Is it really 'bricks and mortar'?

29th Jun 2007

Investors need to learn to spot investment schemes that may be marketed as 'property' investments but are in fact loans to developers, the Australian Direct Property Investment Association (ADPIA) says.

Three major property groups have collapsed in recent times, the latest being Australian Capital Reserves, which reportedly left 7000 investors out of pocket to the tune of $300 million. The Westpoint and Fincorp collapses also hit some investors hard.

ADPIA spokesman Richard Cutler says investors need to check that their property investment will mean they take ownership of bricks and mortar.

"Debentures, unsecured notes, promissory notes and similar instruments are not property investments," Cutler says. "Investors need to carefully scrutinise exactly what they are investing (in) 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."

Heightened building activity has resulted in an increase in mezzanine and unsecured investment markets, which Cutler says don't always offer returns commensurate with their risks.

"Unfortunately what we are seeing is investors putting their life savings into products promising an income return of 9.5 per cent but carrying the level of risk for which developers expect returns of 15 per cent or more," he says. The products are being marketed to small investors, who may not realise the level of risk involved.

ADPIA has outlined a number of steps investors should take before committing money to an investment scheme. The most critical is to make sure you know whether you're 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," an ADPIA statement says. "And if you don't understand it, then be wise and speak with someone (independent) who does."

ADPIA also advises investors to:

• Check out the track record of the investment scheme's owner and managers;
• Find out who the fund is lending money to (if applicable) and whether the two parties are related;
• Read the product disclosure statement and ask yourself whether it is too simple and not backed by strong financial information;
• Get the opinion of an independent, trusted third party, such as an investment report from a credible research house or a discussion with a licensed financial adviser.
• Diversify - don't put all your funds in one investment vehicle, no matter what it promises.

 

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