Welcome back to The Rated Change with York Wealth
Management. As advised, this is some of the wealthiest
families in the country. The Rated Change is
a podcast designed to help you in the pursuit
of building long -term wealth through the insights
of some of the brightest minds in asset management.
I'm your host, Murdoch Gady, and in today's broadcast,
we have Melissa Hosgood, the Managing Director
and Portfolio Manager and Founder at Labasa Capital.
Labasa Capital is an Australian real estate credit
fund. They have a target return of 9 % annualized
real return of 12 .46 % with a half percent management
fee, no performance fee. Why I got Melissa on
is they do a very, very interesting thing. Like
we've had a number of great guests on in the
property space that do the credit side. Some
do the equity side, but what Labasa does is they
have the ability to fund the entire life cycle
of a project. Some of the other fund managers
do as well, but what I find that's interesting
is they're doing it at a boutique level and the
subcategories of the properties, a number of
the property asset classes that I really, really
like, in particular land subdivision. with growing
Australia, farmland, converting it. It is a great
space. The other space which I have been eager
to get involved with and have gotten involved
with since COVID has been the rise of distribution
centres. And one thing Melissa discussed is I
thought distribution centres, you get one for
Port of Newcastle, New South Wales, Queensland,
Perth, and then they're done. But what I'm hearing
is a number of these companies are requiring
more than one distribution hub for sickness breaks
out, they can still function. But the other thing
Melissa said, the culture of the delivery business
is changing from being something arriving in
a day to apparently China is doing it within
two hours. So if that's the path that Australia
is going, having both a state and then a municipality.
when I can do jobs within half an hour I find
very very interesting and the other space as
well is the the rise and the growth of the work
anywhere strategy which has been made really
really easy and more accessible via these light
industrial warehouses or business parks with
a roller door you know you can park your boat
downstairs in the gym operate whatever business
you want anything from my business to a dropshipping
company, a Pokemon store, I don't know, like,
you know, making surfboards in the middle of
nowhere. You can move to Queensland, you can
move to, you know, the back of Bourke and then
run one of these businesses, which I think is,
you know, quite interesting as well. Join us
as Melissa unpacks the credit fund. She also
does direct projects, having wealthy families
and wealthy investors. you know participating
alongside in some of these projects and you know
hear Melissa discuss you know how they look at
a project some of the deals and then you know
what happens from a risk component if a deal
goes sideways and how they work with that particular
investor or client or developer to get a positive
outcome. So before we get in this podcast Please
remember, this podcast is intended for entertainment
purposes only and should not be taken as any
form of financial advice. Be sure to listen to
the disclaimer at the end of the broadcast and
keep your feedback coming. You can reach me at
mgatty at ywm .com .au. So with that being said,
I hope you enjoyed this conversation as much
as I did. So sit back, relax, and enjoy. Melissa
Hosgood, welcome to The Rate of Change with York
Wealth Management. Good morning, Madhav. Thanks
for having me. It's great to have you on, Melissa.
Why don't we begin things off and telling us
a little bit about yourself and how you got into
the world of finance. Thanks for that. Now, I
originally came from China. I'll go back a little
bit more about myself. I've been here in Australia
for 20 years now, Australia's home. I came here
to do my English study initially back in 2004,
did my four -month English study and fell in
love with the country. I came from Shanghai,
a very busy city, very busy. Since I came here,
what stood out to me is the people factor. letting
along the the environment just so beautiful um
there's a lot of um individual attention uh and
there's a lot of warmth between uh you know from
the human interaction i felt hence i stayed i
uh continued on with my uh master's study with
the university of technology sydney um had a
had a great fun for two years and learned heaps
Luckily, straight after that, I got into a row
into the banking world. And fast forward, that
journey ended up to be 11 and a half years in
banking, of which six and a half years with HSBC
head office here in Sydney, followed by about
45 years with Westpac head office in Brisbane.
In the banking days, I look after banks largest.
clientele portfolio, I look after a portfolio
of financial institutions groups as the relationship
management team. This cross -covers one of some
of those most prominent financial institutions
in the world. Customers are such as all the investment
banks, Gomez Morgan in global top 40 to 50 fund
managers and asset managers and insurance groups.
So I learned, threw myself into deep end and
learned heaps. Now, after 11 and a half years,
I start thinking, you know, what I do next. I've
learned this much. It is also the same time.
Whilst I'm still working a very high, fast -paced
banking role, I start to take an interest on,
okay, I'm so devoted and busy. working 95 and
90 10 actually um if i were to choose to invest
my own banking salary which i have very little
time to look after whilst looking after big customers
what i'm going to invest comfortably in terms
of risk and return now this is when real estate
to start to to come into my radar looked at Again,
naturally as a banker, as a risk manager, doing
deals in the banks. And when I looked at the
market, the cycle, where Australia is at in property,
real estate, historical data, and how real estate
as asset class behave. I just fell in love into
it. So I started investing in real estate then,
which eventuated to 2019 to start and funded
Labasa Capital as a real estate -focused investment
manager. The rest is history. Labasa. I was trying
to figure it out. What is Labasa? Why the name
Labasa? Good question. I love a good origin story.
Many people ask. Why Labasa? Yes, yes, we get
that question, this question a lot. People want
to know what's the story behind it as a boutique
house, of course. And I'm glad the name means
something. So Labasa being a real estate focused
investment management house, we named ourselves
after a historical building. So Labasa House
is a heritage building in North Caulfield, Melbourne.
And it's a building with beautiful architectural
design for that era, and it's still beautiful.
It's also known for another name for the house
is House of Elites, House of Dreams. It has beautiful
stony structures, so the structure is very solid.
Now, the Labasse logo, the arch window, it's
taken. from the inspiration of the labasa house
again it's a it's a stone same stone structure
grounded level -headed which represents our approach
and our thinking as the investment manager the
money manager for our investors you know we are
not emotion driven we're data driven we make
sound and grounded conservative decisions for
our investment at the same time it is uh It is
an arch. It's a door. It's an open door to opportunities
for our investors and project sponsors. Yeah,
right. It makes sense. It makes sense. I do love
it as well. Yeah, little known fact about myself.
I wanted to become an architect back in the day.
