OPENCORP TAPS INTO THE CROWD FOR GROWTH
Written on the 27 January 2016 by Nick Nichols
MELBOURNE developer Matthew Lewison started out by giving friends and family a piece of the action from a string of developments he was undertaking.
Now, he is extending his reach through what his company OpenCorp describes as a crowd-sourcing model that has given the group momentum to expand into broader markets.
OpenCorp is currently eying $360 million worth of projects in the Brisbane market, and many of the investors planning to share in the profits include self-managed super funds.
OpenCorp, which was established in 2005 primarily as a property investor, started acquiring sites in Brisbane a few years ago as Queensland's south-east corner finally showed signs of recovery.
Two of the projects, Citro at West End and a new development at Albion, will bring a combined stock of 260 apartments to the Brisbane market.
"Brisbane has been a focus for us for the past 24 to 30 months," says Lewison, who limits the company to medium-scale townhouse and apartment projects of about 50 to 150 units.
"What we've found, particularly in the northside of Brisbane, is a huge undersupply of townhouse and land sites.
"We've seen huge price growth in our land estates and townhouse projects. There's one in McDowell that will be launched soon.
"We bought it expecting to sell for $510,000 to $515,000 for a three-bedroom townhouse, and now we're seeing prices closer to $600,000. There's been huge price growth because there's not a lot of that type of product around."
Lewison concedes there's stronger competition in the Brisbane apartment market which is keeping a lid on prices at the moment.
"The flipside is that, over the past 18 months, prices for development sites have gone up by about 30 per cent or more and construction costs have gone up about 15 per cent."
Lewison says the prices of Brisbane sites have already been locked in by OpenCorp, and he expects price pressures will come to play for some other developers. The company acquired the Albion site for $11 million and it is expected to yield 154 apartments.
"We have been very fortunate with some of the deals we've done, and we're settling on a few shortly that have gone through the development process. We still see some good deals out there but you have to be creative and able to use relationships to manage risks."
OpenCorp is currently undertaking 12 projects nationally, including Perth, with Lewison conceding the company's crowdsourcing model has helped the company grow and diversify.
"The reason we started this was through family and friends who wanted to invest in some of our projects, so we set up a model that allowed them to."
Lewison is quick to point out that the model is nothing like the pooled investment funds that collapsed during the GFC.
"With those, the investor really didn't know what they were lending their money to," he says.
"We put together a product disclosure statement for each of our projects, and that's obviously regulated by ASIC. So the investor knows exactly what they're putting their money into. They're buying an equity stake in that property, a share of the title.
"We're managing the development on their behalf and we're also investing in the fund alongside them.
"It's one of the things our investors like about us. They know we're investing alongside them and that gives them confidence as well."
OpenCorp has a database of more than 400 investors who are offered stakes in each project, with investments starting at $10,000.
"It surprised us that 70 per cent of those investors are self-managed super funds. Some high net worth investors, with the biggest single investment of $7 million made by one.
"The one thing that resonates with our investors is that we have a conservative approach.
"We took the approach that we don't actually like debt until we are ready to start building.
"If you own a parcel of land and the market slows down you can sit on that parcel forever and a day if you have to. But if you have a lot of debt on that land, and you haven't started selling, it could be a year or five years to construction and that debt becomes a burden. In that situation you are not making decisions that are in the best interest of the project.
"We are very conservative when it comes to debt and our funds ensure there is sufficient equity in every project to be managed prudently at that front end in particular.
"Prior to construction, at most we have 5 per cent debt on average and, during construction, debt gets to about 62 per cent of total value. We have some projects that peak at 30 per cent LVR, but it's pretty rare if they ever get above mid-60s."
Lewison says he understands the pressure faced by some developers, particularly listed companies that may take on projects to deliver shareholder growth. He says OpenCorp won't buy into heated markets.
"The way we financially structure our projects and our investments actually makes us uncompetitive when the market gets really hot," he says.
"That's why we didn't buy anything in Melbourne for three years because we really needed to shop around for something off market. We couldn't compete in a tender process where everyone else is being a bit more bullish in their assumptions.
"We had some really good buying in Brisbane for a few years, but it's getting tougher and eventually we'll get squeezed out of that market. We'll be looking for other markets where our conservative assumptions will still allow us to buy sites."
Author: Nick Nichols