It’s one of the most basic rules of property development.
And the collapse of Bathla Group is a powerful reminder of what can happen when you lose sight of it.
This is the story the mainstream media has yet to report.
And that’s understandable. Most journalists are not property developers or builders. They are reporting on a major story with what is presented to them, but many have not yet got to what those of us in the industry believe is at the root of the Bathla collapse.
In the years since I retired from cartooning, my retirement property hobby has grown into a proper cash-flow property business.
Not by luck. Not by fortune.
But by studying trends, pricing, demographics, construction costs, rents, yields, finance and market data — and inputting that information into a custom-built, 18-sheet master feasibility spreadsheet that tells me whether a land site works or fails.
And here’s the important part: around 90% of the property I review goes straight into the bin.
Why? Because the numbers don’t work.
That’s the discipline required in property development.
You don’t fall in love with a site. You don’t allow ego to determine what you’re prepared to pay. And you don’t assume a rising market will eventually rescue a bad acquisition.
For years, Bathla was one of the biggest and most successful property development businesses in NSW. It built an extraordinary enterprise and became a major force in the industry.
But according to people close to the ground, the warning signs of its eventual collapse were visible well before the headlines.
What did insiders see?
They saw a giant in the industry straying from the fundamentals that made it great. They saw what appeared to be increasing confidence turning into arrogance, with sound, conservative decision-making seemingly becoming clouded by decades of success.
And most importantly, they saw acquisition discipline being lost.
Bathla’s early success had earned the confidence of lenders and access to a massive pool of other people’s money.
According to industry insiders, that access to capital allowed Bathla to compete aggressively for development sites – sometimes reportedly outbidding other experienced developers by millions of dollars.
That’s where the problem begins.
Because when you use enormous amounts of borrowed money to overpay for land, you don’t just increase the purchase price. You destroy your future margin.
In property development, the acquisition is arguably the single most important part of the entire process.
If you buy the right site at the right price, you have options. If you overpay, you spend the rest of the development trying to make up the difference.
And sometimes, you simply can’t.
Recently, a relatively small Bathla site – an 11-lot subdivision – came to market.
Bathla reportedly paid approximately $6.5 million for the site four years earlier, subsequently gone to court to obtain a DA, and was now attempting to sell it. A feasibility assessment put the site’s current value at approximately $2.5 million.
That’s a potential $4 million difference on what was reportedly one of their smaller sites – after four years of holding costs and a court battle to obtain development approval.
Another industry player says they submitted what they considered to be a very competitive offer on another site.
They later discovered they had lost to Bathla – reportedly because Bathla paid approximately $8 million more than their offer.
These are individual examples. They don’t, by themselves, explain a $3 billion-plus corporate collapse, but they illustrate what many people in the industry were seeing.
The fundamentals were changing.
And Bathla was apparently continuing to operate as though the conditions that had created its previous success would continue indefinitely.
But the property market doesn’t work that way. For years, rising property values can hide an enormous number of mistakes.
You overpay for the land – the market rises.
- Construction costs increase – the market rises.
- Finance becomes more expensive – the market rises.
- Your development margin gets squeezed – the market rises.
- Until one day…the market stops rising.
Warren Buffet famously once said;
“Only when the tide goes out do you discover who’s been swimming naked.”
When the market stops rising, mistakes are exposed.
- Construction costs have increased.
- Interest rates and finance costs have increased.
- Development time frames have increased.
- Sales slow.
- Prices fall.
- Margins disappear.
And suddenly the market is no longer making up for mistakes made at acquisition.
The same leverage that helped accelerate growth can then accelerate losses.
And when a business has accumulated billions of dollars of debt and a huge development pipeline, a relatively small deterioration in margins can become an enormous problem.
That’s why this isn’t simply a story about construction costs or interest rates, as Bathla Group Managing Director, Bhart Bhushan has suddenly claimed.
This is a story of a much deeper problem. The deeper lesson here is about discipline in good times to quarantine business in slow times.
Success can be dangerous.
The bigger you become, the easier it is to believe that the rules that applied when you were small no longer apply to you. But they do.
The fundamentals don’t care how big you are. They don’t care about your reputation. They don’t care how many houses you’ve built. They don’t care how much money you’ve made in the past.
They only care about the numbers.
You make your money when you buy.
You protect your money through disciplined feasibility.
You preserve it through conservative assumptions and risk management.
And you lose it when ego replaces discipline.
I’m sure that when Bathla started, these principles were followed diligently.
And judging by the size, longevity and remarkable enterprise that was built, they were probably followed successfully for many decades.
But decades of good work can be undone surprisingly quickly when the fundamentals are abandoned.
That’s perhaps the biggest lesson from the Bathla collapse.
Never let success strip you of the principles that created your success in the first place.
Stay humble. Buy well. Know your numbers.
Don’t let ego determine your price.
Don’t use the availability of other people’s money as an excuse to overpay.
And never assume the market will rise enough to rescue a bad deal.
Because when the market turns, the numbers always win.
And in property development, the first and most important rule remains:
YOU MAKE YOUR MONEY WHEN YOU BUY.