So much so they told me to go to Sydney University,
missed out by like two marks or one mark. And
then they told me to go do a Bachelor of Design
in Computing. But when I got there, some of the
kids at Sydney University were so good. I just
kind of looked myself in the mirror and went,
it just isn't happening. And it rotated into
finance. It's just interesting how everyone kind
of makes their way in the world and ends up where
they are. But the reason I wanted to have - You
can always pick it back up. Pick it back up.
You never know your hidden talent and, you know,
do something about it. Absolutely. But the reason
we wanted to have you on is, look, I'll phrase
it this way. We've had some fantastic guests,
a number of your competitors on, in both the
funding space, the lending space on the credit
side, you know, for these types of projects,
which we'll discuss today. And we've also had
a number of developers on, or we work privately
with a lot of, you know, land sub, et cetera.
But what I find really, really fascinating, about
what you do is you cover the entire life cycle
of a development project. Not exactly common,
right? And a bit of context of why I've been
looking for this type of strategy for a while
and why I find this interesting is you mentioned
2019 when you kicked this off. I remember speaking
with my friends and colleagues and investors
saying that the single best investment now since
the CBD was just hemorrhaging. The South African
mob in Sydney went under on the construction
side. All these construction companies in mass
CBD locations were struggling. Meanwhile, there
was this huge boom in warehouses being built
for distribution hubs, you know, off major ports
and airports, you know, for like Amazon. Everyone
knows, like, you know, everyone's saying, like,
you can just click a button and all of a sudden
a product's at your door, right? I've always...
I've been wanting for a long time to find a fund
manager that has that capacity to go down the
warehouse path, but also the land sub and the
light industrial up in Queensland. But to my
understanding, and please, I'd love to hear the
philosophy about how you invest and why you've
chosen to fund the entire life cycle of a project.
And also how the catalyst or the thesis of why
you specifically chose these three or maybe more.
distinct asset classes within the property side.
I'd love to learn more about your thought process
on all that, Melissa. That's a great question.
I will start it by just to touch on Labasa's
fundamental investment thesis and investment
philosophy. Now, Labasa was funded initially
was on the back of Me as a busy banker looking
for answers for myself and looking to invest
in a safe asset class, don't risk too much, robust,
that don't correlate and not volatile to small
changes in market confidence or major global
event. Something that I can go to bed knowing
it's slowly occurring over time and that can
become the cookies in the jar for the stormy
days. So I started investing in real estate,
not wanting to lose money, basically. That's
why I don't choose other asset class, which is
a bit more sensitive to macro environments. So
I started investing and then eventually this
became a business. I'm very proud of. So that
leads to La Paz's investment thesis is capital
preservation is at the centre of what we do.
We, as a team, are real estate experts and finance
investment experts. We hone our muscles on a
daily basis through going through numerous number
of deals. And we say a lot of those to pick up
the right, the yeses. Now we leverage on our
experience on deal origination, structuring,
negotiation, and risk management to protect investors'
capital. We treat investors' capital more seriously
than our own, which goes to our second. Pillar
of our investment thesis is that we invest with
high conviction. We believe in asset classes.
We're very attuned with the market, where the
pricing is at, where the risk lies in the macro
environment, how each pocket of this real estate
market, the sub -markets and sub -asset classes
behave. Because real estate is a very localized
business. One side of the highway could behave
very different to another side of the highway
in terms of liquidity volume. So we go deep on
real estate fundamentals. At the same time, we
co -invest with our investors based on our high
conviction and also just to back our judgment
on that investment decision for our investors.
So we often place our capital as the first last
piece to back our judgments. And to date, we've
not. Never lost a dollar. And again, proudly
speaking, the basis entire duration to date of
five and a half years. We have not needed to
put one asset to mortgage through recovery process
of mortgage in possession, selling someone out
to recover investors funds. So all investments
that we've completed to date has come back through
the planned normal exit channels. market sell
or refi completion of the project so our investment
thesis is capital preservation co -investment
for interest alignment and we run an acts of
portfolio management approach and that is the
overarching context now then comes to labasa
being a whole a full project life cycle investor
Now, we call ourselves an investor than just
a lender for this particular reason because we
do have equity and debt capability. In addition,
we fund the full lifecycle of the project. Now,
putting ourselves in a project sponsor's shoes,
the developer side for a minute. Now, if I were
a developer, I come and I'm not going to the
banks. I go to a non -bank. The rates is a bit
higher. However, what am I getting then in return?
Now, in private markets, currently, it's certainly
fast soaking up some of the voids that the bank
has left. Banks are under their own pressures
by the policymakers, not because they don't want
to write deals, not because some of those deals
are not bankable. People often ask us, you know.
Are the sponsors or the deal not bankable so
they come to private? Now, that's a no, not always.
Of course, some of the deals are just not good
quality and we also say no to. However, there
is a good batch of deals that are actually of
good quality. The sponsors rather go private
for a few reasons. One is the private markets,
the lenders are more flexible in terms of looking
at. Again, a project as an investment. However,
banks were, given the volumes, probably looking
at more surrogate sort of exercise. It's never
black and white, of course. Banks are also coming
up with innovative solutions these days. Privates
can just have a little bit more discretion because
the investment committee decisions can be undertaken
a lot more flexibly. Now, this doesn't mean that
we don't go X degree to... identify and quarantine
risks to some extent because we understand the
space that we're playing um some by giving certain
flexibilities which does represent we're going
a little bit higher on the risk scale in terms
of the capital stack now to compensate and to
protect our position we actually go very deep
in terms of risk analysis our due diligence checklist
has more than 60 items to go into it. People
often say, they think, oh, private lending is
pretty simple, right? Because one side, it does
sound like a very simple business. And for some
of our existing investors, before they fund us,
they're already doing some sort of lending just
through their solicitor funds, through their
lawyers and accounting, professionals assisting
them. to do some on and off deals before they
fund us, they can do it quite simply. However,
in private lending, private credit, to do it
well is not easy. It's one to be able to navigate
through the trough, actually have a process that
look at 60 items or more in an outset class from
the outset looks simple, which at the same time,
you know, very... closely monitor and run an
active portfolio management to be writing groups
of the market movements and the changes through
the life cycle of the asset. If there is any
early signs of risks, to be able to pick it up
before it becomes a substantial risk so that
it, again, can help navigating through. Now,
we look at a deal from an entire life cycle perspective,
which is simply to say, When we look at a development
project, we will be willing to fund the project
from land acquisition stage to then allow it
to further progress through various condition
precedents that it needs to meet to turn it into
a construction project. For example, to complete
the authority approval process, to achieve a
level of pre -sales, to get to... shovel ready
and then we would give them that land traditional
land facility to to then get to the construction
ready stage at that stage we would then top up
to fund the entire construction and cost to complete
basis as a senior lender or stretch senior lender
to complete the deal to full completion as an
established asset now along the way Some of the
stock or majority of stock may be sold. The developer
may decide to keep a portion, maybe 20 lots or
30 apartments for their portfolio purposes or,
you know, just from tax reason or from trying
to capture the... rising market perspective,
they may want to delay the sales to earn a bit
more on the final realisable value of the project.
