One of the questions that the NZ Property Investor has been trying to answer is, can people make money out of packaged property investments and if so, how much?

To answer this it was necessary to try and understand the model being used by these companies, and who pays what to whom and when.

Answering this question has become quite difficult.

One way of looking at the sector is to compare it with other investments, with perhaps managed funds being the most useful.

Here is how to think about it. As an investor wanting to buy either shares or residential property, you have two ways of doing this. One is buying the asset directly and the other is to use professional management.

Many Kiwis buy their property directly and actively manage it. That is, they will determine their strategy, find suitable properties, arrange the finance, do the deal and manage the investment.

In this approach they are directly exposed to all the gains or losses in their investment selection.

Likewise, if I want to buy shares, I will determine what I am looking for (eg: growth potential, dividends, defensive stocks etc) and I will buy and manage the portfolio myself.

Under this method I will get all the gains or losses.

Using the professionally managed model, things are a little different.

If we take the sharemarket example I can pick any of around a dozen fund managers (this includes the big names such as AMP, ING and TOWER through to smaller firms like Fisher Funds and Milford Asset Management) and they will do all the work, selecting shares, researching them, monitoring them, paying tax and so forth.

They charge a management fee and in some cases have a performance fee as well.

These are clearly described and there are general industry standards about fee levels. The performance of these funds is regularly reported so people can see what money is being made.

As an investor I will get the performance of the fund, less fees and expenses.

Now we come to packaged property or professionally managed property.

This is the equivalent of the fund manager and shares.

The packager will find properties, do the transactions, look after the building and tenant management etc – all the equivalent types of things a fund manager does.

The difference is that these properties aren’t covered by securities law and the documentation around fees and management expenses isn’t transparent.

It is difficult to see what they expect their “funds” will return and who is earning what along the way.

Also there is a major difference. One of the selling points for a managed fund is that it owns lots of different shares and is diversified so if one goes badly hopefully performance will not be too badly affected because other shares are doing well.

With packaged property, investors are buying just one “share” at a time and therefore expose themselves to much higher risks than if they owned a diversified portfolio of securities. (This is also true for direct investors). Added to that there is a high degree of leverage and part of the return comes from tax credits and depreciation.

One of things which is clear to The Landlord is that there needs to be more rules around some of this property investment. It’s a point argued before, but something which the Minister of Commerce picked up on this week too.

PS: To see your our in-depth article on how these companies work, pickup this month’s issue of the NZ Property Investor Mag, either here, or by calling 0800-345675 or visiting your local bookstore.

The BNZ’s report on housing prices isn’t necessarily telling us anything new on prices. We know the market is over-valued, and that it has to fall.

Just look at the hundreds of stories we have seen in recent month on home affordability.

All markets go through cycles where assets get over-valued and then come back. Often, like the New Zealand sharemarket at present, they actually become under-valued and present investors with great buying opportunities.

If you go through a sharebroker’s price list at the moment you will see nearly every decent company listed on the NZX is trading at a discount – that is you can buy the shares for less than what their assets are worth.

It’s like having an Easter sale again.

The question for the housing market is how far will house prices fall and will there be “cheap” houses for sale? No doubt about it – yes there will. But not every house will be “cheap”.

People need to be careful about taking predictions about where prices are going and then apply it to every sale.

One of the issues though is that it is getting harder and harder to borrow money from banks.

In the past week the big banks have started to tightened lending criteria and some of the smaller, non-bank players are under pressure too. Some have disappeared already and many of the lo-doc lending products used by property investors have been pulled.

Added to that rates are high. We track home loan rates on landlords.co.nz and there is nothing below 9% and plenty of rates at or over 10%.

Money is expensive.

But the good news is that the housing market won’t crash. Buyers waiting, there is strong employment and at some point (maybe this year) lending rates will come down.

Whenever there is a downturn in any market, whether it is shares or property, there are always one or two people who try to make a name for themselves by predicting all sorts of outlandish doom and gloom.

The latest is one crowd who is saying the housing bubble has been so big that it will take years and years to recover. Indeed, the suggestion is that prices will not rise back above their November 2007 peaks until 2018 at the earliest. The size of the bubble, they say, is so large it may take until 2028 before prices recover and people who invested in 2006 and early 2007 start seeing capital gains again.

While I am not an economist, claims like these seem ludicrous and designed more to create publicity than provide any meaningful insight into the market.

There are a hoard of well-qualified and experienced economists out there making their own predictions, and none I have seen bare any resemblance to the latest, unqualified, soothsayer.

