Zenith Finance Blog

RBA Finance

The Developer’s Curse

What is the developers curse and what can we learn from it and apply to our business?

Few of us would give up our day job to become a property developer. For sure we may be tempted to buy that old house on 600 sqm of land and build a few town houses and make a million dollars but the risks are high.

The property development sector as a case in point can also present as a lesson about relentless questioning; about, in business, panicking in advance; about having to ‘see’ around corners and identify problems before it is too late. One well known property developer (now passed) had an expression “I am always panicking about the question I didn’t ask.”

Panic early

Property development can offer enormous profits but the escape hatches can be shut if the panic button is pressed too late. In the case of Ervin Graf, the above individual, he had experienced a near fatal (business) experience in 1962/63 where a credit squeeze forced many developers out of business. That taught him to always panic in advance (of such an event); to keep unused lines of credit, to pre-sell, to use cash flows to finance development and to keep a conservative gearing. He was extremely thorough in his costing and ensured he had excellent relationships with suppliers and workers as well as bankers and institutional investors. His business became Stockland Holdings now a diverse $8.4 billion company with thousands of employees and hundreds of thousands of shareholders.

The developer’s curse

The developers curse is ‘success’. Developers tend to do well at the start of a boom with small developments. They then enjoy some successes and then as confidence grows they take on bigger and bigger projects. The biggest one is inevitably when the market is about to crash and they lose it all. Be consistent and conservative. The biggest money you make is when you buy the land at normal (a normal price is one where you can track that the average price per sq meter is more or less the same that it has been for 10 years) prices and build in normal times i.e. not boom times.

The lessons for a business owner are stark:

  • Investing all your capital on a venture is risky
  • Take into the worst case scenario and make decisions around that (rather than an optimistic-only scenario)
  • Keep gearing conservative for your business.

Planning needs to be flexible because you can never be certain of all the factors that affect your business.