What's the deal with packaged property?

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.