So we're happy to stay on to also fund the residual
stock facility to provide the extra runway for
the developed to sell it either in an orderly
manner or at the prime time. So by doing so...
There is great advantage by approaching an asset
this way. Now, we have seen some cases that didn't
quite work well, work out from some of our peers.
For example, they may, they just don't touch
construction at all, maybe because they don't
feel comfortable or they're just not quite ready
to take it on. Now, then if they only do land
facilities, now just looking at... as is direct
comparison valuation for land facility for a
project site it's often not necessarily right
because as is comparison comparing one site development
site to another based on most recent sales are
never in our experience so accurate because the
apple is never exactly comparable to another
Apple in a real estate sense because of the proximity
of the location, the characteristic of the site,
what you can do with it, not exactly comparable.
So if the fund only lent on a valuation basis,
on an as -is, and don't assess what's going to
happen later with this development site, sometimes
that value can be obscured. Now, if they lent
on a 65 % LVR, Before they realize it, before
they go into a recovery process, they identify
it. Actually, if you look at it in a project
sense, which is project -related site value,
and that's putting the site, assess the land
value in a feasibility sense, this LVR they've
lent on is 110%. So that's when, even if the
fund go out and recover the asset, they still
lose money. Now, the advantages for us to look
at entire lifecycle is also from a risk management
perspective. One side, we tick the bus for the
developer because when they come to us, they
know, okay, if I speak to Labasa, I know they
will be there for the entire time for me. And
I just then, one side, we often can even give
interns on land and construction. So at the land
stage, we already completed due diligence. We
do the forecast, we test the models, we test,
we check the major checkpoints on developer capability,
experience, visibility of the construction, you
know, numbers. Is there profit left for the project?
Can this sponsor or can this project actually
progress to construction stage? Is the product
they're producing, has a market take up for it?
Are they... Are they priced appropriately? So
we assess them independently based on the market
data from multiple sources we see before we even
receive a valuation. Valuation is the last point
just to check that our judgment is on par with
what values think. So when we've gone this far
for land loan even, it comes with a few folds.
Developer love it because they know we're going
to be there the whole way. We give them terms
at land stage. We can give them land and construction
terms so they know what their cost would be.
So then all they need to do now is just focus
on the delivery of the project. On the investment
side, we have assessed this from end to end,
how and what we're going to do with the site,
whether this site, this idea, this architecture
during. can be turned into reality and still
remain to be financially sound. And we also scope
out the major risk pillars to make sure, okay,
can this project go smoothly, sell through the
process of construction in this duration the
project's planned for, the market cycle, and
still achieve the price point that they're willing
to achieve. And we also build for every project
we assess, we, Labasa, do our own feasibility
as well. Developers do theirs. We do our own
feasibility. We buffer up a lot. We flush through
the buffers that's necessary for rainy days for
developers. Sometimes, you know, obviously when
our project sponsors are very proud of the project
and it's their baby and we appreciate that and
the optimism. Sometimes when it comes to us and
we act to be that level thinker, that other,
you know, the more conservative, the gray hair
partner to essentially push through the deal.
Very much the more worst of case, just make sure
the project is resilient so that all of us can
come out in the end. So this coming back to entire
life cycle approach, Brings us multiple advantages
and goes from the project sponsor's point of
view. And ultimately, Labasa act for our investors.
And this is the risk management framework that
we adopt. And also this approach make us known
as an investor throughout the whole lifecycle
of the project. It expands our... thinking and
our outlook in terms of horizon we'll look at
this project from end -to -end perspective in
terms of asset class you mentioned earlier on
the our sweet spot so LaBasse's current sweet
spot in terms of the sub asset classes that we're
funding which is the majority of the book There's
industrial residential land subdivision and boutique
partly held prestigious sub -six level construction.
Now, we're not heavily exposed into high -rises
at this stage, which was... active decision that
was made by the house, by our investment committee,
myself, at the time, at the beginning, at the
inception of COVID. We see this difficult time
coming for the industry, which is unfortunate.
And we... have pivoted to simple forms of construction.
It's never to say that we won't participate in
high -rises. We're actively looking at quite
a few right now, and I think the shake -up in
the construction industry will further stabilise,
particularly beginning of next year. So we're
already gearing ourselves up to start looking
at some high -quality projects in some great
leadership locations. Do you participate in high
-rises? But as it is now, the whole book is very
healthy. We haven't gone unstuck due to construction
or builder go bankrupt or anything. We haven't
gotten in those cases in our hands. None of the
project is stored. Everything's churning. So
we're quite pleased with where we're at. See,
that's quite unique and it's very interesting
because you speak to someone about property that
doesn't understand it, they do understand it
and they understand the risk. It's just such
an interesting concept how you're investing and
you're doing the full life cycle. Because my
understanding with the risk side is if you cover
one side and you specialize in it, that's fantastic.
But what happens if the other part of the team
doesn't hold up there in the bargain, then essentially
it doesn't matter what the deal is or if you're
making 50 % or 100 % or a billion dollars. If
you can't see it. the full life cycle all the
way through and one particular element, it collapses.
That's where the risk is, right? Surely. Yeah,
which is really interesting. So from an investment
perspective, with the fund, so my understanding
is you're doing private deals as well, but you
also have the fund. So just to unpack the mechanics
of the fund, what's it currently returning? What
are the fees? Sorry, what's the target return?
What have you returned the past 12 months? What's
the management fee? How does it? How's it structured?
