Podcast: Lifting the Skirt on Developers: How to Choose a Developer For an Investment Property | Ep. 237

Posted by Ed McKnight on 07/05/20
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Show Notes

What's Covered in the Show?

In this episode, we talk about what to look for when choosing a developer for an investment property. This is something close to our hearts as it is what Opes does day in and day out.

We also dig into some of the claims that particular developers make, particularly around the world population and the correlation with New Zealand house prices.

Finally, we mention our upcoming property investment webinar, and it would be great if you could make it along. This is happening next Tuesday at 7pm.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and on the show, we're talking about how do you choose a developer for an investment property.

How do you choose the developer for an investment property? Now, this is something that is very close to our hearts at Opes Partners because this is something we do all day every day in terms of evaluating both developers in terms of whether their products or the houses that they're building are good investment properties or will make good investment properties.

And Andrew, I want to get your thoughts on this before I jump in about what are some of the top things you look for when evaluating a developer and their property.

Andrew Nicol: Oh, so as Ed's mentioned, this is something that I look at all day every day. I would have a developer every day contact us and we would choose to deal with 20% of those people to recommend their product. And a lot of this comes down to the fact that we want really, really good products, from really stable developers. And so some of the key indicators for me as to whether or not someone would fit the bill of someone we want to be endorsing.

Firstly the big thing is reputation. So, especially for some of those big name brands, you kind of get a feel, or certainly we do as to what the reputation is of those people, both from a product but also a financial stability side of things. I would give a caveat here that can change. So, I'll give you a great example. So Stonewood Homes started up in Christchurch and they franchised to all over the country. I bought a number of Stonewood Homes about 10 years ago. They were excellent builders. One of the best, particularly for the investment stock market, they were affordable, but good quality homes.

And then they got into some real trouble. And so, particularly Christchurch people would remember this, you'd see news articles on Stonewood homes and basically their reputation crumbled. So they were not finishing jobs on time, they had subpar finish and then of course, they wouldn't go around and correct any defects. And it was a real issue. And at that point we'd already stopped dealing with them and I wouldn't hurry back to them. As it happened, they ended up going into receivership and got bought by the infamous Chow brothers from Wellington. And, that probably too was a reputational concern for me endorsing again their product.

And so we hadn't dealt with them for a number of years, and it just so happened that the new franchise owner for Christchurch, Warwick Isaacs, uses the same lawyer as I use, and my lawyer insisted that I meet Warwick and I did. And I'm glad I did because he is probably now one of my preferred developers to deal with because since then they've cleaned up the brand entirely they have an amazing product. They finish on time. The majority of the time, they are outstanding. And if Warwick Isaacs rang me tomorrow and said, hey I'm going to develop all over the country, he would be one of my preferred developers across the nation, so reputation can change.

But you know, if you are looking at trusting someone with your money to build a house and you're trusting you know, a lot of investment, you know, it might be a five, six, $700,000 investment. You want to make sure that that brand carries some weight when you got to sell that property. Because remember, this is an asset that you want to stand the test of time and actually be worth something later on. And so if you're using a building company that uses cheap materials or just has a poor reputation for the finish of the product. Or any of those things that people kind of know who they are but wouldn't want to buy through them.

You've got to remember that that's going to affect your resale later on. So it's really, really important and it's much more important to get a better product that's going to stand the test of time than it is to get the cheapest product right now. Some of the other things I look at, certainly what kind of warranties they offer, so making sure that you are going to get a robust warranty on the finished product.

You want to make sure that that's going to be solid and stand up. I think that it's really, really important that you see a finished product, particularly if you're buying off plans. So if you buying off plans, you go and see something that they've finished recently that's built to the same spec, not a show home, go and see something that's built to the same specifications as what you were about to buy. And make sure that they've got an attention to detail that they finish them off nicely. Because if from the visibility standpoint that you can see some things that haven't been finished very well, you can bet your bottom dollar that there's some stuff behind the scenes, the foundation and the insulation, you wonder whether or not those things have been compromised as well.

And so I think it's really, really important that you look at that finished product to make sure that you're comfortable, that you're going to get something again, that's going to have a good resale value. And then I'm going to touch on one that is very close to my heart, I am increasingly annoyed by the number of developers out there who are pretending to be something that they're not nowadays.

They pretending to be property investment gurus and that steps on my toes. So you've got developers out there that are going out and saying, hey property investment's a great mechanism for wealth, which is true, buy my stuff it's a great investment. Yes, if you go and see one of these developers and you get inspired to buy property, got nothing wrong with that. But I do think it's important you get an unbiased advice. You go and talk to someone who maybe has alternatives. Or at least do your research and gone look at a bunch of different developers to see what other products are on the market.

Just because someone gets you fizzed up about property investment doesn't mean that their product is necessarily the right investment for you. And I can think of a few where I would not endorse their properties as a good investment, but they're going out there saying, hey, property investments is a no brainer, so buy my product, which part of that's true. But the other part is not.

