I AM greatly in favour of property investments under the right circumstances. Ten years ago my wife and I owned 19 properties and we did very well from them.
Then why did my heart sink when I saw an advertisement for a property investment? Safe as houses, after all?
The advertisement was for an unlisted property fund that owns two shopping centres that offers 8% return for 2016 and 8.25% for 2017.
This sounds much better than the current 3% from term deposits. For many people these 5% extra would make a big difference in their life.
Why did my heart sink?
During the global financial crisis property funds dropped by an average of over 60% in value and, worse, many people still have not been able to sell those investments six years later!
The advertised investment I recently saw was not one of the most horrible ones - it stated in the fine print that your money is locked in for seven years and then will be returned only if the fund can sell the shopping centres.
Depending on the economic times in seven years that may be easy or impossible or anything in-between.
If that was all there was to it, I would not be particularly worried - you get a high return and you take a risk in return and, if you don't need your money for seven years or more, that is not too bad.
However, what happened 10-15 years ago was that such funds invested in more and more risky assets, including developer loans and many, many investors were caught with investments they both couldn't sell and that heavily lost their value and those investments gave no further 8% distributions.
Quite a few funds advertised safe investments and high returns but the loans went to developers and those developers went broke.
Many of these funds borrowed higher and higher amounts to increase their returns. This can work well in good times but when the crisis hit, they couldn't refinance and defaulted on their loans, leading to fire sales where the investors lost much or all of their money.
That is why I didn't feel good seeing the ad - it was a 'here we go again' feeling, especially as that particular vendor managed a number of these frozen property funds.
* Christoph Schnelle, Life Risk Specialist and SMSF Specialist is Auth Rep 308223 of In Your Interest Financial Planning which is the trading name of Big Lamp Pty Ltd (Auth Rep 308161) and FYG Planners Pty Ltd AFSL 224543. This info is general in nature and readers should seek professional advice specific to their circumstances.
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