Ruminations on a real estate cycle
Ruminations on a real estate cycle
1 December 2018

We are humble enough to recognise we don’t always get things right. In fact, we have been wrong about plenty of things along the way. To be successful, half the battle is learning from your mistakes and enhancing your strengths – we felt this was a topic worth exploring in the context of Forza Capital.

This topic in part was stimulated by a very insightful question by a prospective client, “Are there any deals you regret not doing?” Our answer, one certainly not anticipated by the client was, “Sure, how long do you have to go through them all!”

After providing this response, we had cause to reflect on it later in the day. We considered our response to the question would be fairly typical, but it was clearly anything but. This was interesting to us. Why is it that others do not appear to have as many “one that got away” stories?

At Forza Capital, it has always been our belief that we would much prefer to regret the deals we didn’t do, as opposed to those we did do. Often the investment discipline is in walking away from a transaction that is not quite right as opposed to hoping you got the risk analysis correct.

It has been nearly 9 years now since Forza Capital was established, and during that time we have seen the tail end of the GFC, the Greek debt crisis, the election of Trump and one of the most amazing asset inflation cycles ever witnessed. As you never stop learning, we recently held an internal workshop where we reflected on our successes and failure. We felt the commentary arising from this process was interesting enough to share.

Where did we get it right?

  • The deals we did were the right ones – Of the transactions we have realised since inception we have averaged an IRR of 29% (per annum, net of fees) and at all times we had a very strong hedge to equity risk. We are very pleased with our strategy execution and remain immensely proud of the results we have been able to achieve.
  • Targeting the right client base – From inception, Forza Capital made a clear choice to target independent financial advisory groups and self-directed private investors/families. The reasoning behind this is we wanted to interact with people who were the decision makers and would stand behind the conviction of their decision making. We also saw the inherent conflicts in many investment structures, especially where commissions were involved, and we sought to avoid participating in any of this. We are proud to say we have never paid a commission. Back in 2010, this was a pioneering approach given the level of vertical integration and cross selling in financial services but we elected to implement a commission (and conflict) free platform. The recent Royal Commission suggests this was a prescient decision and one by which we find the market is now pivoting towards us.
  • Being honest and open in our communications – One of the lessons we learnt from the GFC was that disenfranchising your most important asset – your clients – was the shortest path to business failure. As such we made a commitment to always tell it as it is – good, bad or otherwise. This has meant on occasions we have had to have tough discussions when we got things wrong, but with the passing of time it has produced a critical outcome – trust. In the business of managing money, the most important currency is trust/integrity and a constant focus on doing the right thing by clients has borne significant fruit for Forza Capital.
  • Recognising what we don’t know –We recognise we don’t know everything and thus we have surrounded ourselves with subject matter experts from a wide range of industries to ensure we fill our knowledge gaps. It is also why Forza Capital, a relatively small business, has a highly regarded and independent non-executive Chairman. We like our views being scrutinised and challenged, and additionally, we like being responsible for our actions to another party. We think it is good governance. Internally, we also continually challenge ourselves to be “constantly curious”. Only by exploring the fringes do you find emerging trends and the next opportunity.

Where could we improve?

  • We were at times too cautious – Over the course of the cycle post GFC, taking investment risk has been richly rewarded. In the early part of the cycle, this risk was more through entering the cycle early. At this time there were plenty of opportunities, but it was tough convincing investors it was the right time to invest. Fast forward 7 or so years and investors are taking on significant late cycle risk by acquiring assets at ever inflating prices, but to date they continued to be rewarded. We started exercising caution and de-risking 18 months ago as we felt the cycle in many sectors was full. In hindsight, this was perhaps too early, and we would have been rewarded for taking on tail end cycle risk, but at the time we did not feel the risk/reward balance was there. There are also a few transactions in the early days of Forza Capital where we sought to totally de-risk a transaction, and ultimately walked away as we could not do so, only to later realise we could have taken on marginal additional risks such as leasing vacant space or renegotiating lease expiries with sitting tenants without compromising the fund assets. In hindsight, we gave up some great deals through being far too cautious.
  • Capital constraints limited our early development – Forza Capital is funded entirely by the balance sheets of the directors. With limited capital, but strong expertise and a handful of quality investment contacts, the intention was to establish an investment business driven by ethics, hard work, discipline and patience. Whilst we are of the belief we built the business the right way, it came at a cost in the period 2012-2014 when there were fantastic investment opportunities but we had limited capital capacity. If Forza Capital either partnered up with another business, or bought in a capital partner, we could have significantly increased deal capacity and business growth by giving a fair bit away. Whilst we rue some of the transactions we did not undertake because we could either not raise the money, or agents/Vendors being hesitant on backing a young business, we believe we made the right decision to retain control of our business and preserve what we set out to achieve.
  • Too great a focus on property and not enough on capital distribution – In the early phase of our business, we felt if we could source the best possible deal, then raising capital would be straightforward. Wrong. The reality is, sourcing capital is equally important as having the right deal.  It goes without saying you need to find the right opportunity, but if you cannot put it in front of the right people, you can never consummate the transaction. Whilst we wrong footed ourselves in the earlier years of the business, a concerted effort over the last 3-4 years now sees us with the ability to find substantial capital solutions. All we need now is to exercise patience and vigilance in finding the right opportunity.

All in all, we got more things right than we did wrong. More importantly, of those things we could improve, most of them stemmed from being risk adverse, as opposed to being unbridled optimists, which is probably the right way to be in property investment! From an investment perspective, whilst we see plenty of late cycle behaviour and risk at the present time, we are starting to see the emergence of opportunity in limited areas. Right now, discipline and patience are required to secure the right investment, but based on what we are seeing we think there could be some quite interesting investments emerge in 2019.

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