Ed McKnight: And I just want to jump in there, Andrew, because I think previously you talked about substance behind a developer and I just want to talk about intellectual substance if I may. I don't have as much of an issue about developers giving property investment advice as long as the advice is sound and as long as the data they are leaning on is sound. And my gripe is that I see a lot of claims in property investment that actually do lack complete intellectual substance.

I've seen one developer go out and say that they want everyone to own their own home, everyone to own their own home and become a property investor. Well that doesn't work. Not everybody can own their own home and become a property investor because if everybody owns their own home, then who's renting all of these investment properties? Who's renting the rental properties?

You know, it doesn't make sense. And so while it's a lovely idea that everybody should own their own home and home ownership is important don't get me wrong, it doesn't make sense that kind of statement, because if everybody owned their own home, the value of investment properties would be nil. Nobody would purchase them. And the other claim that I see, and I've seen this from multiple developers, is this idea that because world population is increasing and world population is increasing extremely fast, that's a driver of house prices. And of course, population is a driver of housing prices, but world population is not a driver of New Zealand house prices. And I see this as real intellectual laziness as an economist.

This idea that, and I've actually been in presentations and seen this where you will see one line is world population and the other is New Zealand median house prices. And if that kind of going up at the same rate and roughly the same line, then there's this idea that they're correlated and it's kind of presented as if it's causal that, look world population's increasing and that's causing New Zealand house prices to increase. And that's bollocks.

You know, this idea that the population of a country in Africa or in Asia is driving New Zealand house prices is completely bollocks and I've got some data to back it up. So over the last 20 years, our population in New Zealand has increased by 24% 25%. The world populations increased by about 27% so there are, over the last 20 years, we've got about an extra 1.6 billion people in the world and just under a million extra people in New Zealand. So if you look at that total increase in world population, that 1.65 billion New Zealand's population increase has contributed 0.058% of that. So less than a 10th of 1%.

So New Zealand's not contributing a lot to world population. So where's that population growth coming from? Well, about 19.6% of that growth has come from India, 9% from China, just over 5% from Nigeria, 4.76% from Pakistan, 3.8% from Indonesia. Then the US and Brazil. So all of these other countries are causing world population to go up. So if this claim was accurate, that world population is causing New Zealand house prices to increase then what does the population increase in India or China or Nigeria or Pakistan or Indonesia have to do with our house prices in New Zealand? And I hope that what you're thinking is these things don't add up.

There's no causal relationship between world population and New Zealand house prices. Now, New Zealand house prices are going up, and there are some good reasons to believe that that will probably continue over the medium to long term because of our net migration flows, because of how population's increasing because of our lack of supply and our high demand. Because interest rates are low.

There are a whole heap of reasons why the claim that New Zealand house prices or New Zealand houses are a good investment. There's a lot of reasons why that might be true, but this idea about world population increasing causing New Zealand house prices to increase is complete rubbish because most of the increase in world population comes from African and Asian countries that have very high population growth. And so that's why I would just want to bring it back to intellectual substance, because if you're going to get financial advice, then make sure that the numbers are crunched correctly.

Make sure that the people giving it are credible and make sure that it's not just some kind of spurious correlation that doesn't actually make sense when you interrogate it with any rigour. Because even...

Andrew Nicol: though you can put the, I'm sorry Ed, I'm sure you could compare the cost of milk and house prices and say that those two were correlated as well. But that doesn't necessarily mean that they affect each other right?

Ed McKnight: Yeah. Well, the idea is the key message here is, look, just because something sounds like it's a good story does not mean that it's a good reason to invest. And I would kind of run away from anybody who's proposing some sort of spurious correlation as a reason to invest, not because they're necessarily wrong, but because I wouldn't trust the, the rigour of some of the other claims that they may make.

And I think that that's really important. Now, I'm sure there are, there are possibly some developers out there who really have the numbers crunched and they know the trends within their regions and within the areas and it all stacks up. But there are certainly some developers who are very loud out in the market, but who lack the substance to back that up. And one of the things I remember once hearing from one of my favourite musicals actually is the less you have to sell the harder you sell it.

And I think that that's possibly the case that we sometimes see the less you have to say the louder you yell it and things like that. And I do believe that's probably what we're seeing, but hey, Andrew, let's wrap it up there.

Of course, please don't forget to rate, review and subscribe to the podcast. It really helps us get the message out to more people. And if you want to see some actual intellectual rigour, then come along to our webinar this coming Tuesday. We haven't actually pinned down the topic or I haven't pitched the topic to you, Andrew, but I think we're going to get pretty nerdy into data, because I want to talk about the differences in capital growth values, depending on what sort of property you've got. So we'll probably be talking about that tap or swipe over that cover art it'll take you straight to where you can register for that webinar. Or of course, just hit up Opespartners.co.nz.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.