Sure. Thanks for that. So Labasa offer our investors
flexibility in terms of how they want to invest
and what style of investing they're more attuned
to. Everyone has a slight difference in their
preferences and hence we offer both a pool fund
structure, which is... More passive and set and
forget, manager would construct and create a
good, robust portfolio of assets in line with
the objectives set out for the pooled fund. So
our current pooled fund invests in... first mortgages
and it does allow a small portion of second mortgage
up to 30 % of the portfolio. But as of end of
June, currently it's 100 % first mortgages across
Sydney, Melbourne, Brisbane, primarily land subdivision
assets. The funds Target return is 9%. We do
give investors floating returns. So we go out
and negotiate very hard on behalf of investors
to get the market return and also price risk
for premium and yet never go excessive risk for
return. So the LaBasse Private Credit Pool Fund.
object is to construct a portfolio which is most
suited for some of our risk adverse and very
conservative self -managed super fund investors,
our old money. This particular pool fund bucket
is designed to be a bucket where you can over
time accumulate a healthy balance by reinvesting.
the returns into the fund. Also, you know, whenever
investors can do a gradual top -up, whilst a
lot of them are still business owners and very
sophisticated investors themselves too, whilst
they run some active investment strategies, whether
it's in key or active real estate, they still
put aside some passive funds into the pool fund
knowing this vault is robust in terms of risk
characteristics. If anything happened in the
outside world to the active investment they're
running in some higher risk strategies, they
can come back to this little cookie jar and they
can live on that. So our pool fund is designed
to be a very dispensive income -driven fund.
which is a fund that will help our investors
to build wealth over time with robust asset classes
underneath, which is every dollar we invest in
Labasa across the board. Of course, the pool
fund is underpinned by real asset values. So
the fund currently, whilst we target return is
nine, manager charges on 0 .5 % fixed manager
fee. And investors get the extra if the market
is going up. We can negotiate harder to get extra
returns. Investors get the upside. So currently,
as of end of June, the last financial year, the
fund 12 months rolling performance net of fees
is 11 .09%. fund from inception basis since 2019,
which includes, you know, earlier days we've
got a small amount of MES in the fund. So funds
performance since inception is 12 % plus, which
is very high, very high for how conservative
the underpin, you know, risk is. Very proud of
where this fund is at. Now, on the deal -by -deal
level, we offer our larger investors family offices.
Some of them have got this much to allocate.
They like to go directly into the deals and write
a bigger check. So we do offer a deal -by -deal
opportunities as well. We recently opened one
that is a $15 million raise. just last week,
and we closed the raise in about 11 hours, over
-raised $10 million. We had to trim everyone
back. So it's very humbling. Our investors have
followed us. The investors have known us and
followed us for a long time. One thing we're
quite, I'm personally quite proud of is that
no one has left us. because of the return or
because of Levasse's service or investment decisions.
No investors has left us ever since the early
days. So that is something that makes me very
happy. So with the credit funds, so just trying
to get my mind straight on this, is the credit
fund purely lending and then the equity piece
is? on a deal -by -deal basis? Is that how that
works? Or is there an equity component in the
fund? Very good question. So the pooled fund
is debt only. So it's just a registered mortgage,
given its conservative nature. Now, for a stretched
senior position or senior, which is senior and
mares blended, or equity deals, now we structure
it at the special purpose vehicle deal by deal
level, which the pool fund may or may not participate
depending on whether we feel the risk profile
is most suited for the pool fund. The pool fund
is the very conservative market. So wait, I'm
just trying to get it. You have one fund, the
credit fund. Is there a second fund for the pool
fund or is the credit fund also have the pooling
component? Okay, so the Proto Fund is an open
-ended pool fund, so it has multiple mortgages
underneath. Now, alongside, in parallel, we have
got multiple deal -by -deal structures. Each
structure is a unit trust on its own. Close -ended
funds are issued based on one deal only. Now,
the pool fund can elect to take some positions
in those assets as well to whatever capacity
managers think deemed suit. to the pool fund
at the time. The pool fund may not participate
at all on those single asset vehicle levels.
So we've got a pool fund open -ended with multiple
assets underneath. Alongside with that, we have
many deal -by -deal structures. Now that makes
sense. The reason why I just wanted to distinguish
this is someone's listening to this and going,
okay, I'm allocating money as a wholesale investor
into the wholesale fund. You know, I'm targeting.
I like the credit component, but I also want
the equity piece. They can get that exposure
purely by the pool fund. They're not having to
go, okay, I've got money in the credit piece
to get access to the lend component and then
also having to do the direct component. That's
a choice. Yeah, that's what I just wanted to
distinguish. Yes, Nana, it's a very good question
for clarity. So the pool fund at the moment is
for its mortgages only. occasionally some small
portion of second mortgages. Now, if investors,
and often we do have investors being with us
for senior for a long time to say, hey, I'm ready
to go up the risk ladder. And at least I'm happy
to reinvest my profit into equity deals. Can
you put me in? So at this stage, if they were
to go debt and equity, we need to put them into
the deal by deal SPV vehicles. Equity deals are
a separate SPV on its own. It's quarantined from
the pool fund at the moment. Now, we are contemplating
and it's on the roadmap that we will issue a
pool fund number two in the second half of this
year, which will be an equity fund. Oh, excellent.
So there's going to be a blend, either leaning
to the credit side with the current one you have,
but then potentially towards the end of the year,
you're going to be listing an equity -only piece.
A high -yield firm. That's going to be interesting.
I want to see that. Now, that's the fun part.
Everyone wants to listen to what's the deals?
How do you think about the deals? Why do you
say no to a deal? But why don't we discuss, since
you mentioned it before, you've just closed a
$15 million transaction. I don't know if you
want to discuss potentially what that deal is
or how does it look like if you can or maybe
another one. It'd be very interesting to hear
it all play out with an actual deal. No, thank
you, thank you. Doing deals is the thrilling
part. And even from the banking days, I'm always
at the front line, responsible for revenue, front
office, revenue -making teams for the banks.
So the thrill of closing a deal, you never get
numb to it, big or small. So I love doing deals,
love closing deals. It makes me happy. Now, this
particular transaction is, again, it actually
speaks to what we mentioned earlier, is an entire
lifecycle play again. It's a 39 -lot subdivision
residential house lot subdivision in the north
-west Sydney. It's a very robust location, fast
growth, walking distance to the proposed shopping
centre, which is under construction. Now, we
have... backed the sponsor to purchase the land.