What I have seen and heard is that there are lots of variables that drive the property market, and predicting some of them is very difficult.

For instance, immigration is a key driver of the market. While numbers are down at present, the government can quite easily turn on the tap that will provide a fillip to the market.

There are lots of other factors like the government making houses more affordable, buyers who have been priced out of the market sitting on the sideline and strong employment levels, which arguably provide a good backstop to the market.

There is no doubt the market is falling from its high growth rates of recent years, but that doesn’t mean total darkness is descending on the housing sector.

I hear an increasing number of stories about landlords wanting to sell up and do something else with their money. That is normal behaviour. However, I am also hearing stories, and seeing people get quite excited, about the buying opportunities which are starting to emerge.

One thing which has intrigued me in recent months is how government MP Clayton Cosgrove is so anti real estate agents.

He seems to take whatever opportunity he can, even when he is overseas, to get stuck into real estate agents, labeling them all “land sharks” and implying they are just rip-off merchants.

Sure there are some dodgy ones, some questionable practices and some issues around the way agents are policed, but….are they all dodgy?

Clayton’s language makes great sound bites for telly and radio, but isn’t warranted.
Last week, after select committee hearings on the new real estate agent legislation, he was up to his same old tricks. However, United Future leader, Peter Dunne, (who calls himself Mr Common Sense) played a card not many expected.

In a release which has probably gone unreported, he says the United Future party “will withdraw its support for the Real Estate Agents Bill…unless there are major changes to the legislation and the sponsoring minister, Clayton Cosgrove, adopts a more consultative attitude.”

“It was clear from today’s Morning Report interview that Mr Cosgrove is maintaining a belligerent, bully boy attitude towards the Real Estate Institute, and his claims to be consulting with the Institute are undermined by his inability even to get the name of the Institute’s President right,” he said.

There is no doubt that the real estate industry needs better processes to clear out the sharks and the dodgy operators, but that won’t be achieved by bellowing at everyone and listening to no-one.

If ever there was a group of “advisers” who needed regulating then it’s the ones who sell all this Blue Chip stuff, or what we call packaged property investments.

NZ Property Investor Magazine has been examining the collapse of Blue Chip. What is amazing is that “investors” bought nearly half a billion dollars worth of property through Blue Chip in a year.

If you think about all the other crowds who are selling this stuff then the sector is a significant player in New Zealand’s investment markets.

Although people are being sold this stuff as an investment and “for their retirement” it falls outside of the securities laws.

This is absolutely ridiculous.

New disclosure laws that came in on February 29 don’t have any impact as the people selling this stuff aren’t investment advisers.

According to the Securities Commission an “investment adviser is a person who gives investment advice about securities.”

All this packaged property stuff isn’t a “security”.

My discussions with the Securities Commission indicate they don’t have any jurisdiction over this, rather it falls to the Commerce Commission under the ambit of Fair Trading Laws.

I can’t see this being particularly useful.

The next bit of adviser regulation is the bill currently before Parliament that “licenses” advisers and makes them all join an Approved Professional Body, who then regulates them. Again, it appears that these rules won’t capture people selling – I wouldn’t call it advising – on packaged property.

Commerce Minister Lianne Dalziel says she has an open mind to changes to the rules, but it is also understood any changes have to be careful and not capture ordinary real estate transactions.

That’s fair enough, but it can’t be to difficult to develop some rules which capture sellers of packaged property.

A couple of months ago I commented that getting finance for property deals was getting harder and harder to obtain and that lending criteria was tightening.

Recent conversations with a number of non-bank lenders suggest that this situation may change quite quickly.

I have come across a number of organisations who have money to lend are keen to find new business – this can only be good news, especially when you look at the latest real estate stats.

In the past week there have been releases from Barfoot and Thompon, QV and REINZ which all paint a gloomy picture of what is happening in the market.

The key messages being that vendor price expectations are too high, housing inflation has dropped from over 10% to being close to static, and the number of days to sell is increasing.

While it’s easy to be gloomy on what is happening, there are positives out there too. BNZ chief economist Tony Alexander said last week that the media are taking a too pessimistic view of the market and not reporting the positives. I tend to agree with him here.

Amongst the positives he lists are strong employment, buyers waiting on the sidelines for prices to become more affordable and rising rents.

Another new positive which, if it eventuates, will help the market is the prospect of interest rate cuts.

While it would be foolish to predict when they may happen there is an increasing likelihood that recent data releases may see this happening sooner than what we thought just a month or so ago.

