As the year draws to a close, GPS has performed its usual review of its strategic direction.
There aren’t any surprises. It continues to be about looking after our investors, borrowers, and builders and then applying some tight management. This strategy has worked for GPS for 30 years.
The last few years demonstrate why I include builders in the mix. It goes back to understanding the risk model of residential property development. A builder not being able to complete a project is a significant risk. This is one of the reasons I value their position and input.
The bank model for lending is to offlay risk, rather than to establish long-standing and genuine working relationships. They offlay sales risk through pre-construction sales. Builder risk is offlaid through fixed price building contracts.
The last few years have demonstrated that this model doesn’t work, where there is an escalation of building costs combined with an increase of sale prices for completed products. As revenue for the projects is constrained by the high level of pre-construction sales, there is a reduced ability to deal with escalating building costs. The inevitable occurs. Builders can’t complete the building works for the contracted price, and they collapse.
The relationships GPS has grown over the past 30 years, and our business model with quite a bit of quiet work in the background, has provided GPS with the base to weather the storm.
Loan pushout due to industry wide material and labour shortages has been the biggest ramification to the GPS business. Our conservative approach, and the trust of our loyal investors, has allowed us to deal with this issue.
Inflation will continue in 2024. GPS is moving in a measured way to increase borrower interest rates. These increases will allow GPS to meet investor expectations for increased distribution rates in 2024.
A credit crunch has begun for residential development finance. It isn’t surprising that due to the failures over the past few years for the banks they now have a reduced appetite for new lending. There has also been a dramatic decrease in the cheap overseas monies and an increase in the cost of institutional monies.
This is all good news for GPS and its investors. We won’t get greedy and seek to expand. We will stick to our long-standing and proven business plan.
The loan pipeline for GPS is full of repeat borrowers and well known and respected builders. It’s more of the same.
GPS will, finally, be open to new investment. This isn’t to grow the business. It’s all about maintaining our business at its optimal size in terms of the number of loans we have in our loan book at any one time. As building costs and revenue from projects increase from inflation, the average size of loans must also increase. This requires additional funds under management.
Our Pooled and Select Funds remain the same. We will be accepting new monies from wholesale investors into the Select Fund. The minimum investment amount is $500K per loan. Such investments will have a higher distribution rate.
We are also looking at attracting another co-investment partner to assist GPS to offlay risk in larger projects.
GPS is a relationship business. New investment is mostly from referrals from our loyal investor base. Referrals will be truly appreciated.
If you have any queries or wish to further discuss any of the above, then please contact either Courtney, Olivia or me.
Thank you for your support and loyalty during 2023.