Today, Dan spoke with Troy Linnane of JLL about his market views, opportunities and challenges he has faced and some advice/lessons learned thus far in his career.
The podcast will be released every fortnight on Tuesday and will feature an elite developer discussing these same topics.
The podcast will be available to stream from iTunes and via the HoldenCAPITAL website.
For more information about the podcast or getting involved please email paige@holdencapital.com.au
Read full transcript below:
Daniel Holden: Well, hello everyone and welcome to the Constructive Finance Podcast. I'm your host Dan Holden and today I'm very excited to be joined by Troy Linnane, who is the head of JLL Valuation. Troy, thanks for joining us.
Troy Linnane: Thanks Daniel, for the invite.
Daniel Holden: By way of introduction, can you give us an overview of JLL, and in particular, the area that you run, which is residential development valuation and advisory.
Troy Linnane: Yeah, sure. JLL's listed on the New York stock exchange, headquartered in Chicago. We have 280 corporate offices globally, we operate out of 80 countries, with a workforce of about 60,000 staff. In Australia, we've got ... we've been here for about 60 years, two and a half thousand people in Australia. We're a fully integrated real estate company. From strategic consulting, evaluation advisory, acquisition management, cap markets, all the way through, so across all sectors as well. So yeah, we're one of few agencies who can offer all that.
My team is residential development, valuation advisory here in Brisbane. I do have a national head of that space, so obviously got counterparts in the other cities in Australia. And we look after essentially residential development projects, apartment developments, townhouse developments, land subdivisions, mixed use. Yeah, so that keeps us busy.
Daniel Holden: Great. How long have you been in that role, and prior to that, what made you a guru for that role particularly?
Troy Linnane: I've been with JLL for about two years now. I've had a pretty diverse career in the property industry. I've spent about 25 years working for National Australia Bank in their property finance area. Grovener, as investment manager. Stockland as an acquisitions manager. So look, I've had a pretty diverse background.
Daniel Holden: And most of that, was that based around the valuation trade?
Troy Linnane: I started off as a valuer-
Daniel Holden: Within the bank and within the property companies?
Troy Linnane: Yeah, well. In the bank it was more about looking at property lending deals and assisting the relationship managers in credit making a decision on a property transaction. So, obviously looking at valuations but also looking at the property risks associated with those deals.
Daniel Holden: Yep.
Troy Linnane: Stockland was acquisition manager for apartments team. Grovener it was more investment manager role, which was a bit of asset management and acquisitions in the commercial space predominantly. So obviously in all of those roles, you're utilising the skills from valuation background and then just applying in different ways. So I got into the res dev space after my time at Stockland and find it a very exciting sector to work in.
Daniel Holden: Excellent. And so in terms of JLL and the res dev team that you guys operate, when you're working with property developer clients, I guess property developers come in all shapes and sizes, from [Maron 00:03:44] park doing a splitter block, right up to the listed corporate developer. What would represent most of your current client base?
Troy Linnane: Yeah look, we've got both private developers as well as the listed groups that we work for in various capacities. Generally, it's the size of project that defines the work that we do.
Daniel Holden: Okay.
Troy Linnane: So for an apartment project for instance, it'd generally be something about 50 units and above, land subdivisions would be multi-phase type projects. So townhouse projects generally about 20 units and above sort of size. That's for privates or for listed groups, yep.
Daniel Holden: Okay. And so in the life cycle of a develop project, when should developers look to engage a specialist like yourself?
Troy Linnane: I'd like to think that the earlier on the better, to be honest.
Daniel Holden: Yep.
Troy Linnane: If a developer's ... even if they're experienced in their trade and whatnot, just getting an impartial set of eyes to look at a potential opportunity.
Daniel Holden: Yep.
Troy Linnane: Obviously we can assist with feasibility analysis, supply and demand. Drill down to what the competition is doing in the particular area that they're looking at.
Daniel Holden: Okay.
Troy Linnane: What revenues they're achieving in those projects and sales rates and that sort of thing.
Daniel Holden: Okay.
Troy Linnane: So look, the genesis of an acquisition I think it's appropriate to get us involved, to be honest.
Daniel Holden: Some people listening might think valuers just do project vals on behalf of the bank, when it's basically shovel-ready. So maybe it's worth highlighting some of the other services you guys do outside of project vals for banks.
