Many property professionals and investors bemoan the fact that while they believe they have the skills and experience to do it, they don’t actually have the time to undertake their own projects.  The reality is most just don’t have the motivation and drive to take on all the tasks involved in what is a complex process with more than its fair share of risks. There is however, and alternative to those who have a good portion of the skills and knowledge required but not the inclination or time - Passive Partnering.

Many look at this option with disdain on the basis that they are putting themselves in the category of “dumb money” and there are plenty of horror stories around to support that proposition. Ask anyone in the industry, particularly on the finance side and they can tell you any number of anecdotes about friends and fools investing in projects that went south and took their hard earned with it and I have previously talked about this in an article entitled “The 3 Fs of Dumb Capital”. But there are certainly ways you can passively participate while still being in control of your risk position.

Firstly you need to have an understanding of the risks involved. Just like investing in the share market, you either research the stocks and specific markets you choose to invest in and understand the forces at play or you don’t bother and accept the fact that you are gambling in the biggest casino in the world and the consequences that follow. Some would say it doesn’t matter either way in that particular arena but in property, you can do a lot to ensure that your investment has a real prospect of delivering the anticipated return.

To evaluate your own appetite for risk, which should determine the manner in which you invest in the sector, you need to research the options available. Assuming that you have a good understanding of the processes and forces at play in the development process but not the time or resources to directly undertake a project yourself, the options to participate range from direct partnering in a project to investing via a third party managed fund or similar vehicle. The returns you will receive are, or should be, directly related to the risks you are taking on however, this is not always as it seems so the key to doing the homework to gain an appreciation of the real risks involved in these structures in addition to those relating to the development process itself. 

I believe that there are a number of key elements to the process, which an investor needs to consider including where in the capital stack you want to place your investment and the levels of control you wish to take. As I said earlier, if you lack the motivation to take on the required tasks you may be better suited to investing in a managed mezzanine or a preferred equity fund where the return is balanced by the level of engagement they are required to take. 

Having taken the decision to directly participate as an equity player requires an understanding of the risks involved but more importantly, being prepared to take responsibility for your role in the process. To a large extent you are backing the developer to deliver on his role in the process and that is why the due diligence you undertake is a critical step because once you are on-board there is no stepping off the boat. Having committed you then need to maintain a watching brief, utilise the skills and feedback from the various project consultants/participants and be prepared to contribute using your own skill sets as appropriate to help make the development a success.

The levels of your participation can vary according to the players involved and complexity of the deal; and may be somewhat bespoke during the negotiation process so its important to assess how much you can or want to participate because equally, your prospective partner will be mindful of how intrusive that participation will be in what he sees as his deal. With the right advise and a careful assessment of the factors at play, the rewards can be very attractive for both sides but the secret is working with the right players and having direct access to all the critical information. Knowledge is always power when deciding if you are suited to this type of investment.

In summary, you can bet on the red with the other punters at the wheel or go and play on the big boys tables where you can use your knowledge and experience to secure a potentially bigger pot. It’s a question of risk return and committing to the process. So, where you want to put your money down?

This article was written by Dan Holden of HoldenCAPITAL, who are a bespoke construction finance firm, they arrange construction finance and invest in projects through their equity fund, HCAP INVEST. To discuss your project finance requirement please call (07) 3171 4200 or visit www.holdencapital.com.au.

Read more from Dan Holden of HoldenCAPITAL:

From DA to digging a hole

New HoldenCAPITAL report describes non-bank funding landscape

Diversify your risk by partnering as a passive investor

What is mezzanine funding?

Why the banks fear foreign pre-sales

Risk & reward: Does more debt solve your problems or do you need a JV partner?

Don't forget your GST obligations when arranging your project finance

Why the bank won't let you have a second mortgage