Industry Insights 25/5/2017

Do Tier 1 Developers Even Exist?

Jordan Ralph
By Jordan Ralph
Do Tier 1 Developers Even Exist?

Whilst looking at job ads on Seek recently, I noticed one of my industry peers running a job ad for a “Tier 1 developer.” It got me thinking; what does that actually mean?

Having worked in recruitment for the development industry for 2 years and talking with a range of industry contacts, categorizing developers is not that easy. Building and construction is simpler, with the idea of Tiers relating fundamentally to turnover and the job size the business can handle. In loose terms, builders can be classified as:

• Tier 1: $1B+ turnover, jobs $250m+

• Tier 2: $200m turnover, jobs $50m+

• Tier 3: $50m turnover, jobs $10m+

So what are the rules for classifying developers, and do they exist? Can you classify them by the revenue they generate, value of acquisitions, or the related construction costs? Maybe total debt and how well the banks know them? Most people have the perception that the large corporate companies (Mirvac, Frasers, Stockland and Lend Lease) would be classified as Tier 1 Developers simply due to the size of the company, but this does not consider project sizes or values, and how successful their projects are.

Looking at Victoria’s residential market (the market I cover), if the turnover or revenue of projects is how Tier 1 developers are classified, then companies like Yarra Park City/OSK Property (Melbourne Square – ~$2.8Bil) and Glenvill (Yarra Bend – ~$1.2Bil) would clearly be up there. But these companies are not that large in terms of their team sizes, and don’t necessarily have a high annual turnover, thus may not fit the typical Tier 1 description.

Tier 1 contractors are geared to only take on projects above a certain constructing cost. Why? Because their overheads need big jobs to support their machines. Developers on the other hand, are not governed by project size, but by the equity they have, the funding they can obtain and, the return hurdles they need to achieve.

Taking all this into account, anyone who tells you that a developer is a ‘Tier 1’ may be using a catchy phrase without having thought about what this means.

My final suggestion on Tiers is as follows:

• Tier 1: Owner or CEO has appeared in the Fin Review looking pensive and strategic, most likely owns a supercar or yacht. Knows the Planning Minister on a first name basis.

• Tier 2: No longer has to work but trying to be bigger/better/shinier than the people they went to private school with.

• Tier 3: Currently “consulting” whilst raising equity/begging to get the first acquisition away. No fingernails left in case they have to tell the wife they may need to sell the house.

What do you think?