Troy Linnane: Yeah obviously that's one facet of what we do. But like I said we can provide that advisory piece, which I think is more value-add for a developer because they may not have the in-house skill sets or expertise or time for that matter. And to outsource that to someone like us, who's actively involved in that market, could help and save them money.
Daniel Holden: So an example of that might be a developer who's active in Sydney or Melbourne, looks to Brisbane, says, "I'm interested," And comes to you and says, "Guys, I want you to give me an analysis of the Brisbane market, and where's under-supplied?"
Troy Linnane: Yep.
Daniel Holden: "You know, which of the main nodes around Brisbane, Chermside, Mount Gravatt, Indooroopilly. Tell me which of those nodes is the best for me to enter."
Troy Linnane: Yeah.
Daniel Holden: And they'd get that report done before they come and spend twenty million bucks, hopefully.
Troy Linnane: Yeah. Before they-
Daniel Holden: On the site.
Troy Linnane: Yeah. Before they buy it and make a mistake, yeah.
Daniel Holden: Preferably not us though.
Troy Linnane: But even guys locally that may be operating in the apartment space and are looking to diversify and are perhaps looking at land or medium density, and not that familiar with those sectors.
Daniel Holden: Yep.
Troy Linnane: And they are profoundly different, obviously. So just engaging us there. But yeah, the example that you put forward is a classic example. Yeah.
Daniel Holden: Great. So what qualities do you look for in a property development that give you comfort to take on that project?
Troy Linnane: First and foremost, a sponsor.
Daniel Holden: Okay.
Troy Linnane: Their track record, their experience. And then I suppose the development itself, the product that they're looking to develop. So you know, as we know, property markets move, and therefore the product, if it's approved scheme, whilst it's approved, that product, that approved scheme may not be relevant to the current market. It may have a high weighting of, say, one-bedroom units and that segment of the market's kind of run it's course right? And it may have DA for 300-odd units that are probably more appropriate to scale it back a bit and dumb it down, so to speak. Particularly where we're at in the current cycle. So, less is more.
Daniel Holden: So if you were brought a project and it was something that you weren't comfortable with, are you able to decline working on a project, if you've got an opinion it's a bit of a white elephant?
Troy Linnane: Look, yeah. Before we undertake work we definitely go through a process where we think it's ... Whether or not we should ... Especially if we're doing a valuation report for funding purposes, before we accept doing that job, we definitely vet those things that I've just touched on and whether or not it's an appropriate risk for us to undertake. We wouldn't go out of our comfort zone ... Like, we don't like going into regional Queensland for example, we stick to the south-east Queensland here, which is an area we know best.
Daniel Holden: Yep. And so in your mandate, you're meant to value the project itself. Saleability, sale values, and it's interesting to hear you comment that you look at the sponsor first. Brisbane's a small town and some people have a reputation that precedes them. Is it hard to compartmentalise the people and the project?
Troy Linnane: I don't think so. You need to be up-front with your client at the get-go and say, "Look, for these reasons, we think that perhaps it's better going down this path for this particular site, or we see the numbers based on x, y and z because of this."
Daniel Holden: Okay.
Troy Linnane: We may not see the same way.
Daniel Holden: Yep.
Troy Linnane: Perhaps that's where we need to just pull it up then.
Daniel Holden: Yep.
Troy Linnane: So look, I think it starts with the sponsor and then the project is the project, right.
Daniel Holden: And so is there an element that's involved-
Troy Linnane: Yep-
Daniel Holden: And-
Troy Linnane: The key for us is making sure that you've got that communication piece-
Daniel Holden: Yep.
Troy Linnane: And if you can sit down and explain logically where we're coming from.
Daniel Holden: Yep. And so the execution obviously of a project is vital. So what you were saying before, though, is maybe that the project is a bit of science, being that it's probably black and white and numerical.
Troy Linnane: Yep.
Daniel Holden: Whereas the developer is a bit more art. So kind of art and science.
Troy Linnane: Yeah.
Daniel Holden: Matching the two and making a decision.
Troy Linnane: That's a fair call.
Daniel Holden: Yep. Cool. And so what would you think are the top two problems that property developers get themselves into?
