“Why did you invest in that development project?”
Since retiring from the corporate world I’ve been investing regularly in a number of property development projects. These projects are across a range with GDVs up to £10m+.
A friend recently asked me what attracts me to invest in one particular project and reject another. A good question and you’ll find a plethora of information and guidance online, most of which, centres around yield or return on investment. However, whilst important, for me, it’s a very personal choice and my investment decision is primarily based on people.
Taking the Plunge
My first venture into investing in this sector was in 2017 in a fairly modest development in West Sussex with a GDV of £2.5m. I simply liked the people involved and, I accept, a naïve approach to investment! Whilst there were some challenges with the project the developer was great to work with. Since that first, somewhat blind leap of faith, I have invested in all of his subsequent projects and will continue to be a big supporter of his business.
Since that first investment, the “people” element is still the key driver of my investment decision although, I’d like to think, there is a bit more science to the thinking now. I like to support developers who have flair (this is not what a Scotsman stands on!) and someone who can turn the vision into reality – preferably on time and within budget. Most development projects encounter problems to some extent and I am encouraged when I hear how a developer has dealt with the challenges he has encountered.
I also put a lot of credence on the people who have brought the project to me. Are they also invested and do I see them as part of a long term relationship? If it’s a “one-off, stand-alone” opportunity then it’s probably not for me.
I tend to invest as part of a syndicate and I like to know about my co-investors. Can we all work together and do they have “patient capital” if there is a serious problem with the project? Investing as a member of a “club”, with people I know, works for me.
Of equal importance, as a second-charge investor, is who is lending ahead of me in terms of a first-charge senior lender. Are they an experienced property development funder and can they be relied upon to act professionally. I seek to ensure the developer is incentivised to deliver the project if problems are met? Surprisingly, there are fewer senior lenders in this category than I would hope – sadly.
Once I’ve got comfortable with the people component I then look at the project itself. Does it all stack up and make sense with sufficient contingency for unforeseen costs or delays? Is there enough profit in the project for the developer after my investment return?
And for me, as an investor, is this a project I could be proud to be involved with? Whilst a bit esoteric this is important to me. If all of the above boxes are ticked then I’m in and if not then I’m out!
You can learn more about the importance of developing relationships with your investors and how to prepare a persuasive sales pitch, by signing up for our webinar – Deal Clinic: How to Negotiate Development Funding.