sydney’s inner-west areas of Balmain, Petersham, Newtown and Leichhardt.
“Once upon a time, these inner-city areas were rundown, filled with light industry and were undesirable to the general population,” he says. “Now they are awash with community spirit and a thriving and diverse cultural scene comprising cafes, galleries, restaurants and music.
“Such a lifestyle presents many desirable attributes and therefore increases demand for a range of living options.”
He also recommends going for smaller apartment blocks. “Those with less than 50 apartments are often more desirable to a renter,” he says. “Ensure the project is designed by a well-known architect, has quality specifications and minimal common areas and facilities [pools, spas, gyms] to ensure low body corporate fees.”
Melbourne-based property investor and developer Mark Etherington, who last year was valued in the BRW Young Rich at $75 million, says, “It’s no secret that hotels and residential properties in mining locations or surrounding mining locations are commanding very strong room rates and rents” but that no matter where you invest, you need to ensure you have stable financiers and aren’t over-exposed.
The former carpenter made his money from investing in hotels and commercial property, such as the Rydges hotel chain. His $100 million-plus investment portfolio now falls under a number of entities, including Australian Property Trust which he set up in 2004. The trust also includes sub-divisions for new housing in capital cities including Woodlands Estate in Canberra and the North Melbourne Redevelopment, which are both still in development stage.
Etherington recently left one of his financiers and recommends investors have diversified funding sources. “We are geared low against valuations, which is very beneficial in the current conservative economic climate,” he says.
“However, having all our main portfolio debt with one financier proved problematic when negotiating the term of the debt facilities and pricing parameters. We left ourselves exposed to individual ‘can’ts’ that lost focus on what was important to the bank.”
Before putting money in, he suggests showing the proposed investment to the bank and getting feedback on how it meets current lending policy.
“There are numerous opportunities available. The cost of funding has reduced, yet yields are still relatively high,” he says. “Assess each deal on its merits. It’s not a good idea to think that all property sectors are good investments. Conduct your due diligence on the asset, on the underlying income – whether tenant, business or end-target buyer – and, importantly, conduct due diligence on the bank.”