Troy Linnane: I think one of them is what we touched on before, is where they're entering into an area which is outside something they're familiar with or understand. So the scenario you gave before of perhaps a southern developer coming to Brisbane and not fully understanding our market up here, is one. I think over-gearing, cashflow constraints, is another issue that can get developers unstuck.
Daniel Holden: It's a long time between drinks then for property developers.
Troy Linnane: That's right. And specifically big projects right? And talking 24 months til you see money coming in, and a lot of things can go wrong in that 24 months unfortunately. Ground conditions, construction-
Daniel Holden: Markets change.
Troy Linnane: Markets move and that sort of thing. So yeah, having diversification is the key too I think, for the guys. Yeah.
Daniel Holden: Okay. And so your role is working between two parties, being the developer and then the bank. Being a developer might engage you for market research, feaso support, initially. And then the bank instructs you, possibly on the same project, to work on their behalf and the numbers of money involved are quite substantial. There must be some emotion and ego at times. How do you avoid this conflict and keep the peace?
Troy Linnane: It's hard to avoid the emotion and ego. [inaudible 00:11:11] sometimes. But look, the numbers are the numbers. And we provide an impartial, honest, how we see the numbers. Which is backed up by research, data, comparable to that development. So whether we're providing those numbers for the developer at the get-go or then later on for the bank, the numbers, assuming all things being equal and the time gap's not that significant-
Daniel Holden: Yep.
Troy Linnane: They should all be the same. And like I said before, that communication piece, I believe, is where you can logically explain where you're coming from.
Daniel Holden: So you mentioned data there a few times. The valuation industry has a big reliance on data. With the interweb bringing the general public better access to that data, do you see that affecting the valuation process or industry as a whole?
Troy Linnane: Yeah I do. Probably more so at the residential end.
Daniel Holden: Yep.
Troy Linnane: So where guys are doing that, the houses and units and whatnot for the retail lending piece.
Daniel Holden: Okay.
Troy Linnane: I think already ... That scenario, that I'm not that close to, but I think already below a certain LVR, banks use core logic data and median house prices and that sort of thing
Daniel Holden: Okay.
Troy Linnane: When it goes above a certain LVR, I think they then seek valuation requirements, mortgage insurers and that sort of thing dictate that. So I think it will definitely have influence there. Technology is changing as we know, rapidly, and information is the key in understanding that information and being able to dissect it and interpret it, is the key, and it can only keep improving, I think. It'll help all decision makers going forward, in our space and I think you can't be naïve to that as well. There could be some disruptors coming forward that we're not privy to at the moment, but yeah. You need to embrace technology and move with it.
Daniel Holden: It's interesting. I went on a roadshow last year with a pre-sales marketing crowd and we went to Singapore to some of the property expos they've got over there, and interesting talking to the sales people who were on the ground there, selling properties from Brisbane, Sydney and Melbourne. And they were saying that they're there talking to a couple, and they'll be having a conversation with the husband, and the wife's there faced the other way with an iPad, checking out where in Melbourne this suburb is, and what else is happening in the area and you know, comparable sales and kinds of stuff. So that access to data is changing the way we do business.
Troy Linnane: Dropping into the council website, looking if there's flooding issues with that site here in Brisbane.
Daniel Holden: Exactly.
Troy Linnane: All those sorts of things. You can get these goggles now where you can drop your phone in and click on an app and you can fly through an apartment project [crosstalk 00:14:13]
Daniel Holden: Okay, like virtual reality, yep.
Troy Linnane: Virtual reality sort of stuff.
Daniel Holden: Yeah, great. Okay.
Troy Linnane: So you can, yeah. Sitting in Singapore and looking through a proposed apartment project here in Brisbane.
Daniel Holden: Right. So as at July 2016, the end of July we are now. I guess we get a bit of an insight from you on where you see the market currently, and I guess the ebb and flow of the demand on our product, maybe if we talk about the hot topic, which is inner-city apartment, and then cover some of the other sectors in terms of supply.
Troy Linnane: Yeah. There's been a lot in the press about the Brisbane inner-city apartment market, and I suppose the apartment markets along the eastern seaboard of Australia. Obviously the banks have put the handbrake on lending in that space, across all three major cities. In Brisbane here there's been a lot of noise about the supply. Given those funding constraints, that supply I believe will come off, or self-regulate. So you hear a lot of noise about 25, 26 thousand apartments coming on the Brisbane market.
