Real estate, alternative real assets and other diversions

An incoherent proposal

The Guest Essay

Most large funds hate development risk – but there are real success stories out there. You just have to avoid the more spurious schemes…

Monday morning’s first call is from an old market chum asking if I’ll meet his latest client. He thinks this firm has something very attractive, unique, scalable and set to capture the stellar outperformance of the Irish housing market in recent years. 

Property is always interesting. I like deals that can be scaled up, and I like solid large returns. As many of our London investors are looking to diversify out of core London and the UK, I agree. Irish ‘resi’ sounds interesting. I ask for further information including financials, but apparently this team are in town tomorrow, and if I can make time to meet them they’ll explain their deal in detail. I set aside an hour.

Tuesday morning, and 20 minutes late, a young Irishman pops into the office to present his real estate vision. He’s got the blarney turned up to 11 as he rattles through plans his team have to develop promising sites near Dublin’s motorway. 

The pitch book is very glossy. They will build new affordable homes and make lots of money by doing so. He tells me it’s relevant to me because I’m going to give him the money to build them, and he’s going to pay me a fabulous 6% interest for doing so.

I’m bemused. He thinks I’m grinning because I’m buying it. 

He’s wrong.

I listen as he explains his competitive advantage, which largely comprises what he learnt during his five years working for an American bank. Then he describes his executive team: one of his mates who left school early and is now running his own building company, and another who was a planning officer and is able “to get things done”. Their “unparalleled” experience gives them a clear “USP” in the sector, he tells me. I’m very aware of the huge profits established Irish builders have been making.

I explain that we’d really need to understand their previous successes in terms of projects, sales and margins, asking how’d they funded themselves thus far, and how much equity they would be putting in. 

It turns out they haven’t actually done anything yet. 

For the last two years they’ve been trying to raise money. When I ask about equity, he tells me it’s all in the land we’ll buy for them – which I sort of understand, but am unlikely to accept.

Then he tells me a bigger reason he wanted to meet me is because his new financial advisers think I’ll be a lead buyer of a new eurobond issue he’s launching to fund his projects. The firm has “filed docs” to raise €50 million through a bond listed on the Copenhagen Exchange. It will pay 6% interest per annum, “which is much more than you’ll get investing in other eurobonds,” he tells me.

I notice the documents he hands me are dated last year, and ask if this means they’ve already launched the bond. “Oh, yes, it’s doing very well, we’ve got great interest, and we’ll be getting some big orders for Middle East family offices this week.” My heart sinks. I tell him I have to wind up the meeting.

Of course, they haven’t sold any bonds, and I know the “Middle East family offices” might remain interested – but definitely uncommitted. 

I ask the chap some questions. Has he heard of LCF and mini-bond misselling? Apparently not. I ask what he’s going to do with a block of €50m if investors commit, and then explain coupon drag to him – how is he going to pay investors’ returns if he can’t make his money work immediately? He responds they’ll focus on building and selling houses quickly so they can pay the coupons, and can use money they don’t spend buying land and materials to pay the first year’s.

I make it as clear as I can that this isn’t a project I’m interested in, but do offer to pass is details to some property development lenders I work with. He’s amazed I’m passing down this superb opportunity. The first property development lender I speak to tells me I did the right thing walking away.

There are plenty of good property opportunities paying real returns on risk. Property development risk is an interesting one. Most large funds aren’t prepared to take development risk – they want to invest in completed projects. I can understand why; everyone has heard the rumours of new lenders and crowdfunding sites losing millions on unwise development lending (and sure enough, at least one is now on special watch by the FCA).

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