Learnings From Our Investment In Toowong

In September 2023, RW Capital sold one of its largest development projects in Toowong Brisbane, at a 32.5% premium to valuation. Whilst we are satisfied that we obtained the best possible result available in the market and delivered a positive return to our investors, we couldn’t help but feel that the sale was a bittersweet moment. Given that the property was such an amazing development site with so much potential, could we have achieved a better return for investors?

After four years of ownership and multiple attempts to proceed with the development of the project, we decided to sell the property as a cleared development site with DA approval for two towers and a shopping centre within a new proposed local town centre. The main driver of our decision to sell was the ever changing and extremely tight construction market in Southeast Queensland, which meant we couldn’t justify the risk of proceeding to construction of a project this size.

By way of background, we acquired the 9,000sqm site in June 2019. We were really excited about the asset and the opportunity to transform it into a prominent landmark in Brisbane, alongside our partner State Development Corporation (“SDC”). The vision was to create a central hub for office tenants and residents, where everything you need is at your fingertips, in a gateway location to Brisbane’s western suburbs and adjacent to train, bus and ferry infrastructure.

Demand from residential purchasers and retail tenants was strong. SDC successfully pre-sold the residential apartments not once, but twice, at favourable rates. They also improved lease agreements via increased rentals and reduced incentives. However, construction prices escalated at a pace faster than we could increase revenues. To put it in context, the final construction price agreed in September 2022 was 40% above the initial indicative construction price received in September 2019, from the same top-tier builder.

As a result, and following consultation with our investors, we decided to engage Ian Hetherington (Ray White Capital Transactions) and Christian Sandstrom (Knight Frank) to sell the property on an as-is basis with DA approval. After months of negotiations and due diligence, a sale price was landed with a relatively quick settlement of 60 days.

Although investors received a 9.35% p.a. return over a four year investment period, and we managed to secure a strong sales price at a time of significant uncertainty for development sites, it was not the >20% p.a. we set out to deliver.

So, what were the lessons? The most important one was when the market (in this case the construction market) turns against you, it is very tempting to push forward and attempt to make the numbers work. After running the first formal construction tender in late 2021 and receiving very disappointing pricing in 2023, we should have sold the project then or at least stopped spending funds trying to make the numbers work. In hindsight, we probably would have achieved the same sale price a lot earlier, and without incurring additional costs on redesign and marketing as we ‘chased’ the construction market.

It can be hard to let go sometimes, especially when you worked so hard on a project that was once so close to fruition..