Daniel Holden: Yep.
Troy Linnane: That's the 5k radius of the CBD. If you tally them all up, yeah, those numbers are about right. We do track that data quite rigorously in my team. But you need to drill down into that data and look at what's under construction. What's approved, what's mooted and so forth. So our view is now, given the market the way we know it is, is that unless you got a crane onsite now, you're probably not going to ... high probability you're not going to have, it's not going to happen this cycle.
Daniel Holden: Yep.
Troy Linnane: So if you then strip all those others out, it then comes back to about 15 to 16,000 apartments over the next three years. This year, there's about 8000 need to be complete, which is a high water mark for Brisbane, yes. But over the next two years, 17, 18, there's another 8000 over those two years. So like I said, about 16,000 all up over the next three years, so-
Daniel Holden: So of those 8000 that are pencilled in for 17-18, how would that reflect as a ratio of how much we absorb or go through each year naturally? Is that a year, two year supply? Is it you know ... we're not talking ten years cataclysmic, it's just a bit of a bulge.
Troy Linnane: Yeah, look, Brisbane apartment market is still emerging as a product say in comparison to Sydney and Melbourne, and the majority of buyers of these apartments have been interstate investors, then overseas buyers and then locals, right? So for instance, off-the-plan sales last year on our stats were about seven and a half thousand sales.
Daniel Holden: Yep.
Troy Linnane: Which is significantly ... a significant high number.
Daniel Holden: Yep.
Troy Linnane: My opinion is in a normalised market, it's probably about four thousand, [inaudible 00:17:20]. So therefore if you break that down again, it's only really about two ... Don't forget, those ones that are under construction have been pre-sold. The vast majority of them have been pre-sold as well.
Daniel Holden: Particularly with the barriers on finance and getting the project [crosstalk 00:17:35]
Troy Linnane: Absolutely. So they wouldn't have started-
Daniel Holden: Yep.
Troy Linnane: Unless they had a certain amount of pre-sales.
Daniel Holden: Yep.
Troy Linnane: And the banks also kept a cap on third buyers too.
Daniel Holden: Yep.
Troy Linnane: So most of the banks would limit exposure to third buyers between 20-30% of GR.
Daniel Holden: Yep.
Troy Linnane: So, and look, there's a lot of talk about settlement risk at the moment, in our market. It's fair to say that settlements are taking longer because of the tightening of banks' lending policy in the residential investment sector.
Daniel Holden: Yep, okay.
Troy Linnane: Obviously we've heard they've been capped at 10% of their loan book.
Daniel Holden: Yep.
Troy Linnane: In that space, so they're applying a lot more rigour to their ... And then obviously they've softened on their stance on lending to foreign buyers as well, so there is a slowing of settlements of projects, but we're not hearing any disaster stories as yet.
Daniel Holden: I think it's also interesting that you've thought 4000 is the comfortable number for the city of Brisbane to maintain, ongoing. That's still a decent amount of product that can brought to the market to provide those 4000 apartments. When you look at our average apartment size, ignoring the recent spike we've had in some of the bigger apartment projects, most apartment projects in that 5k ring would probably fit in the 50-100 apartments per project, some in 100 plus, but for the most of it. So there's still a fair few projects that can operate and be profitable to deliver those 4000 apartments year on year out. So we're not talking about going from 8000 apartments to 1000 apartments. It's not a complete white-wash of the industry. It's just an adjustment of volume.
Troy Linnane: Yeah, I think that's the same as my opinion and I think that'll be driven by a number of things. First of all, the dynamics of households now. Here's going to be more propensity for people to want to live closer to the city, closer to amenity, transport and whatnot. The affordability, the younger first home buyers. It's very hard now ... median house price in Brisbane now is close to $600,000 on current stats. So to get a detached home in Brisbane is very challenging for a first home buyer. So whilst they might rent first up they may then look to buy an apartment as a segway into getting into the housing market, right?
Daniel Holden: Yep.
Troy Linnane: And I think that affordability piece is just going to be a driver there. And empty-nesters wanting to decant out of the family home into something which they can lock up and leave.
Daniel Holden: Yep.
Troy Linnane: Is more manageable and that sort of thing.
Daniel Holden: I've seen some great projects in that empty-nester space that are selling really well.