At the time, it has the DA already, no pre -sale,
no construction certificate. So we settled the
land with them and provided the runway, the lead
time to construction. And based on also the robust
demand and demographic social economics, we see
we also have given this transaction very flexible
pre -sale terms. We allow the deal to start construction
earlier without having to be held for too long
and then sell it as the civil works progress
throughout the construction period and we've
got a midway progressive pre -sale hurdle. i
.e., the facility is 15 months. We have by month
nine, we will have a pre -sale debt cover of
50%. These sort of covers and measures make sure,
one, we allow the project to start earlier. We
have done our assessment. This product will sell.
So that's not a blanket, just a blind option
to the sponsor. We're looking at the data, looking
at the market. This product will sell. So they
can start a bit earlier. And then most recently
they've finished everything's done. They've sold
more than 60 % of the lots, which all the settlement
has come through as of end of July. So now we're
just tipping the rest of the stock into residual
stock. So that's a perfect example for this whole
lifecycle approach, For the developer, it's very
easy for them because throughout the whole duration
of the project, they're talking to one team.
And this one team has in -depth knowledge about
this project from start to finish. So often what
we find is that there's not even a lot of incentives
to even inquire for pricing elsewhere because
there's not even if the difference is 0 .5 %
here and there. it doesn't really move the needles
for the developer coming to this point. So we
love it too. From the developer's perspective,
what's their process? Do they have an option
on the land or a letter of intent? Why did Labasa
come in and provide the capital to settle on
the transaction? For this transaction, it's a
straight sales contract. So they've entered into
a purchase contract on the land, put the deposit
down, and then start talking to finances, which
is Labasa at the time, on the land facility.
And then we essentially say, okay, we'll come
in for land and we'll fund the whole thing. To
make a deal like this worthwhile, instead of
you just going and finding the deals yourself.
My understanding is these transactions have to
have like something unique, you know, something
interesting to get it there. From a returns perspective,
what's the minimum return that you're looking
for from an equity play, you know, on this type
of project? Is it 30, 40, 50 %? Like what are
the numbers? Okay. So this particular case study
is debt only. So we were the senior lender and,
you know, slightly stretched manner. So the LDR
is still sub 70%. It's within the senior equation.
Senior, we measure ourselves on an internal rate
of return. Essentially, it's a relative term.
It's anywhere from single digit to early tens,
which is where majority of the private houses
are playing for senior at the moment, regardless.
The banks, this is much lower. That's actually
the spread between banks and private. Everyone
is seeing that it's getting crunched when cash
rate is high. The differential is not huge, but
it still varies between that high single digit
to early tens based on the characteristic of
the project and how high we go on LVR, how much
risk we take is the variable. Now, on equity
side, again, the variables is even. Hence, the
return bracket is also wider because equity capital
comes into the project in the earlier phase of
a development process. So in the risk sense,
the earlier you come into the project. the more
risks you are actually wearing throughout the
project, the project risks as it goes, right,
by obtaining all of the authority approvals,
by obtaining some pre -sales, and by locking
builders, the project de -risks as they go. So
we price our equity in a very dynamic manner,
which is the right way to do so as well. We assess
how much risk we're taking. Are we taking the
full cycle of a project risk? then we price ourselves
as a true equity player from more inclined to
ordinary equity style of return and it is definitely
it starts from high teens to to to mid -20s and
that's sort of very wide range depending on how
much risk we're taking but if we're only coming
in at a later stage when the project is largely
de -risked with the construction builder lined
up ready to go and the obtained some pre -sales
proved the price point of the asset in the market
obtain all the approvals shovel ready when we
come in the last mile then we act more like a
mess sort of returns so that's for the land sub
is the um so just thinking about the three Which
you do. So you do the land subdivisions, right?
And then you got the light industrial. I find
light industrial fascinating. Actually, I wouldn't
mind getting into that and specifically Southeast
Queensland where it's just booming. Why I find
this so interesting is my family, my grandfather
retired up in Noosa. You know, my uncle lives
up there and he always made a joke that, you
know, everyone wants to live in Noosa. But what
they don't understand is you can't get a job
in Noosa. You kind of have to bring a job or
bring a business. And in COVID, what I found
fascinating is when everything crashed and everything
got destroyed, these, how would I best explain
light industrial? You take a lot, 12 ,000 square
metres, you allocate, you put what, 20 to 23
lots of them. But what these are, to paint the
picture, I don't know if you've ever driven around,
like people listening, business hubs and you
see the, like a drive -in and then you've got
like a roller door either side and then you've
got like a walk -up. Why I love these assets
is you can stick anything in there. My business,
I could go move to New South Sunshine Coast,
drop in, have a gym downstairs, et cetera, park
the car, park the boat. Meanwhile, I can run
a full financial advisory business upstairs or
an accountant, anything. You can go full fiberglass.
My understanding is from a recession perspective,
from the risk curve. This asset is very, very
interesting because anyone can work there at
any point in time. It's not, you know, purely
just for the CBD. So, yeah, I'm just curious
on… Yes. I don't know how to attack this, but
maybe let's look at, I don't know, for this particular
sub -asset class, you know… What suburbs, what
regions is this the most attractive currently?
And if you were looking at a deal, like what
returns on the equity piece would you be looking
for? Sure. Great little sub -market topic to
hash. Now, industrial is very hot and we love
these asset cards. And ever since 2019, we have
repetitively lent to industrial. And we've backed
a couple of industrial project sponsors across
six, seven different projects with the same sponsor
until they're quite large players. And we see
the fundamentals as the lender from our lens.
We just love it, both from the debt and equity
angle. Industrial asset is hot in Australia,
driven by quite a few factors. One is that there
aren't enough. or approved land use for industrial
asset. At the same time, the society or the way
people live and work demands more industrial
assets to service them. From a mum and dad individual's
lifestyle perspective, there is the downsizing
effect. People are moving to more prominent...
primary prime areas in a smaller living environment
maybe a beautiful owner occupied apartment in
the lower north shore but they might still have
you know their vintage cars their boats and their
toys and there's nowhere to store in the apartment
which creates the self -storage service requirements
for people getting used to higher density or
downsizing living environment. On the business,
that's factor one. And factor two, on the business
side, there is this natural evolution of how
business is delivered and conducted, how the
services are rendered. These last few years,
COVID accelerated it. As you mentioned earlier,
people don't... don't necessarily have to work
or live in the CBD of Sydney to benefit from
the employment opportunity that Sydney offers.
