‘Growth, growth, growth’ – it’s one of the most commonly used terms in both property circles and investment circles, and certainly CFMG Capital are guilty of both frequently using the term ‘growth’ and also profiting from actual growth when it occurs.
Growth cycles, growth corridors, revenue growth, growth, growthgrowth!
Don’t get me wrong, we love growth at CFMG Capital as that’s what we consider the ‘cream on top’ of a job well done. However, the important thing is – we don’t rely on growth, we’re not slaves to growth and we don’t need it to effectively deliver quality residential developments and fixed 12% per annum returns to investors in our Land & Opportunity Fund.
Why don’t we need growth to function efficiently?
Well it’s simple: we target a certain return level on all our projects that is conservative and achievable based on all the inputs that go into our feasibility model when considering a new opportunity. That targeted overall return is obviously well and truly higher than 12%, and to put it simply – we’d like there to be something in it for us! It also provides an appropriate risk margin for investors in our fund.
That feasibility model is simple. It doesn’t assume any growth in property prices, though it often assumes growth in costs in some circumstances. So essentially what we’re saying when we assess an opportunity is;
“Does this opportunity provide an appropriate forecast return at or above our target if land values as at today’s date remain as they are?”
If the answer to that question is yes, then we will then go to contract on the development site and begin more detailed analysis of all the assumptions that go into a feasibility model. When assessing an opportunity, we have a rigorous and detailed due diligence process and we will often stress test it on negative price growth and/or cost escalations. Another step in the process is having an independent valuation completed on behalf of the bank. As part of that valuation, the valuer will create their own independent feasibility model and will not allow for any price growth in their model either – thus giving us a strong and independent review of our own assumptions.
When taking all this into account, it becomes clear that if we decide to move forward with an opportunity – it’s because we’re confident it stacks up without any additional growth. That’s not to say we don’t target growth areas, we most certainly do – it’s more getting back to the point that we’re definitely not reliant on it. Not only that, if a project sees some revenue growth, more often than not it will also sustain some cost growth as a result, so it’s not all sunshine and rainbows when you see a bit of revenue growth in a project if it’s all offset by costs!
Therefore it’s important to remember that while growth is certainly our friend, it’s not something we can afford to rely on – it’s merely that little bit of cream on top of another successfully delivered project.