Troy Linnane: Yeah.
Daniel Holden: Price point is 800 to 1.4.
Troy Linnane: Yeah.
Daniel Holden: And they've been selling like they're 600.
Troy Linnane: Yeah.
Daniel Holden: They're just ... in terms of sales rates and absorption, they're actually going really well.
Troy Linnane: I was talking to a developer yesterday who's from Melbourne, very established in Melbourne. And he was saying projects they're doing down there, they're getting parents buy in the same complex as what their children have bought in. So they're obviously offering a diverse range of product there alright.
Daniel Holden: Yeah.
Troy Linnane: But he said there's a number of instances where ... So that's interesting.
Daniel Holden: I think it's an opportunity for-
Troy Linnane: Melbourne and Sydney are a lot more mature and they've got a lot different affordability.
Daniel Holden: Yep.
Troy Linnane: And I just see Brisbane following, essentially.
Daniel Holden: So it was interesting to hear you say that I guess you diversify between the supply, just as a DA versus the supply, which has actually got the potential of getting legs and becoming a project. So maybe you can talk us through the process of how you actually decant that down into what's real and what's, not fiction, but as in what's actually not going to happen.
Troy Linnane: Yeah, it's hard to be categoric on that. And the elephant in the room I believe also is some of these overseas developers that don't have the same funding constraints as perhaps local groups have.
Daniel Holden: Yes.
Troy Linnane: We've seen some examples of that here in Brisbane. Listed groups too have got stronger balance sheets, so you can't discount those. And if you tally them up there's a few of them as well. It's fair to say at the moment that for a project that doesn't have development finance in place at the moment, it's going to be hard for them to start now.
Daniel Holden: Yep.
Troy Linnane: Unless they've got some other funding solution.
Daniel Holden: Or a good finance broker.
Troy Linnane: Or a good finance broker. Like Holden Capital.
Daniel Holden: Exactly. So there's often much discussion I guess around return on cost and profitability of projects. I've seen a variety of arguments that revolve around the more de-risk the project is, the lower the acceptable return on cost. And their argument is, because that they've actually more substantially de-risked the project by fixed price contract, gross maximum price, and they've actually got sales locked in, so therefore the numbers are more concrete and therefore the return on cost is actually a more sure thing than it being a punt. Is there any rule of thumb numbers that you try and hit? For example if it's a fresh DA with no market acceptance it needs to be 25% return on cost, whereas if it's shovel-ready, fixed price contract and half-sold, that you might actually tolerate a 17 or 18% return on cost?
Troy Linnane: It's a big question. And it's one that's always asked to us to be honest. Look, first and foremost, when we're doing valuation for funding, and we're assessing the market value of the site, we've got to assess that market value based on primarily sales evidence of the comparable sites. So obviously if it's got no DA, we should be comparing like with like. If it's got DA, we should be comparing it with sites with DA and just seeing how they fit. Yes, we do test that land value by residual cashflow analysis, so we do a work-back scenario.
Daniel Holden: Yep.
Troy Linnane: And sure, there's different risk involved with a site like you were saying, it's got no DA, versus a site that's got DA, they've got construction contract locked down, they've got pre-sales and get all that, but ultimately it's still a site, and as we said before, values change in cycles and that sort of thing, so therefore that land value's got to be supported first and foremost by site sales. And when we do that residual analysis, if that does show a development margin that's perhaps below 20%, well, as long as there's enough site sales to support that number, I'm comfortable with that. I do highlight that banks obviously like to see that 20% development margin. And when you go below that, there needs to be good, robust justification to support why. So I'm not saying that you can't be below. And there could be justifications because of the market. It could be high like 25, as what you were saying before. But generally banks like the starting point of 20%.
Daniel Holden: Yep.
Troy Linnane: And then you can err either side, but at the end of the day, you've still go to the have the sales evidence to back it up.
Daniel Holden: Yep. Cool. Okay. So we are seeing I guess a trend in mid-2016 that the smaller apartment investor rent-driven apartment has had a good bull run, and we're now seeing more projects emerge that are more lifestyle, owner-occupier, empty-nester targeted, which is good for this point in the market. We had some people recently on the podcast in pre-sales quantity surveying and I asked them the question around that extra 10 to 15 square metres that people are adding onto their DAs, adding onto their apartments and re-juggling their DAs at the moment, and we're seeing both one to try and attract the better buyer, can you give us some insight into "extra value", in inverted commas, in making a two bed, two bath, with the same size kitchen, same size wet area, adding an extra 10 or 15 square metres and how that reflects in your mind. If it's actually adding any value, or is it just increasing a GR graph, to try and make a feaso look a bit better?