They can be living out of Noosa or run their
business out of places in the outer areas by
creating a space whereby you have your showroom,
you have your storage display downstairs and
have a mesling office upstairs and you can...
create some very creative spaces and enjoy that
headspace and the actual space to be more productive
in that way. So the businesses on Occupy Style
or rental for these sort of mid -size spaces
is also rising rapidly, driven by the way businesses
and services are delivered these days. Now, thirdly,
is from a servicing perspective, that's servicing
for both, again, the individual and businesses
perspective, which requires more of regional
satellite industrial parks to service people,
one, from an individual's perspective, may choose
to live. outside of the CBD and save this travel
time, but they might still be running a sizeable
business, whether it's cold storage or major,
you know, trade businesses, they need larger
warehouses. However, the existing warehouses,
you know, service those regional, those regions
may have also be out of capacity, hence. industrial
park, the expansion or a widening of this footprint
of existing industrial park is on demand. Some
of those are being created to cater for people
who decide to leave and run their business out
of the CBD, which is more convenient, more time
efficient for them. On the other side, and because
the city became more spreaded and population
is growing, Australia is growing at a world leading.
pace in advanced countries since you're at close
to high ones and 2 % population growth. This
is a very high number versus compared to other
advanced countries. Some are shrinking, some
are there sort of steady at the same pace. So
Australia is still growing. While it's growing
then, which means the city is spreading further
out of the CBD, it requires more larger facilities
which will cater for logistic centers to go and
reach out to provide goods and deliveries to
those satellite cities to serve as a broader
gradient in the sense that people where people
live and work so larger companies is also securing
bigger facilities in broader region to one optimize
their their efficiencies from a logistic distribution
perspective to service broader area to create
centres. On the other side, businesses also needed
to expand because the natural demand is expanding
too. So industrial, in a nutshell, is very hot.
Now, La Paz is looking, we love this asset class,
so we are going equity and debt in this asset
class. On one side, it's simpler than high -rises.
We love it too. its larger land content footprint.
We recently secured a project whereby one of
LaBasse's special purpose vehicle fund will acquire
the land and work the asset and then establish
warehouse sheds and hold on behalf of our investors
for long -term income and capital precision.
Yeah, it's a fascinating asset class. And I think
I was speaking to a colleague, I can't remember
if it was Chemist Warehouse or another one of
the major players, but something about the distribution
hubs with these large, you touched on the distribution
hubs like Amazon, all these dropshippers, or
you can just be a one -person shop and have a
huge warehouse space for these dropshipping -style
businesses. But from a risk management, which
also benefits the demand side with COVID or getting
the flu, These days, if one warehouse gets the
flu, they kind of send everyone home and it goes
to a standstill. But what I'm hearing from large
businesses, they're seeing that risk in the past
couple of years going, oh dear. And then they're
just naturally going to go, they're going buying
different hubs just in case if one shuts down,
you've got another two to go. So essentially
the flow doesn't stop. So people can get their
products in a timely fashion and it doesn't disrupt
the cashflow process. Are you seeing that? That
strategy is becoming quite common now or is that
just a knee -jerk reaction to past events that's
slowing down? Oh, it's certainly the trend. Even
from the office space where people are seeing
the headquarters trim back on leasing footprint
and create, again, the region -centred sub -hubs
for employees to go and work in the neighbourhood.
Now, industrial side, it's case by case and depending
on the business's efficiencies, mostly for larger
tenants, that they would evaluate the whole network
footprint of the country, for example, in the
strategic planning time, potentially look at,
okay, if we jig, take up a... a footprint in
this particular strategic location which will
feed to the next one in terms of exchange and
stopover and then go to the next stopover to
service the other region. So they may shuffle
their distribution centres and reorganise it
in a more effective way to get either consolidation
or actually split from whichever sense that makes
sense. more economic sense to deliver services.
You know, for example, for distributions and
logistics centers, we're seeing more split at
the moment because the last mile logistics has
become very hot because the businesses that is
doing the B2C delivery wanted to be same -day
delivery before it's 3 -5. two weeks, it's no
longer competitive. And it's in Asia countries,
it's two hours delivery when you buy online.
Sorry, did you say in Asian countries like China,
it's two hours delivery? And it's actually put
on the website when you purchase. For example.
The logistics on that would be crazy, the number
of trucks. So these are the new behavior and
consumers trends. And then to also beat your
competition. So this then creates more. Last
mile, the sub -distribution centers. So the major
warehouses were distributed to these sub -logistic
centers that is actually within 30 minutes drive
to where most people live. So that's the example
of the spread. And then from a cost efficiency,
they might close down a couple, the businesses
might close down a couple, satellite distribution
center might build a bigger new facility for
it. storage cost or cost efficiencies because
they've now got this other substance that is
riding the heart of the city so driven by business
demands it could vary a bit but these are some
of the trends we see which which lines up with
this more fast -paced competitive consumer consumption
side If I'm understanding you correctly, because
how I was thinking of it is just every single
major port, you know, you stick in a massive
distribution hub. And then I was thinking, okay,
you get one for each major state and then off
it goes. But what you're saying is they're going
distribution hub for the state for the main port
or even Newcastle or something specific. But
then they're also putting in a sub smaller one
on a regional scale. just essentially across
the entire footprint. So theoretically, every
single major consumption from a consumer standpoint
that actually is a big consumer, they'll potentially
put in a distribution hub just to service that
municipality. Is that what I'm hearing? So that
means the demand is just going to keep climbing
in this space. they're right so it's not slowing
down like i thought i thought potentially like
okay once everyone's got covered it just stops
but it's never going to stop because the the
more population grows in and find places to live
people are farmlands just being bought up for
you know tens of millions or hundreds of millions
of dollars they're doing 600 houses you know
it's just growing and growing and growing which
means every single place for every single major
company will require some form of satellite distribution
house there so this this space if I'm understanding
it correctly, isn't really slowing down. It's
just naturally going to evolve like a beautiful
virus. There is a growing demand. So one is from
fulfillment centers for fast delivery we touched
on. The other side is business owners may decide
to exit from a shopping center because business
these days is not entirely dependent on pedestrian
traffic anymore. So it's online competition.
