A property development fund is a managed investment scheme that allows any investor to get involved in large scale property development through debt financing arrangements or direct equity investments.
The investment philosophy of these funds lies in adding value to a property, either by turning empty land into useable space (e.g. by building residential apartments or a shopping centre) or by repurposing existing land to make it more productive and valuable. Fund managers source projects with attractive returns and appropriate risk profiles and then provide the developer with capital to execute the necessary steps such as acquiring a site, obtaining development approval, constructing the property, and selling or renting the property upon completion.
One of the newer and safer investment opportunities is to find a manager that operates the entire vertical, managing the development from both the fund and the property development. This removes the risk of any miscommunications or misrepresentations throughout the project. Usually, once the developer has progressed the project to a suitable stage, a fund manager will either sell the asset to a third party, rent out the asset, or swap their equity interest in the project for a share of the ongoing profits or cash flows.
The first property development funds were created in Japan in the 1980s and soon became very popular as a form of real estate investment. Property development funds are similar to a unit trust in that they are available to retail investors. They are usually structured as trusts, with a trustee acting as the fund manager and investors subscribing to units in the fund. This differs from a unit trust in that a property development fund invests primarily in unlisted property assets, relying on the property itself to generate returns as opposed to being traded on an exchange. Some managed funds have publicly listed subsidiaries that undertake the same activities as the unlisted company.
Property development funds take three forms: debt, equity and hybrid. Property development debt funds are structured as a debt vehicle, whereby the fund manager provides finance to the developer being the borrower. The fund manager’s investment returns are generated by the interest charged on the debt. Investors have a passive role in these funds, taking no active role in the management of the operations, and are only entitled to their share of the interest and principal payments.
A property development fund differs from a property fund that invests in a range of developed property assets; the development fund, being on the project side, focuses on the construction and development stages of a project, while the property fund is on the asset side and focuses on the existing part of the project (i.e. the developed, or developed up, part of a property or portfolio of properties).
One of the most frequently asked questions when it comes to starting out in property development is, “how much money do I need to start a property development?”
It’s an important question, but the answer can be complex. It will depend on your geography and/or where you feel comfortable investing. Additionally, it will depend on how hands-on you want to be, or are able to be, and it will depend on the building development resources you have available to you. All of these variables are why it is becoming more popular to invest in a Property Development fund. It removes all those variables mentioned above, and you have the benefit of group buying power in many ways.
Otherwise, if you choose to develop on your own, you need to:
1. Research all your options and get as much information as possible.
2. Be realistic about what your investment strategy is. Knowing that you’ll probably get a better return for your money in the short to medium term by purchasing established properties, you need to know if you’re willing to wait a little longer for your returns. Ensure you know exactly what you’re getting yourself into beforehand so that you don’t get carried away and lose money.
3. Start small. While the more money you have to invest, the better the returns, it’s also incredibly important not to invest too much at first. If you’re inexperienced, you’ll have to get up to speed with all the legalities of buying a property. This will take time and you’re also going to have to learn everything you need to know about the property market.
The author of this article is one of the leading property developers in Australia, but also has an experienced financial management offering, with decades of experience in the industry. In this article, he discusses some new and exciting options in property investment. Visit https://landen.com.au/ for more.