This week, one of Australia’s largest builder-developers collapsed, sending shockwaves through the property industry.
My first thoughts must be with the 350 staff members whose livelihoods have been impacted; the thousands of subcontractors and suppliers facing uncertainty over unpaid invoices; and the many buyers who have paid deposits and are now wondering whether they’ll ever receive the property they worked so hard to purchase.
As more details emerge, this is shaping up to be one of the largest builder collapses in recent memory – more than $3 billion is reportedly owed to creditors, while dozens of projects containing thousands of apartments have effectively ground to a halt.
While the human impact rightly deserves the headlines, there are also some important lessons property investors should adhere.
In my view, there are three that stand out.
You need growth and cash flow
Perhaps the most important lesson from this collapse has nothing to do with apartments.
Sadly, too many investors become obsessed with growth. They focus on rising property values, development potential and future profits, while paying insufficient attention to cash flow.
The same mistake can occur in business. A company can own hundreds of millions worth of assets (billions in this case), but if those assets aren’t producing enough cash to meet current obligations, trouble is going to find its way to your door.
From what has been reported so far, the Bathla Group controlled more than 200 empty development sites while only a small proportion were actively generating revenue.
This is an important reminder that owning assets and generating cash are two very different things.
Rising construction costs, higher interest rates, and policy changes may have contributed to the collapse, but those factors alone don’t explain a failure of this magnitude.
Businesses survive challenging market conditions all the time. What they cannot survive is running out of cash.
For investors, the lesson is simple: capital growth builds wealth, but cash flow provides the oxygen to stay alive. The best portfolios are built on both.
Do your due-diligence
Size, reputation and marketing budgets are not substitutes for proper due diligence.
Many investors assume that a large builder with a long track record is a safe choice. This collapse is a reminder that even the biggest names in the industry can fail.
Before committing to any project, investors should take the time to inspect recently completed developments, assess the quality of workmanship, review available financial information and seek feedback from customers, tradespeople and suppliers associated with the builder.
In our experience, these conversations often reveal far more than any display suite or marketing brochure ever will.
The goal isn’t simply to determine whether a builder can construct a quality product. It’s to assess whether they can deliver that product on time, at the agreed price and, most importantly, still be in business when construction is complete.
If you’re not comfortable getting this part right yourself, pay someone to do it for you, there are good businesses out there who do this day in and day out for investors (I say Custodian are the best, but I’m obviously biased).
Don’t buy off the plan
The final lesson is one I’ve been spruiking for years: investors should be extremely cautious when purchasing off-the-plan apartments.
Supporters of the strategy often point to the potential for capital growth between contract signing and settlement. While that can occur, investors must also accept a range of risks that simply don’t exist with established property.
High-rise developments are particularly vulnerable because of their construction and funding model. A project can take 18 to 24 months to complete, during which enormous amounts of capital are spent before meaningful revenue is realised.
Compare that with a house on a block of land, where builders typically receive progress payments throughout construction and projects are often completed within six to twelve months.
The financial risk profile is fundamentally different.
When you combine those risks with the fact the land is what grows in value, the case for avoiding off-the-plan apartments becomes compelling.
You can’t avoid risk when it comes to making investments; but you can learn to manage the risks that will aways be there.
This collapse is a reminder that growth without cash flow is dangerous, due diligence is non-negotiable, and not all property investments carry the same level of risk.
For investors pursuing wealth creation through property, understanding these three principles has never been more important. Ignore them at your peril. Follow them consistently, and you’ll dramatically improve your chances of long-term success.
If you need a guiding hand, do reach out to our team at Custodian.
