'Don't look for shortcuts when it comes to investing.'
THE latest collapse again highlights the fact that many investors are not following the basic fundamentals of sound investing.
Here President of Australian Direct Property Investment Association and head of Macquarie Direct Property, Richard Butler, gives some pointers on investing in today’s property investment market and urges investors to follow the basic rules of sound investing before giving money to ‘property’ schemes.
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There were some basic principles investors should follow to help avoid losing money on investments that may be marketed as ‘property’ investments, but are in fact mezzanine debentures and unsecured notes used to fund development projects.
According to the Australian Securities and Investments Commission, mezzanine investing literally means ‘middle’ and therefore investors are actually supplying the middle ‘slice’ of the money. The mezzanine investor would more than likely receive a second mortgage as security. However, in the event of default, the second mortgage is only of value if there are sufficient funds after the first mortgage is fully paid.
Importantly, the investing usually operates outside the financial services laws that protect investors. ASIC advises that while mezzanine funding is legal, it is assumed that investors have a high level of knowledge and understand the risks associated with the investment.
When you look at the spectrum of property investing, ‘bricks and mortar’ investing such as the family home and investment properties, has generally proven to be the least risky – and best understood – style of property investing,” Cutler said. “Lower yields have been the historical norm.
At the other end of this spectrum are the development funds, which take on more risk and hence expect higher returns. Developers of property assets generally expect at least a 15% return on their investment because of the risks involved.
The recent growing economy had lead to an increase in development and construction, which has created demand for more funding than the usual debt and equity structures provide.
The heightened building activity has resulted in an increase in mezzanine and unsecured investment markets.
Investments companies are being created to meet the funding needs of the development companies. In some instances, the development company is owned by the same group behind the investment company. And these investment companies are actively targeting smaller investors.
The rate of return from the investment should be commensurate with the amount of risk. Unfortunately what we are seeing is investors putting their lifesavings into products promising an income return of 9.5%, but carrying the level of risk for which developers expect returns of 15% or more.
ADPIA has outlined a number of crucial steps investors should take before they commit any money to any investment schemes:
· Firstly, look at the managers behind the fund. What is their track record? Who owns the investment company? Also look at to whom the manager may be lending money. Are the two parties related in any way?
· Make sure you know what you are investing in and where you sit in the repayment order if things do go sour.
· Next, examine the structure of the investment. You don’t need a high level of investment know-how to do this. Just make sure you know whether you are investing in property assets, or simply lending money. This means looking behind the headline return numbers and really understanding where the income is coming from. And if you don’t understand it, then be wise and speak with someone who does.
· Read the product disclosure statement (PDS). Is it too simple and not backed by strong financial information?
· But perhaps more importantly – always get the opinion of an independent, trusted third party. This could be an investment report from a credible research house or a discussion with a licensed financial advisor. A small fee to a professional up front is never wasted when you are wanting to protect your investment. This professional advisor should also check with the Regulator and check into the Directors of the Scheme.
· Finally – and crucially – diversify, diversify, diversify. Don’t put all your funds in one investment vehicle, no matter what it promises. ADPIA’s own research and publications keep stressing the point of never putting all your savings in one area. We cannot stress this enough.
Debentures, unsecured notes, promissory notes and similar instruments are not property investments – investors need to carefully scrutinise exactly what they are investing and make sure they are an ‘owner’ of a property asset – and not just a ‘lender’ to an investment scheme.
This is why so many investors have been caught out in recent times – they do not fully understand the terminology and wrongly believe they ARE investing in bricks and mortar when in fact they are not.
The fact is,
According to a recent report prepared by Atchison Consultants, direct property delivered a solid 10.5% per annum in the 10 year period to 30 June 2006. The report further shows that direct property produced the highest levels of income of any other asset class over the same period.
A key platform for ADPIA is to promote better understanding and education around property investments. Cutler encouraged investors to consider the range of resources at their fingertips to help avoid investing pitfalls.
By Richard Cutler, President of Australian Direct Property Investment Association, and chief executive of
*ADPIA is the peak industry body representing the $20 billion direct property investment sector, with more than 250,000 investors.