Expert in Focus - Steve Barlow
Expert in Focus - Steve Barlow
Instead of a property crisis, COVID-19 is creating opportunity, according to Clearstate general manager Steve Barlow, Australian Property Investor Magazine's latest Expert in Focus.
Mr Barlow provides his unique insights into the challenges and opportunities for investment emerging in Sydney’s greenfields land development market, and with an expansion to Melbourne on the cards, he says he sees plenty of opportunity for further growth, even as markets continue to be shrouded in COVID-19-related economic uncertainty.
Tell me a bit about the history of the company, and how it’s grown to have influence in Sydney’s land development market?
Dean Willemsen, our founder, started the business in 2011 on the back of the flurry of development activity that was happening at that time. It was during the peak of the market, when developers were making significant sales at significant prices, but customers weren’t being treated very well, to be blunt.
They were being treated as a number, so Dean’s view, or vision if you like, was to deliver a better customer experience - something that was reflective of the $750,000 that the customers were spending on a house and land package.
It’s their life savings in most instances, and the analogy we would use is that you could walk into a Hyundai dealership and spend $30,000 on a car and receive a better customer experience than with a land developer where you’re spending up to $750,000. For us, that just didn’t make sense. It was obviously a business venture first, but also, we wanted to make a difference in terms of the customer experience.
Was that around the time that most developments - greenfields land or apartments - would sell out in a weekend in Sydney?
That’s it. Dean is born and bred in north-west Sydney, he has a couple of other businesses and one of their other offices is in north-west Sydney, so he was always driving through the growth centres of the area, and he would see things like a marketing sign go up, and then three months later it would be on the ground, in the dust.
So he just thought ‘there is a better way to do this, where we can treat customers like a customer as opposed to a number’, because there were plenty of examples of that happening.
That was really where the idea came from, he’s got a big focus on customers in all of his businesses, so that’s where we started.
Since then, I think we’re up to project number 15, and we are actively looking to do more.
The fact that we’ve grown quite quickly is on the back of having some really good capital partners, quality consultants, having that focus on the customer and trying to be a bit of a leader in the fragmented land space.
We typically compete with doctors and dentists and wealthy individuals who want to try their hand at development. In fragmented subdivision, the parcels that we buy are affordable, in terms of a development project, they are obviously capital hungry, but they are also bite-sized chunks.
We compete a lot with what we would call unprofessional developers, so we would like to think that we can lead that fragmented land subdivision space.
How difficult is it to find acquisition opportunities at the moment, and how competitive is that?
I’ve been with the business for three and a half years, and I would say up until COVID, it’s been very challenging. There has always been a disconnect between what a vendor’s price expectation is and what we can afford to pay from a feasibility perspective.
That was exacerbated not so long ago by the government increasing some of our local contribution costs, and the reality is that the vendors just don’t have an appreciation of the fact that our costs have gone up, all they care about is whether they are going to get the value that they’ve got in their mind.
So that’s made it challenging. What COVID has done, for us anyway, is to give us a pretty positive view on the market over the longer term. So we can basically sit in front of a vendor and say ‘look, we can get pretty close to your number, not quite, but we can get close, and we are in the middle of a pandemic.’ So we’ve been able to turn that into a bit of an advantage for us. So going back to your original question, I would say that now has been the best buying conditions we have seen for a long time.
Wow, is that because people are being more realistic on price because of the pandemic?
Not so much price, there has been a little bit of an adjustment I would suggest, but I think where we are probably winning is more on term.
I’ll give you a real-life example. We were talking to a vendor about two years ago regarding a site in Austral in south-west Sydney. And they wanted a number and settlement in six months. It just didn’t work for us.
We are now in due diligence on the site, and we’ve pretty much paid the same dollar value, within about 5 per cent, but we’ve got a 24-month term and they are looking after the remediation of the site. So we are getting a better all-in deal, it’s not just price. It’s fair to say they are more willing to give us time, and because we’ve got a positive view on the longer-term market, time works for us.
So what is the scale of your developments - what does a typical Clearstate project look like?
Our average is about 50 lots, and we look at anything from 20 to 250, that’s our sweet spot. Our strategy in terms of project size is reflective of the fact we can get in and out of smaller projects quickly. We are not exposed to any one market for an extended period of time. A 50-lot subdivision will allow us to be in and out within about two years, which is a really nice length of time for us.
Now you mentioned that acquisition opportunities had improved during COVID, how about on the other side when you’re trying to sell - what’s happened there?
We were having a great time pre-COVID, it was not back to the halcyon days but we were certainly very happy with where our sales were landing both in price and volume. Since COVID, outside of the hysteria and the real uncertainty that happened at the very start, we’ve seen lead numbers reflective of a market boom, really good lead numbers. Initially we put that down to people having more screen time - they were at home and had more free time as a result, and we expected to see a drop-off. But we haven’t. In fact, we’ve probably been continuing to trend upwards.
