High stakes attract high profiles to new projects

BY GREG NINNESS

A new breed of private equity-based property funding vehicles is springing up to fill the void left by the collapse of finance companies such as South Canterbury Finance, Strategic and Hanover and the retreat of international lenders such as Bank of Scotland International.

McConnell Group, a large ($593 million turnover) privately owned development company that owns Hawkins Construction, launched the McConnell Real Estate Opportunity Fund last month aiming to raise up to $60m for development projects, and last week Charta Group completed a $14.25m capital raising for its Kauri Property Fund, which has invested in a property earmarked for redevelopment.

McConnell Group director Sandy Maier, who was sent in to sort out the mess at South Canterbury Finance at the end of last year, will be a director of McConnell Funds Management, while Milford Asset Management has taken a stake in the Kauri Fund and Milford director Brian Gaynor has taken a seat on the Kauri board.

Both funds have been structured to allow institutional and wealthy private investors (the minimum investment is $100,000) to take equity stakes in property developments, in return for potential capital gains that reflect the risks involved.

"It's a private equity model that's very common in Europe and the US," said Peter Whitten, general manager of McConnell Funds Management that has been set up to run the McConnell fund.

"It's putting a structure together for someone who has a reasonable amount of wealth and is able to take a bit of extra risk in a portfolio sense," Whitten said.

The new types of funds will also be hugely beneficial for the developers promoting them, by providing a convenient source of cash for projects that might otherwise not get off the ground.

"If you look at how property developments and especially value-added projects have been funded in the past," he said, "the traditional model of borrowing as much as you can from the banks, getting some extra from finance companies as mezzanine finance and having very little equity in the whole thing – we think that's dead and just isn't going to come back."

The McConnell fund will be structured as a limited partnership, in which the McConnell Group will have a $4m stake.

In the current market, it could take on the characteristics of a vulture fund, which picks up partially completed projects with which the existing developer has struck difficulties.

Whitten said such projects would be "prime targets" for the fund to invest in.

"They may not be situations where they've gone under. They may be situations where the owner needs more equity and the banks are not willing to put more money into it. So the opportunity is there to acquire those [projects] or do joint ventures with the existing developers."

The fund would be looking for between four and six projects to get under way over the next couple of years.

As each project was completed, it would be sold, and investors would receive their share of the profits.

The aim was to provide investors with a minimum pre-tax return of 15% a year over the life of the fund, which would be wound up after six years.

However, if it is successful, McConnell is likely to launch more of the same.

That would probably be in two or three years, when investors start receiving payouts from the first completed projects.

Future funds may be structured to appeal to a wider pool of investors and could even be listed.

"But that's something to consider in the future," Whitten said.

McConnell Group had already identified some projects that may be suitable for the fund.

"There's certainly a couple that we could move to do formal due diligence on when the fund closes," Whitten said.

The Kauri Property Fund has taken a different tack and is based on the long-term development potential of a single asset, a 5.8ha industrial property in the Auckland suburb of Panmure.

The Kauri Fund has been structured as a company and has been set up by Kerry Hitchcock and Mark O'Connell, who are directors of Charta Group, a property development and management firm that's mainly been involved in Auckland's CBD apartment market.

Between 2005 and 2007, Hitchcock and O'Connell acquired a portfolio of 14 adjacent industrial properties in Panmure, which they have now sold into the Kauri Fund for $26m (against a valuation of $34m), financed by $14.25m from investors and a $13.75m bank loan, with the surplus covering establishment costs and providing working capital.

Hitchcock and O'Connell will maintain a $5m stake in the fund.

The properties are let to various tenants and the rental income from them is expected to provide investors with an initial pre-tax cash yield of 7.5%.

However the main attraction of the property is its long-term redevelopment potential, and the fund intends to have the site rezoned to allow mixed-use development on the property.

If the rezoning is successful, a valuation by Colliers estimates the land's value would increase to $43m.

Investors would then be able to decide whether to sell the property and take the profit, allowing someone to take the development risk, or retain it and undertake the redevelopment themselves.

The Kauri Fund may also consider a public float or NZX listing at some stage.

In the meantime, both the McConnell Fund and Kauri Fund have attracted some high profile players.

- © Fairfax NZ News