Private property issue #15 - developers going under

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Developers are starting to tumble.

DDL Homes Ormiston Limited was taken over by receivers this week.

And some smaller developers like Oceanside Homes are in liquidation.

On top of that, the bad headlines still haven’t stopped for the beleaguered Reed Myers.

So property investors must know –

• Why are some developers folding, and
• How do I tell whether a developer is likely to fold (or not) when I buy a new build off the plans

Why are developers folding?

The cost of building materials is up 34% year on year (March ’21-’22), according to Eboss.

But, as well as paying higher prices for materials, developers currently struggle to get them in the first place.

Builders can’t get their hands on Gib board … even though the company’s factories are running 24/7 at full capacity.

When the building materials don’t arrive on time, construction timelines get pushed out.

That increases the developers’ interest costs … since they can’t repay their loans until the properties are completed and fully paid for.

That starves the business of cash … so some developers can’t pay their bills.

How do I stop this from happening to me?

If you’re going to buy a new build off the plans, you need to look closely at the developer.

And while that’s easy to say (just look at this comment I saw at the bottom of a Herald article) … no one tells you how to check out the developer ... the right way.

So how do you actually do due diligence on a developer?

1) Ask these specific questions

When buying off the plans, I always ask … “who’s funding your project?” “Who’s lending you the money?” And “what are the terms of that finance?”

E.g. do they need to pre-sell 95% of the development before getting the funding?

I’d also ask, “who are your building contractors” and “are they locked in?” … this will tell if their labour supply is locked in.

To be fair, the answers you get may not mean much to you.

But, what you want to notice whether the developer is cagey about giving you the info or whether they’re forthcoming.

2) Run an NZ legal information institute search

This is golden.

It’s worth running a search on the directors of the development company to see if they've run into legal troubles before.

The best place to do this is the NZ Legal Information Institute. This searches through 211 databases of NZ law. And you’ll be surprised what you can get.

I’ve done this on developers and property investment companies (who still operate today), where the directors have a history of fraud and financial mismanagement of companies.

3) Check if the ultimate shareholder lives in New Zealand.

It’s better if the development company owner lives in New Zealand.

If they don’t, it’s easier for them to pull their money out of a project when times get tough.

So head over to the NZ Companies Office, search for the company name, and check the address of the major shareholders.

If the company is owned by another company, keep clicking through until you get to the ultimate shareholder. If their address is not in NZ, that could raise a red flag.

To be fair, when I’m checking out a developer for Opes Partners investors, I run through more steps than this (23 steps, to be exact).

But if you are looking for an off-the-plan property on your own, these are three practical steps you can take to check out a company before investing.