This has been a hot topic in recent months for GPS investors. It is therefore no surprise that this complex item was discussed at the last GPS board meeting. The short answer is that we expect that there will be increases in the GPS distribution rates but, not quite yet.
It is important to note that the distribution rates at GPS have never been tied to the RBA or other arbitrary rates. They are determined by our loan book and market conditions within the residential development industry. At the same time, we have our underlying obligation to act in the best interests of investors and to put their interests ahead of our own, which also plays an important part in our decision making.
To change rates quickly, we would have to raise our borrower interest rates mid-term. This is not good credit policy and prejudices our ability to achieve the high level of repeat borrowers which our investors expect from us. When interest rates are increasing, we must start writing loans at higher interest rates and build the depth of these loans within our loan book before we can pass them on to our investors through higher distributions.
This delay worked to the advantage of GPS investors when interest rates were falling. We were slow in passing on reductions in distribution rates because we were able to run out our loan book of higher rate interest loans. This ensured a longer period of higher rates for our investors.
As demonstrated by how long GPS has been operating, we are in it for the long game with the priority being not losing any money, and having consistency in return to investors.
While I have a good degree of confidence in the residential development market in Southeast Queensland for the next 10 years (thanks to the Olympics), I believe that there is still a level of uncertainty which requires us to exercise caution. Unfortunately, poor policy and implementation by our state government does not assist with this uncertainty.
A decision has been made by GPS that it is, again, not the time to mindlessly follow the competition but to stay true to our tried and tested policies. Our priority is to continue to improve the quality of our loan book, as better quality borrowers improve our productivity.
Our goal is to be able to increase distribution rates through a productivity dividend, rather than increasing our risk profile.
My view of the current market is that it is not the time to be chasing higher returns through higher risk. I back this up by how the Woodhead family invests in its own originated and operated business for over 25 years, and now in its second generation. I want to see more stabilization in building costs. I want to see how far property prices grow and the depth of the buyers.
GPS has differentiated itself from the competition over the years. A direct investor and a largely direct and repeat borrower base, sticking to our knitting, treating investors and borrowers as clients are a few examples.
An important differentiation is that our investors invest with us and not in us. While this may appear to be a pedantic differentiation, it is important in understanding our mind set and what drives us.