Troy Linnane: Good question. The question you'd ask yourself is who's your target market? And if you're going for more of the local market owner-occupier, of course more space, layout, storage, those sorts of things. [inaudible 00:27:33] quality as well, the standard of the fittings and fixtures, will definitely add value. But if your project is more targeted to the investors, the extra 5 to 10 metres is not going to add much value. You still need good design, layout and quality. Unfortunately both the rental market and buyer market are getting a lot more discerning there. And because of that supply and competition, you can't compromise because the people have got choice, and they're going to go to the quality. So you've got to provide that. But it all comes down to your target market. As we know, the minute you start increasing floor area, it's going to affect cost, and that's going to affect your returns. That's what separates the good developers from the ordinary developers I suppose. Understanding first and foremost who their target market is-
Daniel Holden: And working backwards.
Troy Linnane: And how to get those margins up.
Daniel Holden: Yep.
Troy Linnane: From providing the right product at the right price.
Daniel Holden: Start with the end in mind and work backwards.
Troy Linnane: Correct.
Daniel Holden: So I've also, I guess heard a bit of a theme that some developers are doing an amenity-lite version of property developments, more so where they've actually got a location that provides not so much natural amenity, i.e., parks and rivers and that kind of stuff, but more so is close to other facilities, i.e., rather than putting a gym and spending a million dollars of developer's budget and body corporate maintenance of an extra couple of grand a year, and a pool on the roof, which again costs another couple of hundred grand for a developer and ongoing maintenance is actually quite expensive.
We've seen some pretty flashy developments come out in the last couple of years, but I have heard a few developers saying they're actually heading the other way, and that they're looking and providing minimal community amenity within the building because the actual surrounding area provides, you know, there's a 24 hour gym across the road. There's a pool in that gym complex. There's a theatre across the road. These types of things where they go, "Well let's just build something that investors want to own and renters want to rent, and forget the fancy theaterettes and rooftop decks and these kinds of things." Is that a trend that you've noticed?
Troy Linnane: Yes and no. Again I think it comes back to who the target market of this development's for. And yeah, throwing some bells and whistles at something that is in an area where that's already offered perhaps, like the examples you've given, may not make sense. But as differentiators from one development to another in an area, I think some of those extras over and above not just what the unit offers but what the occupant of that development can also utilise without going outside that development.
And it's not just token offering, but there's a lot of thought and there's a bit of thought and money gone into that, I think are good differentiators and will attract both ... whether the occupier is a tenant or an owner-occupier. It depends on project and location. There's no hard and fast rule on that I'm afraid. You've really got to work like we said before. Look at what sort of prices you can get for your apartments and then what sort of extras you can throw in to help justify those prices, and expedite your pre-sales as well by saying you're offering this, this and this.
Daniel Holden: Yep.
Troy Linnane: There's no ... I don't believe there's no set formula or anything like that. You've just got to look at what's ... the amenity in that area-
Daniel Holden: Each project on it's merits and build around that.
Troy Linnane: And then look at merits and then try and be a differentiator. I think yeah, everyone's doing rooftops now. You know, yoga lawns and-
Daniel Holden: Running tracks.
Troy Linnane: Teppanyaki bars and all this sort of stuff. You know, and look that's all good but you just got to make sure that also that it looks good in a couple of years time as well and doesn't look daggy-
Daniel Holden: Yeah. And it's functional as well. Doesn't end up with cobwebs on it.
Troy Linnane: Yeah. And I think the other important thing is impact on body corps, absolutely. Especially in an investment project, an investment-led project. Maintenance of those common facilities can add up.
Daniel Holden: Yep. So one question I've heard raised a few times by developers is the value of placing little or no reliance upon sales within the subject building, and I'm guessing that's because it's not actually transacted yet, but can you give some insight into the reasoning and maybe if it's an industry thing that you're not allowed to do, and the background behind that?
