Jun 24 2019Add to Favorites
One of our first property financing deal was a c 150 apartment project, called VIDA, located at the riverfront in Brisbane’s Westend by Pointcorp, with a gross completed value of $100m approx.
Bank West provided the first ranking senior debt, and we sat pari-pasu with Maxcap as a mezzanine loan, ranking in priority behind the bank with a second mortgage security and with Thakral Capital Australia subordinated to us as equity. After we had run a lengthy and detailed due diligence process, our capital was called in about the third quarter of 2013 and repaid in full by the end of November 2016, with a 21% IRR (-annual internal rate of return).
This was absolutely one of my favourite investment projects, the developers, Paul Gideon and Chris Vitale, friends for over 20 years who met playing AFL, went into business together with a mortgage broking business and had a track record of several successful property developments. They are fabulous to work with and are outstanding at complicated delivery.
Pointcorp did its first development in 2002. Paul was a builder and Chris was in the finance industry their first project was four townhouses. Now, Pointcorp has a focus on luxury Brisbane inner-city developments and more regional major home and land subdivisions.
The residential market in Brisbane was strong at the time and by the time our capital was drawn, about third quarter of 2013, our capital position (principal and interest combined) was covered by unconditional presales contracts with 10% deposits (which we had set as a condition president to the draw of funds).
Given the velocity of the Brisbane residential sales market, it was likely that values were going to increase considerably over the estimated 24-month build-to-settlement investment period, from the c. $7500 average off-the-plan sale price. As a result we took the view that settlement risk was minor.
The apartment product set a new level for the Brisbane market, which had traditionally been more of an investor market historically. VIDA was exceptional quality and very well-designed owner occupier stock, which the market had received well. The design and finishes were outstanding. The location was fabulous, close to the CBD, right on the river front with walking tracks along the water and with waterfront views back to the city.
By the time our capital came into the deal, the fixed price and time design and construct contact had been value- engineered and finalised with ASX listed builder Divine, the senior financing documents had been finalised with Bank West and presales locked in, so the primary risk was delivery risk. With the project being located right at the riverfront, meters from the water, the piling and basement levels had to be excavated well below the water table, and this represented a challenge.
Some contamination was also found on the site next door, which was owned at the time by DEXUS and although testing was done prior to excavation, it was hard to tell if this contamination had spread to the subject site, with a high probability due to the high water table which creates more easy flow of substances under the ground than if the water table is lower.
A detailed dewatering management plan was put together and an advanced methodology of excavating which incorporated secant walls and enabled a reverse methodology of reinforcement. Instead of excavating to the bottom and then starting piling from the bottom of the excavated hole in the ground upwards, the water table required the seacant walls and piling to be built from the ground level downwards, and the excavation went progressively downwards as pumps pumped the water out of the excavated area.
In addition, a new way of constructing the basement was provided by a European engineering firm, which meant the basement when complete, would essentially have an element that floated. The design also had to be flood -proof after the Brisbane floods a few years prior, so the design was innovative and complicated.
From a risk perspective, we identified the basement and excavation as being an issue with investors and the likely delay in the program as a result. The excavation works were part of the fixed price and time design and construct building contract with the builder. Additionally, the project had a sufficient margin to sustain the event of additional costs and delays associated with a tricky basement excavation and build, so we went ahead and made the investment.
Sure enough, dealing with the water table brought up complication and with significant delays, additional pumps had to be shipped in from Europe to pump out tens of thousands of liters per second to ensure the site didn’t flood.
The building methodology at the riverfront meant that the original pumps and the additional support pumps had to stay on until the excavation completed and the building structure was several floors high, so as to ensure the weight of the structure was heavy enough for the water under the ground to not “pop” the building out of the ground.
There were major inclement weather days during this period, which meant further delays and extensions of time to the construction contract.
Finally, the basement excavation was complete and the structure started coming out of the ground, slab by slab. As the upper levels were reached and the structure almost completed, the pumps were turned off and the building stood its ground, the structure heavy enough to stay in place. At about the same time, it was announced that Divine the builder couldn’t afford to pay its creditors, principally its major bank ANZ, and was at the risk of going into voluntary administration.
After the significant delays and potential additional costs of the dewatering, this wasn’t welcome news. One of the developers in the partnership, Paul Gideon had a building background, came from a family of builders and had a building licence and so whilst alternative builder Hutchinson was on call in the event Divine folded, the plan B was (given the more complicated and substantial part of the structure was up and finished) for Pointcorp to take over as head contractor to finish the interior fit-outs with the existing contractors on site (and the removal of Divine as principal contractor).
Divine made an announcement to the ASX that it would be selling major land holdings it owned in order to pay its debts and so, in the end, were able to complete the project.
The project feasibility always maintained more than sufficient margin to pay our principal scheduled return and then the additional time costs which were identified to our investors in the upfront dd risk analysis and sensitivity feasibility prior to investment.
After significant delays, occupation certificate was achieved, and settlements of sales completed. Our capital was repaid with profit in November 2016. As anticipated given the strength of the market, most of the off the plan buyers had gained equity uplift in the upswing in the Brisbane residential market in the construction period between the off-the-plan sale and the date of settlement.
At the same time, the heavily contaminated site next door which was owned by Dexus on Donkin Street was acquired by Pointcorp for further development. About 8 months later a Chinese developer R & F Projects acquired the site from Pointcorp for $82 million, three times the price Pointcorp paid for the site.
MP Funds Management is working on a range of high-quality deals for co-investment and institutional debt arrangement in the hotel sector, retail shopping centre sector, commercial office sector, development sector and acquisition of bulk residual brand new residential apartment product (at a discount). Our key focus is the eastern seaboard of Australia.
MP Funds Management fee structure is largely performance-based and aligned with investors receiving their principal investment and base return in the first instance, with our fees being largely performance driven.
Mandi Prager is the principal of MP Funds Management. MP Funds Management has provided investment funding for over $1.1bn of real estate-based investments across 22 transactions and produced an average annualised investment return of 21-22% (IRR).
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In 2014 we co-invested with former Managing Director and board member Steve Day, in the headstock of real estate investment management business, Propertylink. Investing in and managing major industrial warehouse portfolios, office tower portfolios, and infrastructure projects, other Propertylink co-investors included Goldman Sachs and London’s Duke of Westminster.
In 2016 we provided mezzanine finance for two separate town house developments of c. 24 townhouses each, so around 50 townhouses in total in Brisbane. MP Funds Management came into the deal for a short period of six months. We had the opportunity to buy out a portion of the existing capital providers position at a 19% (investment return (which was compounding monthly).
I am fascinated by the intergenerational transfer of wealth and how the financial and investment sector will evolve as a result. According to a study by Wealth X, over the next decade or so, one of the largest ever intergenerational wealth transfers will take place. Including all individuals with a net worth of $5million or more, its expected $15.4trillion of wealth to be transferred by 2030 globally. This sum is equivalent to the entire Chinese economy or 17 times the market capitalization of Amazon, one of the world’s most valuable companies.
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