It's the selling to do the work. internet -based
customers. So they may decide to retreat themselves
and exit from a shopping center paying high rent
and limited space and don't have space for lesser
organized items to be not put on display. And
then they might decide to, okay, I don't want
to go far. I'm leaving my cart in a city and
I want to have a warehouse just in the inner
city and I'll run it from there. So that is also
another stream. I love it. Now, there's probably
a lot of developers going to listen to this and
they're probably thinking to themselves, hmm,
if I was going to speak to La Bassa, what is
their wish list? You know, what suburbs? So let's
say Queensland to begin with, like what suburbs
do you think right now possess the hottest opportunity?
Like what's the most attractive, fast -growing
suburbs like, you know, in Queensland? If like,
you know, someone's looking at a project and,
you know, you had your pick of the litter, like
what would flag your interest? This is a million
-dollar question. This is the fun part. Well,
we'll share it over a glass of red wine. However,
broadly speaking, because we do, as Labasa's
investment house, we're location agnostic and
essentially asset class agnostic. We do look
deeply into every deal. It's fundamental. There's
one great advantage as well as we say agnostic.
Because Labaste only invests in real asset class
and we don't touch anything else, we are able
to and for a broader footprint in terms of location
of the asset and asset types. So we do hold a
very good amount of knowledge base in each vertical.
So from... The hot pocket and where we trade
most, we still end up noticing that we trade
most in Eastern Seaboard. So currently all of
our assets are in Sydney, Melbourne, Brisbane.
We also traded, transacted in Adelaide. We keenly
look into Perth and other locations. We are agnostic.
We can go Metro, we can go regional, which we
have done. Again, we assist every deal on its...
It's merit and we'll price each deal based on
the risk profile and time span in that sense.
So we do approach every deal not in a quickie
cutter way. In terms of the sweet spot, we would
love to continue to bring our footprint on in
terms of investment appetite is again still the
land subdivision space. The industrial subdivision
and build form, we love them. And also the boutique
build, beautiful quality, medium -high finish
residential apartment in that 25 to 150 key sort
of scale, which I think is a good size for one
for just the... to also from a risk management
perspective, if something goes wrong, we can
still, you know, work it out together and it's
a good size that we can sort of solve problems
on. So I'll leave it at that. We'll have a glass
of wine to figure out where the hotspots are,
but no, but that makes a lot of sense. You know,
that's very, very interesting. Is there another
deal example that, you know, you've done recently
that you want to dig into or is there any other
areas you want to discuss that's on your mind?
I'll mention a quick one. So everyone knows that
the COVID period hasn't been easy for any new
builds and certainly it's not to say LaBasse
hasn't experienced a project not going as planned.
Now, we're always going into a project, one,
we assess very tight. We want to choose a successful
project rather than a project that is going down
and only finances make the money. It's just not
our style of investing. We assess and select
the right deals to go in whereby everyone is
going to take their share and we're going to
come out successfully. So we do go into project
with... a conservative assessment but still choose
a successful robust resilient project to go into
however when something happened like the broader
broad environment as a disruption as the scale
of covid um we had a project where um and it's
a new build it's an apartment um and it's certainly
experienced cost overruns because the labor cost
time delays and the construction materials, it
compounded to quite a sizable cost of the run,
which we're talking about in construction, because
the price rise during COVID was 30 % plus. But
again, it's one that we were very comfortable.
We always, when something happened, we approach
it not going as planned. Our approach, because
we run an active, portfolio management approach
we're in touch on a weekly bi -weekly monthly
if not more frequent every other day basis um
when something is when environment is tightening
which is experiencing some issue we we jump onto
the forefront of it and we appreciate often when
something happens Our sponsors communicate with
us openly and proactively just so that the problems
aren't vested and until it gets your explosive
stage. And we also have our checks and our monitoring
scheme. So often we identify issues and prevent
issues from occurring in an early stage. For
example, we're looking at details on whether
a major order has been made. Now, if... within
a certain period in a context of the project
program. Now, if a major order hasn't been made
by a certain time, we just know this project
is going to experience a delay. So we surface
that in advance, and if it's oversight or if
there's a reason it's not made yet, we have a
conversation with our sponsors, make sure we
keep them in check, nothing's missed, and we
work as a team with them. When cost overrun happens
during COVID, And we assess, again, is this the
stock that the market will still be willing to
take? And it was yes. Sure, it's a very tightly
held market. And is this a risk that is materially
escalating the credit risk profile? Now, to a
degree, yes, because there's cost of the runs.
But however, if we go a bit longer and then give
them time and extra. extra capital to bankroll
the project. Is this a better outcome for investors?
It's yes. Because the worst case is to sell the
project halfway before the end realizable value
for a construction project is actually crystallized.
If a funder is backing off midway, it's a disaster.
So we, however, you know, we've got our frameworks.
We make sure our credit risk escalation is still
within our threshold and investors getting paid
for taking that extra risk. And the risk is still
within threshold matter so that because every
go up, every letter, every mark of the risk threshold
requires LaBasse to take a different approach
in terms of managing our risk profile. And we're
very. with that and for me and the team, we respond
to things quickly and we'll work around the clock
to solve problems and we're proud of that. So
this particular project went through the difficult
period and we stuck in there the whole time.
We backed the sponsors. We backed our judgment.
We backed the project. At the end, the project
was fully completed at the end of last year.
One of the few sweet factors was we were also
allowed, because at the initial DD stage, this
type of product is very short of supply. It's
extremely short of supply in Sydney North Shore.
So we allowed the project to go with lower pre
-sale threshold to allow them to sell better
for a better price when people can see the finishes.
And typically that's how these more luxury products
end up. So the project has overachieved, even
though there has been cost overruns. In terms
of the end sales value, one of the units has
picked up an extra 40 % in price and that's largely
compensated to this also extra ground on costs
as well. And again, because we've taken a view
to allow that flexibility there. It saved the
day. If we, let's just say, if they have to go
to the banks or, you know, on a more strict terms,
which requires selling the majority of the stock
at the beginning of COVID, plus the cost of run,
they will absolutely be upside down. So it was
a good case. Again, this particular case, we've
gone in land settlement. We've done a stretch
senior and we banked the project through. construction,
we're now on a residual stock tranche with them.
