DEVINE INTERVENTION: DAVID KEIR

WHEN David Keir (pictured) joined Devine Limited (DVN) as CEO in March, the company had been rocked by allegations of fraud and espionage. Keir is only concerned with getting on with the task at hand and the former Delfin Lend Lease CEO has brought a few old mates with him to turn Devine around.

Company founder David Devine resigned in February in the midst of a heated lawsuit with a former personal assistant who had allegedly leaked company secrets to Leighton Properties. Matters were made worse when it came to light that two former employees had allegedly defrauded the company of millions of dollars.

It was a tough landscape for Keir to enter, but it’s the challenges that drive him. He’s the father of triplets after all.

Every CEO stamps a new position with something to signal their arrival. For Keir it was a new approach to partnership-based property projects, but there was one big issue – funding.

“There were a couple of things that needed to happen virtually straight away and one was the rights issue and $70 million capital-raising that we undertook, adjusting our share register so we’d have a high level of take-up from institutions,” he says.

“Leighton Holdings took up their rights so they’re sitting at 49 per cent now and continue to be a very strong supporter of the Devine business, but we also had to resecure our debt facility with ANZ, which now gives us a bit of certainty to grow our business.”

The cash boost has given Devine the opportunity to build the types of projects that fit its long strategy, while Keir’s approach is to partner with landowners rather than buying properties outright.

In May the company secured a site north of Adelaide that it will build into a $240 million estate and there’s an upcoming Melbourne deal that will be even bigger.

“At the same time we’ve successfully launched the construction of Hamilton Harbour, which is the largest apartment project in South East Queensland at the moment,” he says.

“Between Leighton Properties and ourselves, we were able to go out there with a club of banks to get the $170 million of debt needed to construct the first two towers.

“Banking conditions are still very challenging but at the same time, for the quality projects have achieved good levels of presales the finance is there. The two towers under construction will be completed in December 2011, while we’ve just launched the third tower at riverside with 70 out of 180 apartments sold within the first six weeks of launching the project.”

But Keir’s biggest coup yet came after less than three months on the job, securing a 59ha site at Evanston Gardens north of Adelaide, which will be built into an 800-home site. And the upcoming Melbourne deal will be double the South Australia site in size at about 2000 lots, with an agreement likely to be finalised within a month.

“Both of those are larger scale projects than what Devine’s traditionally undertaken, and both have been done on a capital-light model where we’ve partnered with the landowners, as opposed to paying upfront cash for the land,” he says.

“The amount of equity required for those projects is a lot lower historically and is more in line with the types of business deals that I’m used to having undertaken at Delfin.

“I’d say at the moment we’re being overwhelmed by opportunities – that’s a nice way to describe it – in South East Queensland, obviously in Victoria, South Australia, we’re beginning to look at a number of opportunities in Sydney, as well as regional centres like Gladstone and Townsville, so we expect over the next six months that we’ll be able to continue the announcements of new projects.”

Keir expects to hire more staff as growth continues and has already appointed former Delfin colleagues Andrew Brimblecombe and Warren Thompson, as well as
former Urban Pacific and Medallist Developments CEO Neil Anderson, in senior positions.

But despite the optimism, debt security and new projects, Devine shares have fallen with the rest of the market from $0.28 to around $0.24 at the start of July.

Consolidation expected

With difficult lending conditions, Keir wouldn’t be surprised by consolidation among private developers in FY11 and expects ‘reasonable or marginal growth’ in property prices in the next few years.

“What we’ve seen out of the GFC has been companies that have got a high level of support from financiers and lenders, like Devine, have money that’s available for growth,” he says.

“Certainly a lot of private small scale developers are in very challenging situations, given the high cost of debt and in many cases their highly-leveraged positions, which means that there’s opportunities for those who are able to pay.

“I expect that you’ll see consolidation between the smaller developers and some of that will occur as M&A activity and at the same time I think we’ll see consolidation in the privates as well, and they certainly won’t be as active as they’ve been.”

While he’s not ruling out diversification in the future, Devine is for now firmly focused on affordable housing and apartments, as he sees affordability as one of the greatest issues facing Australia.

“Within Australia we’ve got a huge challenge. The cost of housing is starting to approach greater than six or seven times household income, makes it enormously challenging for Australians to own their own home,” he says.

“Whilst there’s always a proportion of the population who want to be and are happy to be in the rental market, that probably represents 30 to 35 per cent of all housing in Australia, and that’s going to grow largely because it’s becoming cost-prohibitive for people to own their own homes.”

It’s a view echoed by the demographer Bernard Salt. Salt says the commitment to change must be made across state and local governments and likely for the duration of several terms of office.

“The game here is to say great idea but there’s just no land. Sorry but I don’t agree with that. It’s a question of priorities. Saying there’s no land and no availability is just a cop out,” he says.

“It’s the emptiest continent on the planet, we do have the land, it’s just a question of the choices you make. It was a decade ago when I released the Big Shift in 2001 and it was pretty much on the money, but we are in a different space.