This week much of the attention is on the Reserve Bank and what it does with interest rates. A cut is out of the question and it seems a rise, although suggested by some, is a long shot too.

A bigger question is when will the central bank start cutting? Until recently the view was very late this year or early next year. However, little signals are appearing which suggests there is a slim chance cuts could come earlier.

I suspect when cuts come they could be bigger and deeper than many predict. No doubt the government is hoping for earlier rather than later with a general election due around November.

On that note it was interesting to see the Prime Minister’s comments that the government is not expecting a property crash (nor does it want one!)
She is spot on here.

As for the market itself. Well you have ASB chief economist Nick Tuffley advising buyers to be patient – prices are likely to tumble in the next 12 months, he says.

Yet discussions I have had with real estate agents suggest that vendors have over-inflated expectations on price and there are already a bunch of bargain hunters out there.

Vendors wanting to sell will have to drop their prices making this a good buying period for investors.

Just after nine o’clock on Monday fixed-price real estate agency The Joneses announced it wasn’t proceeding with its sharemarket list. After lunch it was gone. In voluntary liquidation.

Talk about pulling the plug and going down the gurgler.

The Joneses listing was curious in that earlier director Chris Taylor had said the listing wasn’t about raising capital, rather it was about profile and transparency.

He said last month: “We are not the same as your typical IPO [Initial Public Offering]. This is not an IPO. We are not aiming at raising capital from the public.”

Guess in the end though that wasn’t quite the case. Seems as though the company needed the capital and it wasn’t forthcoming.

It’s easy to blame the volatility in the capital markets, but maybe the truth is more that investors didn’t buy the concept or the numbers.

The company made big noises about revolutionising the real estate industry and getting a piece of the $1.3 billion market.

However, at the end of the day their listing was probably ill-timed. Real estate is all about volume and pushing through deals.

In the current market the number of deals is declining quickly, and the big players are out to capture as much of the business as they can and protect their patches.

With that background it is difficult for a new, low cost, under-capitalised model to compete.

The Joneses demise is a loss for vendors and purchasers. They brought some competition to the real estate market, and helped reduce costs. We can all argue that is a good thing.

A question I have been pondering is whether schemes like what Blue Chip offered investors have a place in the market.

No doubt many of you will say no way. They are just big rip off schemes where the promoters clip the ticket the whole way through.

However, I suspect there is a place for them, as long as they are well-run. But there’s the rub. How do you tell if it is well run? And what are the rules around these things?

On the latter it would seem there are very few rules; certainly less than around other sorts of investments offered to the public. That in itself is a concern and something the government should be looking at in terms of its current reform of the financial adviser market.

With regards to the former question the answer isn’t particularly clear right now, other than to say the Blue Chip clearly wasn’t well run. I would be interested in your thoughts on this. (Email me here).

Stepping back a little it appears that there are some similarities between Blue Chip and finance companies which have failed.

One of the issues with finance companies is that in many cases businesses relied on new money coming in to help fund investments when they matured. When the inflow dries up a cashflow issue develops.

It seems with Blue Chip there may have been a similar situation.

Secondly we have seen “contagion” in the finance company sector where bad news with one company impacts on investor confidence in the sector and other companies. Blue Chip maybe to this sector what Bridgecorp was to finance companies?

The government made two big housing announcements today – one about housing affordability and the other about a shared-equity scheme for wannabe home-owners.

Clearly the ideas are aimed at winning votes as they are aimed at helping Kiwi’s achieve that great New Zealand dream of becoming homeowners.

However, the ideas are full of interesting ideas and irony.

Firstly, it’s very curious that the central bank is trying to slow the housing market down, yet the government is doing things which most people seem to see as being stimulatory to the market.

One point I struggle with is what is this affordability issue about? As mentioned before it is about how much people earn, what mortgage rates are and house prices.

Whichever way you look at this issue it is absolutely clear that incomes aren’t sufficient to pay the mortgage on a house with prices where they are.

Yet we keep hearing the answer is things like making more land available, or changing things like the Resource Management and Building Acts.

While they may have some impact, they are not the crux of the matter.

So the PM’s announcement that more land will be made available seems like a sop to the very vocal lobbyists.

At least property investors can see some benefit in the idea.

The other initiative from the government is a shared equity scheme, where the state helps people into houses by sharing the equity.

This idea has lots of merit, as well as a touch of irony because the government will now be far more involved as a property investor.

As an investor, no doubt it wants to see house prices rising, just like other landlords!