How Australian Property Funds Allocate to Development

Why Funds Allocate to Development

Stabilised property assets deliver 5.5-7% net yield with modest growth. Development delivers 15-20% IRR but with construction, planning, sales, and market-timing risk.

For diversified property funds, blending 8-15% development with 85-92% stabilised income improves overall portfolio IRR by 100-200bps while keeping risk acceptable.

How Funds Access Development

Three models:

1. Direct development
Fund owns the site, manages the project. High control, requires significant operational capability.
- Examples: Mirvac, Stockland, GPT, Lendlease, Cbus Property
- Risk: full operational exposure

2. JV with developer
Fund contributes capital, developer contributes operational capability + promote.
- Most common model for non-listed funds (Charter Hall Wholesale, ISPT, AustralianSuper)
- Risk: partial operational exposure, partner-selection risk

3. Pre-funded forward fund
Fund commits to acquire completed asset at agreed price. Developer manages construction.
- Risk: counterparty (developer) and market-shift between commitment and delivery

Risk Frameworks

Major Australian property funds typically apply:
- Maximum 8-15% of portfolio in development at any time
- Maximum single project size 2-3% of portfolio
- Pre-sale / pre-let requirement before drawing capital
- Sponsor diversification (no more than 30% with one developer)
- Geographic diversification (no more than 40-50% in any single city)

Brisbane Allocation Trends

Major funds have shifted toward Brisbane:
- 2019: Brisbane ~12-15% of fund property portfolios
- 2025: Brisbane ~22-28% of fund property portfolios
- Forecast 2030: continuing toward 30-35%

The shift is structural — population, yield, infrastructure.

Vendor Implications

For vendors selling development sites to fund-backed buyers:

1. Fund-backed developers settle reliably — institutional discipline
2. Pricing tier sits at institutional level — 8-15% premium over speculative
3. DD timeline 90-180 days — fund approval cycles
4. Conditions tend to be standard — funds use template documentation
5. Settlement risk concentrated in fund approval, not finance — different risk profile

Vendor Strategy

When negotiating with a fund-backed developer:

1. Verify fund commitment — written letter
2. Understand JV structure — who has decision rights at each stage
3. Negotiate based on fund's standard terms — they're often non-negotiable but predictable
4. Allow time for board / IC approval — typically 2-3 cycles
5. Use back-up offers — fund approval can fail; have alternatives ready