Direct developer funds: What are they and how can you invest in them?
Development funds are not exactly new to the Singapore investment landscape. But it isn’t as widely talked about as other more traditional investment instruments. This is despite it being one of the more lucrative investments you can make as an investor.
So, here’s what you need to know about direct developer funds.
What is a direct developer fund?
A direct developer fund is like investing into a property from a developer’s standpoint without the hassle of facilitating the project management. Though you are not the developer yourself, you make the same gains and enjoy the similar benefits.
It is essentially private equity for property.
Many investors want to make developer margins. However, due to huge capital outlay and high expertise required, not many are able to do so. Hence, direct developer funds open up the doors to investors who are keen on investing in property without all these barriers.
But wait, this sounds familiar. Is it like property crowdfunding?
No. Property-crowdfunding is commonly used by boutique developers who lack the financial strength to fund their own projects. You could take part with as little as S$5,000 for property crowdfunding.
And property crowdfunding come with higher risks and is still largely unregulated due to the sector being relatively new, which also means there is a lack of a sustained track record. There is also a chance of losing your capital if the developers fail to follow through with the project.
Crowdfunding models guarantee investors a certain percentage return by the developer and a percentage cut from the project’s profits. In this instance, this is ideal for the developer as it is cheaper to get a “loan” via the crowdfunding platform rather than from a commercial bank. It also happens to be the case that the loan amount is usually too small for private equity players but yet too big for an individual investor.
In addition, a lot of these developments listed on crowdfunding platforms are based overseas and are more loosely legislated.
But direct development funds do not rely on community funding. These developers already have a large amount of capital to pump into their own developments and the projects will proceed whether or not they meet their “investment quota”. Developers work with other Joint Venture partners and when these partners happen to have fund management capabilities, investors are able to access these development funds.
To be able to offer this type of funds, institutions must be a Registered Fund Management Company (RFMC) or hold a Capital Market Services Licence, as issued by the Monetary Authority of Singapore. ZACD is one such institution which has progressed from being a RFMC to one with a Capital Market Services Licence.
By investing into the fund, accredited investors become shareholders in the company (special purpose vehicle) and would potentially make the same returns as the developer (less the management fee).
On the other hand, a lot of the real estate listings that you see being displayed on crowdfunding platforms actually involve investors buying the finished unit at a discount, essentially making them a retail property buyer.
Developers and direct developer funds: why do they do it?
Developers tend to seek joint venture partners with the right skillsets to enhance their development across the real estate value chain of activities. These can include project consultation, property management and distribution. It makes sense for a developer to have a partnership with ZACD since one of its subsidiaries is SLP international property agency, that has a sales force of over 1,000 property agents.
For foreign developers who may want to enter the Singapore market, they require local expertise to develop in Singapore. Hence, they will prefer a joint venture with parties that can guarantee their success.
When these JV partners have other subsidiaries with fund management capabilities, they can offer their investors the chance to partake in these opportunities.
Why is it better than buying a physical property?
For foreign investors, or even for local investors who wish to purchase a second property, there is an additional buyer’s stamp duty (ABSD) of up to 15% which cannibalizes the profits and makes it a less than ideal situation for investors looking for the best returns.
On top of that, financing through banks will affect your total debt servicing ratio on subsequent properties as you will be getting increasingly less leveraging from the bank.
Buying a physical property also includes paying agent fees and seller's stamp duties, which add on to overall cost and compromises the return on investment.
Lastly, in order to maximize returns on physical property, units need to be rented out. However, such rents are exposed to market fluctuations and there are no guaranteed rental returns.
Singapore's real estate scene has witnessed a steep upward trajectory after the 2008 global financial crisis even though growth has tapered slightly in the recent 2 years due to government cooling measures. Nevertheless, in the long run, compared to other developed markets like Hong Kong and Japan, there are still a lot of growth opportunities which fits into the timeline of current development funds to capture the potential upside in the next 4 to 5 years.
That is why it is a better bet to invest in developments that are locally-based such as the ZACD projects, that take place in areas that most people are not only familiar but are also able to identify with.
What about payouts?
Payouts are classified as capital dividend and repayments. Depending on the development fund, capital repayments can occur as soon as the show-flat is up and is dependent on the take-up rate of the units.
Progressive dividend repayments, on the other hand, will only be paid one year after temporary occupation permit (TOP), which is a temporary permit to allow owners to occupy the building when the key regulatory requirements are met as it may take some time to obtain the Certificate of Statutory Completion (CSC) and after the warranty period is over.
This could take up to 4 or 5 years, so don’t expect your investment to see returns in the short term.
Do also take note of the projected returns on equity. Historically, based on ZACD’s past performance as an example, some projects have seen returns of up to even a four-digit percentage. However, it must be noted that this is considered an above-average return and that the rate of return on equity varies across companies and funds. That being said, overall it can be seen that there is a stable and consistent performance throughout.
How can you prepare yourself for investing in direct developer funds?
The best thing you can do for yourself before investing in any instrument, regardless of your financial standing, is to educate yourself as much as possible on the product.
Of course, it is also wise to read up on the development you are investing your money into. Developments with strong sales in the early stages are definitely a good sign that your investment will see good returns.
Location of the property is also key to its success – this is applicable to any kind of real estate investment. A development in a good location will likely see a healthy demand and strong appreciation.