Property development is all about return on investment (ROI) – adding value to an asset to build growth and wealth. It’s the same with business – we need to understand what type of asset we want to develop, and make decisions that create a strong ROI on the investment we make in building it.
In this, the final in my Growth Metrics series, we continue our look at the ‘foundations’ of our business, the four underlying principles of how we structure and run our organisation. In the previous article , we looked at how to measure time and value, and how different business models are needed depending on the size of the organisation you want to develop.
Now we’ll look at the other two principles: How you make decisions to ensure ROI and how to build or recruit the right capability.
Making decisions to support ROI
I like to use the analogy of property to illustrate business principles because developing a property is very like building a business. Its particularly appropriate in Australia, where, as an investment category, property holds over 62% of Australians’ wealth, compared to just 12% in the US.
There are several types of property investors with differing ways of making decisions, based on their ROI and who need different capabilities to make their project a success.
· The owner-occupier makes a purchase based on the size of the family they want to grow – they are investing in a family home and lifestyle. They are like the 4-5 person lifestyle business, which, like a family, runs relatively easily, overcoming the few inevitable disagreements without formal management. The owner and staff take on multiple roles and decisions are highly influenced by lifestyle. An example of a lifestyle business is a small consulting company, small marketing agency or construction business. They are small, nimble and very locally branded.
· The more creative and ambitious buyer might buy a bigger block to split, and engage in a small-scale building project. This is like the 12-24 person business, which now needs management and specialist skills, and where investment decisions are based on showing a profit on the sub-division. Examples include professional expert practices, like legal, accounting and financial planning businesses. They are still local, but maybe at a city, rather than suburb.
· Bigger investors will look at building a commercial or residential tower – they are like a bigger business, from 48 people up to thousands. A high rise, like a mid-size business, requires significant management capability and plans for ROI over a longer term. These are often businesses that have a strong financial influence and can aggregate, such as plumbing supply companies, builders. They understand how to create leverage through their name, which is usually known nationally.
· Land developers invest in big parcels of land to develop from scratch, putting in infrastructure, features such as a golf course or marina, developing housing plans and offering house building opportunities in the new suburb they have created. They are like the franchise business, setting up an infrastructure and licencing it for others to build their own lifestyle business, supported by their brand. They need highly sophisticated management systems and skills to drive success for themselves and for their franchisees. These are the McDonalds and Subways, very conscious of knowing how to help their licensees make money in what looks to be an effortless business.
In each case, the process and rationale for making decisions differs, based on the level of investment and the ROI target. The people and the capabilities needed also depend completely on the type of development.
No matter which approach you choose, you need to get the Growth Metrics right – if the metrics are wrong, the development, or your business, will fall over.
The consequences of getting it wrong, like the rewards of getting it right, depend on the size and scale at which you are operating:
Get your lifestyle home purchase wrong and you’ll end up spending your time fixing it up, doing lots of little repairs and renovations, rather than enjoying the dreamed of lifestyle.
Get the small development wrong and you’ll end up with unhappy tenants, lots of complaints, and a drain on your time, money and energy.
Get the tower wrong and the risk is far bigger – you could end up being sued for damage to people and property
If the large-scale land development goes wrong, you have a disaster on your hands, the suburb breaks down and the investment is lost.
The key to success is to understand what you are building from the start, plan and build the infrastructure and revenue strategies to match the type of development that you want to be. When you do that, you’ll know what you need to build – you’ll plan for good time management, efficient functional structures and the right financial model so that everyone makes money.
Map the capabilities you need, to ensure you have the right people aligned with that business model. Don’t employ someone who knows towers to work on your split block development, or vice versa – get the right people for the job.
That brings us to the end of this series. Keep an eye out as the next phase will introduce case studies of real businesses – where they have come from, where they are going, why they do what they do, and sharing and learning from their experience.