So it's a full life cycle again. Now that's really
interesting. And that's, you know, from the beginning
of our conversation, what I find very interesting
about this, the entire life cycle of a project
strategy is, and look, anyone that invests or
looking at assets, as we know, timing, you can't
control it to an extent. And if someone goes,
something goes badly. It's how do you respond
in that particular environment, which will determine
potentially how the result is. And it's nice
to hear that you're not forced into making, like
some companies or, as you mentioned, banks, they
force you into essentially cutting your losses,
getting out immediately to essentially stop the
bloodshed. That might help in the short term,
but the long -term ramifications of that can
be... huge when when essentially if you have
a full life cycle partner that understands there
are risks and it's not the decision about just
getting rid of it and stopping the bloodshed
it's it's okay what options do we have how can
we resolve this and still get a good outcome
which i find very interesting yeah if i'm understanding
correctly which is what you do right you essentially
help a partner yeah and also we ultimately act
you know, with the framework. So we also, you
know, we manage threshold matters, but we make
sound commercial decisions. And if something
goes wrong, one thing that our investors will
have and our project partners will have out of
the bus is if something goes wrong, one phone
call comes to us, the whole team, we will be
on the clock, 20 coffees a day until this thing's
done. How many in the team? I forgot to ask because,
you know, you can't be everywhere. How many is
in the Labasa team now? We're nine of us. We're
still British where everyone is very cross -trained
and multitasked. Six of us are full -time, three
of us are senior advisors. We're quite sufficient
in the way we are. Everyone multitask. Yeah,
right. The other thing which I found is what
I love about, you know, having these conversations,
we don't know who's listening. There could be
like a 16 -year -old kid going, I want to get
into property because my dad's in it and my grandfather's
in it. And, you know, is there any advice or
counsel you would have to a young mind, you know,
looking at the path of, you know, getting into
this particular investment space? Become a real
estate investment manager? Oh, yeah, anything
like going down the… Yeah, getting into the world
of the property side, the lending side, the equity,
looking at deals. Is there any – it's not just
a young mind being 16. What I've found, and you've
probably found the same, some of the brightest
people I've ever found in particular spaces are
doing something else. They might be 27, 30 years
old, listening to this, going, what am I doing
with my life? But I've been running projects,
I don't know, in liquor or a booze company or
an accountant, and they just want to change.
Is there any – thoughts you have to you know
anyone looking to get into this space you know
good good question good question and these are
um again the major million dollar questions for
for anyone to think about whether it's uh establishing
a footprint into a brand new area coming into
your career or uh as a career change i think
Before diving into the specifics of the industry
and whether it's, you know, of course, one, you
choose a rising industry. So the industry that's
still growing versus, for example, our station,
you probably guess it's a devising industry.
And if it's an industry that's fast growing,
that's good. However, that's definitely not everything.
You need to break it down to, okay, within this,
I want to first of all sail in the direction
of the wind, tick. It just means there's more
opportunity. Again, that doesn't mean if you
go reverse, there isn't. Life is never black
or white. Just remember that. So a tick of a
growing industry just potentially implies there's
more opportunity. Then, however, it's most important
to look into, okay, what specifically is it?
There's multiple streams within this industry.
Also, in real estate alone, you can choose to
be an investment manager, you can be a developer
or, you know, a valuer. And there's many different
streams. And before you go into that, I guess
real estate is the key word. So I think anyone
thinking of going to real estate side needs to
have a passion for real estate. You need to love
looking at properties and you feel energized
when you're talking about a property deal. And
that's the part about finding your passion. So
if it lights you up when we talk about property,
which I do, you're probably in the right direction
as well. And then if you fund the industry and
the property, as those two boxes tick, and then,
again, it's around your natural strength. What's
your natural strength? Are you more on the on
a deal side or on an analytical side? There's
various different type of roles which guards
the door of an organization in a particular stream
niche. Like Labasa is in this management house.
We also have our front office, our middle office,
which is the compliance risk strategy reporting.
And then the deal -making side, you know, what
is more suited for the individual, you know,
run and be the chief negotiator or you want to
be, you know, this very analytical mind and to
make sure everything's in order because you're
just naturally super organized. I think these
are not different to when people decide to make
a horizontal or going deep into one area. Coming
down to a few points. One is to do what you love,
which is, I'll end this with my definition for
happiness. I do openly share with the team and
some of my customers hear this too, and it is
how I run my life. So my definition of happiness
when I left the banking world, this is what has
driven me to establish Lobasa, is do what you
love. based on what you're naturally good at.
So choose an area you're passionate about and
do it the way you want. So, you know, how you
want to, which, what type of firms aligns with
your values, what sort of cultures that they
have, or do you want to go and go solo? And if
you go solo, you enjoy the flexibility or you
actually want to go together with others and
go further, right? That's another choice as well.
And then last point is crucial, is do it with
people you love. And for Labasa, I choose very
carefully who comes into the firm. And we sometimes,
you know, unfortunately, we have to do some selections,
re -selections. It's very important who we share
our lives with and enrich the journey. You know,
the financial outcomes will come. When you take
those three things, we don't even need to think
about it. We will create successes for our customers.
We will create success for self, which is self
-development, exceed our version today, tomorrow,
right? So build self in a spiritual and capacity,
holistic manner. We talk about this a lot within
the firm. So I think going along, do what you
love, do it the way you want. Do with people
you love. If you go with those three principles,
whether it's real estate or something else, you're
on the right track. Well said. Couldn't agree
more. If anyone wants to learn more about Labasa,
how can they reach you? Our website is labasa
.com. We also update some of our insights both
on the website and on LinkedIn corporate profile.
We just started a Facebook profile as well, which
is something new. So on our website, if you're
interested, parties can also subscribe to our
newsletters. We do share our insights regularly
given we're seeing such a large volume of deals
and we do have some good understanding of how
things are moving. So I would encourage everyone
to check us out. Fantastic. All right, Melissa,
it's been really insightful having you on and
that conversation was a lot of fun and I'm looking
forward to picking up again soon. I certainly
enjoyed our conversations. Thank you again for
having me here. All right, Melissa, have a great
day. You too. Bye for now. To get in touch with
York, head to our website.