Troy Linnane: So for the retail valuers, they're basically, from what I understand, like I said, I don't operate in that area day-to-day. From what I understand they've got set criteria on what they can rely on and not rely on in terms of comparable evidence. So yeah, and that's driven by the banks and the mortgage insurers and whatnot, okay?
Daniel Holden: Yeah.
Troy Linnane: From what I understand they're not allowed to look at sales within the complex. They've got to be resales. So it can't even be off-the-plan sales-
Daniel Holden: Fresh settlement.
Troy Linnane: It's got to be within the same suburb.
Daniel Holden: Yep.
Troy Linnane: And I think it's got to be within six months. It's pretty rigid, stringent criteria. Now, I think there needs ... My personal point of view, my personal opinion is that there obviously needs to be regard to sales within the complex. And off-the-plan sales within that area. As well as resales within that area. You've got to look at the whole basket. You can't just pinpoint-
Daniel Holden: Yep.
Troy Linnane: Isolated, you know. And obviously you've got to look at those sales, who they've been sold to, how they've been sold. Is there a two-tier element? Is it ... At the end of the day, we've got to interpret what we consider is fair market value based on a pool of sale that have been ... Unfortunately the retail guys do have set parameters that they've, like I've mentioned before, that they've got to work within. And I think that's where the disconnect comes from, essentially. When we're doing a project, we look at, definitely look at sales within the complex already. Off-the-plan sales within other comparable projects and then also resales within that area. And we take, we analyse all of those. Look at the origin of the buyers, incentives that have been offered. All those sorts of things.
Daniel Holden: Yep.
Troy Linnane: And then make a call what we consider is the current market value, yep.
Daniel Holden: So probably easier to do in a high-volume market, like 5, 10 ks of the CBD.
Troy Linnane: Yep.
Daniel Holden: Probably less of an easy chore in a suburb that doesn't have a lot of development and some examples might be Redcliffe where it looks like a potentially good place to develop but potentially where developers go to die, they go out there and think it looks pretty and-
Troy Linnane: [inaudible 00:35:36] also [inaudible 00:35:38].
Daniel Holden: Has some nice amenity, but-
Troy Linnane: Sometimes.
Daniel Holden: Every year a Sydney developer comes to Brisbane and flies in over Redcliffe and ends up doing a project there, and-
Troy Linnane: It's nice when you get down there.
Daniel Holden: It's good when you're there. Good when you leave too.
Troy Linnane: Specially this time of year.
Daniel Holden: So getting the crystal ball out, where do you see the marketplace in twelve months and maybe three years?
Troy Linnane: You know valuers don't like looking in crystal balls, mate. I think the next twelve months in the apartments space here in Brisbane will obviously be crystallised a lot more so than it is now. It's fair to say that I think the rental market will soften because of the amount of, that 8000 odd units that are coming through this year, so there will be a bit of recalibration going on there. So short term I think the apartment market for an investment product, has got a bit of sorting itself out to do. I think projects that appeal to the local market will go better. And what I mean by that is I think there's an opportunity right now for boutique or smaller projects that provide a good offering to downsizers, empty-nesters. And that doesn't need to be apartments. That could be a townhouse product in the middle ring, and those sorts of areas. I think obviously Chermside, Mount Gravatt. A lot of that investment product, I believe there's a lot of supply in those areas as well, right. Not just the inner ring but those sorts of regional nodes. Same sort of thing.
Daniel Holden: Yep.
Troy Linnane: So I think townie projects. Already seeing some high-end-
Daniel Holden: Yep.
Troy Linnane: Projects come to fruition at the moment, and we haven't seen a lot of that. And I think those guys that get in early, will do well.
Daniel Holden: I agree. I think it will be a short window, but we've already seen a lot of across our desk, and some of them have been really good. Very smart projects, good locations. Good product mix. Good like as in terms of the shape of the building and who they're pitching the product to. And some of them that've launched have sold really well, which is exciting.
Troy Linnane: Yeah. I 100% agree with all of that. Yeah, yeah, obviously there's some river-front location projects that tick those boxes-
Daniel Holden: Yep. And so the three-
Troy Linnane: There's been people crying out for that sort of stuff, so that's ... they're doing well.
Daniel Holden: And so the three year view, how are you feeling about let's keep it within that 10k ring. How are you feeling about three years?