“Start thinking strategically about how you can connect with an important value of the Australian people which is affordability.”

According to Keir, the housing affordability problem is driven by two main factors – constraints across many states through growth boundaries, as well as the challenges to get approvals for development with the level of infrastructure charging that’s applied.

“Those costs really have driven the cost of housing through the roof in Australia. How do we overcome those issues? I think many of the state government initiatives, and certainly working closely now with the Federal Government, are starting to provide the breaks that are needed across the industry to ensure that we can provide affordable product,” he says.

“We’re continuing to grow and population growth is important for the continued economic stimulus for Australia, but the fear of population growth, the fear of immigration won’t do anything to soften housing affordability – it will do the reverse, which is quite concerning.”

Prime Minister Julia Gillard has made it clear she is not a big advocate of ‘Big Australia’ while Opposition Leader Tony Abbot has been outspoken against asylum seekers.

Keir believes politicians are missing the key issue when it comes to population growth.

“One of her (Gillard’s) first statements has been about changing the title of the Population Minister to the ‘Sustainable Population Minister’ and I think the debate that needs to occur now is not about sustainability versus growth, but about how do you grow in a sustainable way, and we have that opportunity in Australia,” he says.

“Density is certainly an area where a company like Devine will retain our focus and a very significant proportion of our business, in continuing to deliver apartment projects.

“While there are financial challenges there and it’s difficult sometimes to get that stability of earnings, because they tend to be lumpy projects because of their length and time and scale, there are definitely market opportunities that exist within that.”

A call for reform

The Henry Tax Review included a proposed shake-up of the property industry, including introduction of land tax on all land, the removal of transfer taxes, as well as a ‘more neutral’ personal income tax treatment for residential rental investment.

The Federal Government rejected proposals and while Keir found the recommendations ‘very strong’, he believes there is a case for reform.

“There’s opportunities for getting better financial arrangements, particularly high density projects where you’ve got an enormous amount of debt being secured for construction, and at the same time you’ve got the individual purchases, securing money for the final purchase price, so there’s an awful lot of money that’s probably not being used effectively,” he says.

“There need to be some level of rationalisation around investment purchases and tax opportunities and liabilities for people with investment properties and there needs to be a restructuring of the tax effectiveness of primary residence.

“I think stamp duty needs to be abolished. It certainly was mooted with the introduction of GST that stamp duty would be a fall out from that and New South Wales has stamp duty on properties under $600,000 and I think that’s a step in the right direction.”

With population growth and an undersupply of housing, Keir does not think that Australia’s property bubble will burst any time soon. It will however be very dependent on consumer sentiment.

“More so than interest rates it’s a question of consumer sentiment, getting confidence around what is happening in the broader economy – the property industry is driven by confidence so if people are confident about their job and their living conditions, they’ll generally invest in property and change homes,” says Keir.

Investor sentiment may not have looked too kindly on Devine recently, but that’s been the case across a range of industries in the capital markets.

Keir remains bullish on Devine. After all, it was the catalyst for him to make the switch from Delfin.

David Keir on:

Leadership:
An important part for me is leading a group of people to have a sense of pride in what we do and driven behind that’s got to be communication so I tend to over-communicate to staff. I spend a lot of time just with people to understand what motivates them and put in place personal and professional development plans for everyone, so we’re all driven by a common set of values and a common set of outcomes that we’re looking for. Equally, you have to focus on the people outside the business like the partners. The third thing is the strategic thinking of where the business is going to go and how we’re going to get there.

What changes your life:
I think like most people, when you have children. Individually, most people tend to be selfish and then suddenly you wake up one day – having had triplets we didn’t wake up because we didn’t sleep - you get a whole new appreciation of life. You start thinking more about the future than today, about things like sustainability. All these things you start to worry about – what impact are we having on this place? You start to think of the generations to come.

Private property investment:
I’ve always had a fascination with property and my family has as well, so I guess my personal attraction is to investment properties as opposed to investing in the stock market. I’ve got properties on the Gold Coast, Sunshine Coast and Brisbane.

Travel:
We love skiing so when we get the chance we go on a skiing holiday every year and every couple of years we go on an overseas trip. I think it’s great for the kids to see what’s happening in different cultures and other parts of the world.

Choosing Brisbane:
Apart from growing up here, I still find it one of the most relaxed cities certainly within Australia. It’s got everything we need, the river, the parks, the entertainment facilities and it’s just an easy going relaxed kind of city, particularly compared to Sydney.

Challenges:
The first few months at Devine have certainly been challenging. I think all of us have moments where you think, ‘am I out of my depth?’ I think any CEO who doesn’t have those thoughts at different times isn’t really challenging themselves or their business.

Cystic Fibrosis:
I’m a business ambassador for Cystic Fibrosis Queensland (CFQ) and I’m a strong supporter of the work that CFQ does for those families that are affected by CF. That’s a big part of my life as it’s such an important thing to give back in the community. I have two close friends whose children have been affected by CF and I’ve been introduced to that through them over the last five or six years.