They are real buyers, but they are just nervous and not quite confident enough to commit to a purchase at this stage. The government stimulus has really helped with confidence, but unfortunately the current projects that we’re selling don’t meet the criteria. So, while it’s good for enquiry, as a conversion tool, it’s not quite so good.
So how does Clearstate’s strategy, other than its focus on customer service, differ from its competitors?
Outside of the established market, which is obviously a competitor for any developer, our competitors are in two buckets. There are the non-professional developers, which I described before - doctors, dentists and the like wanting to try development. In simple terms, we are more professional and experienced, so from that perspective we probably stand out a little bit.
Ultimately, we are a small business but we have a corporate mindset. We like to do things in a structured way, we have internalised some of our functions so we can control more of the development process as a result of that, meaning we stand out from our direct competitors in the fragmented space.
Secondly, in terms of the professional developers, we’d like to think that we can compete with them on a professional level, , but probably where we have an advantage over the bigger players in Sydney, is that fragmented projects are typically located closer to the amenity, whereas the bigger projects tend to be further out. So our masterplans, while they are limited in size, have the advantage of location and convenience. For customers trading off between wanting to be in a masterplanned community with a big brand or wanting to be closer to a train station, that’s where we typically have a strategic advantage over the big guys.
And I suppose you are working with a lot of the same builder partners as well, when you’re talking house and land packages?
The way we look at it, and it might be a little bit crude, but we are a third of the equation for a homebuyer, from a new house and land package perspective. The other two thirds are the builder and the financier. We have to work in partnership with the builders particularly to make sure that the customer experience is as good as it can be and that the variety of product that we are offering is as diverse as it can be. Because our customers are everything from a first homebuyer that’s Aussie born and bred, to newly-arrived immigrants to second homebuyers and investors. Everyone has a different set of requirements, so we have to cater for as many of those buyer types as we can.
So take me through your recent acquisition at Box Hill, obviously it was strange timing to be in the middle of a pandemic and to go ahead with a significant move like that, so what’s the rationale there?
We are backing that undersupply exists in Sydney, and we are backing that the undersupply is going to become even greater as a function of COVID. So having product to deal with that undersupply is an advantage. We have received fairly competitive terms from our vendors, allowing us enough time for the market to recover, in our view, and we’re in a growth corridor in a desired part of the north-west, within four kilometres of the Rouse Hill town center and the Sydney Metro.
Realistically, good product in good locations is what you need in any market. So, it is a risk-adjusted purchase I would suggest, but all things considered, we are pretty comfortable and we are continuing with that sort of strategic mindset while also looking for other opportunities.
Some of the forecasts for Sydney’s property markets post-COVID are pretty mixed, some are predicting price plunges, others are predicting things to be steady or for there to be a small amount of growth, so where do you guys see things going, you’ve obviously got a lot of confidence, so take me through why?
Our high-level view is there won’t be considerable price growth or discounting within the next 12 months, unless you are a very motivated or desperate seller. By virtue of us securing 12 month or greater terms from our vendors, we can see out this period of uncertainty and bring a product to market when there is more certainty.
But in the current environment, no one knows – someone will be right and someone will be wrong. We just think that if you’ve got a quality product you give yourself the best chance.
The other thing, and this was starting to become prevalent even before COVID, was that the undersupply impacts the builders, in the sense that they want to build their forward pipeline in the same way we do, so as supply starts to restrict, the builders become a customer as well.
That also gives us confidence that you’ve got the typical buyers that we would sell to most of the time, but we also have this builder market that starts to emerge, that will allow us to clear some stock.
So how do you see the market evolving post-COVID, and did you find that being a land developer and not having to do home opens that the restrictions didn’t really affect you that much?
We didn’t go and meet people on site as we typically would, but equally we were able to say ‘here is the address, go and have a look for yourself and give me a call when you are on site’. The restrictions didn’t really affect us, obviously land is land, if you understand the location and it is X amount of metres wide by X amount of metres deep, you can get your head around it. Fortunately, our projects are typically 5 acres, they are very visible from the street, you can roughly estimate where your lot is going to be, we are not having to sell the benefit of an apartment or a built form where you have got to try and tell a bit more of a story.
You have recently embarked on an expansion to Melbourne, how long was that in the works for and was that your first foray out of Sydney?
We delivered a project in Melbourne that finished in 2018 and we really liked that experience. We like Melbourne for a few reasons. The market is about two and a half times the size of Sydney’s, from a greenfields perspective, so house and land is more accepted in that market than it is in Sydney, and it’s just a bigger market to play in.
Planning is more efficient, the NSW planning system is from all reports the most difficult in the country, and Melbourne is a lot better, so that has its appeal. From a business sense, we are very Sydney-centric, so if Sydney catches a cold, so do we. Diversifying into different markets from a business or strategic standpoint appeals to us.
We have been looking at Melbourne pretty much since we finished that project in 2018, not as thoroughly as we are in Sydney, probably more opportunistically if you like. But we’ve been looking and we are close to landing something.