Troy Linnane: Hopefully by then we'll obviously have sorted out that supply and things will recalibrate. There'll be some funding solutions available again and I would suggest that'd be perhaps twelve months prior to then be a good time to try and secure sites. I even think if you can, within the next twelve months, trying to secure a site that's perhaps got holding income on it, and that's got development up side, and then wait for that next three years. Just hold it for that period. So if it ... if you can get a 4 or 5% yield to help you with the holding costs-
Daniel Holden: Yep.
Troy Linnane: That's not a bad play at all. It's about those that are ... At the moment it's about not jumping too early. Keeping your powder dry. There will be opportunities. I still think it's a little bit unclear at the moment. I think at the end of this year, early next, it'll be a lot more clearer to us on how things are going.
Daniel Holden: And hopefully it's not ... I guess post-GFC we had a lot of catching and falling off. It's kind of where will the bottom be and when can you pick it. What I've seen from three clients of ours have actually been patient and capitalising themselves to take advantage of the Johnny-come-lately who joined the market twelve months ago.
Troy Linnane: Yeah.
Daniel Holden: The dentist/doctor/accountant turned property developer, who, "Oh, it's a bull run, let's get in, let's have a crack." And we're already seeing development sites turn around and sell for a bit of a loss within a short period because rather than take on a $20 million dollar loan, they'd prefer to take a $1 million loss. Dump the site and get on with it. And so three clients that I've spoken to in the last probably two months are purposely sitting there waiting to pick up those opportunities. One of those clients actually asked me to pre-approve a reverse-equity facility in their current project, so that they had three mil, within a week, that they could get their hands on, to go and buy a site, cash unconditional 14-day settlement and just put in a cheeky and hopefully grab that opportunity.
Troy Linnane: Yeah right.
Daniel Holden: So it's becoming that kind of market.
Troy Linnane: Yeah.
Daniel Holden: And like I say, hopefully it's not post-GFC vulture hunting type mentality, but it's a little bit of find the opportunity, buy it well and then turn it into ... You know, do what you do best as a developer which is add value to the site and execute it, so I think we're seeing that market already appearing.
Troy Linnane: I agree, essentially. I think the banks still ... A lot of the credit guys still remember the GFC too, so ... I don't think it'll be that falling knife analogy that you, to the same degree as what you mentioned before in the GFC. But absolutely there will be some opportunities, because there will be some that bought late in the cycle, right? So those that bought late last year, you know, brown fill sites that don't have any income coming out. Perhaps bought high. And yeah, just ... Like I said, I don't think people need to rush in quite yet. And I think opportunities will start to crystallise as we work through this year and early next.
Daniel Holden: So what would you say to a younger you about navigating through the game of property development?
Troy Linnane: I think the first and foremost, the important thing is you've got to be a personable sort of character in the property game. What I mean by that is, you need to be able to listen but also ask questions and communicate and not be afraid to ask questions. And you need to be able to have a good understanding of the market which you're operating in, and if you can try and identify who the key players are, and perhaps even try and find a couple of good mentors to just get, you know, sound some advice off on career direction and that sort of thing, I think it'd be great. Is great. You know, the property industry is, I think, it's an exciting industry. I've been in it for 25 years in different types of capacity. You meet all sorts of people. Some characters along the way.
Daniel Holden: Yeah.
Troy Linnane: And it can take you from the small time operator right up to the boardroom listed groups. So you need to be able to communicate to all types. You can't be afraid to communicate. You need to be able to articulate yourself well, both in a written and oral form, I think.
Daniel Holden: Cool. And most important question. What's the best bottle of wine you've had recently?
Troy Linnane: Cloudy Bay from Marlborough, 2013.
Daniel Holden: Fairly recent.
Troy Linnane: Yeah, fairly recent.
Daniel Holden: Still going.
Troy Linnane: I think we've finished it.
Daniel Holden: Beauty. Alright, well Troy, thanks very much for your time. Really appreciate it.
Troy Linnane: Good mate.
Daniel Holden: Thanks for your insight into the market and hopefully the listeners can learn something from that and hopefully use it in their day-to-day practise and find some opportunities themselves.
Troy Linnane: Good. Thank you.
Daniel Holden: Really appreciate it. Thanks mate.
Troy Linnane: No worries.