Property: Profits and pitfalls

By ANNE GIBSON

Property investors should consider the risks before they put money in, says a real estate consultant.

Brian Rankin, a director of property consultancy and management firm Beresford Associates on Auckland's North Shore, says income reductions are just one warning sign of the risks of the business.

With $420 billion invested in this sector nationally, we have a lot to lose when returns fall, and Rankin has listened as upset investors have complained about real estate products lately.

Small-time investors have bought bonds in ventures promising high returns and apartments with fixed annual returns. Prominent examples are Takapuna's Spencer On Byron hotel tower and Metropolis in Auckland.

But investors in Spencer On Byron have seen their expected returns halved, and Metropolis investors have waited since May last year for repayment.

Rankin also worries about many syndicated property investments and how safe returns are. Property is not immune to the vagaries of the general economy, he says.

The economy is based on activity. It needs buyers and sellers of goods, services and products. Real estate is no different. It has suppliers, users and investors.

The balance between supply and demand of property is crucial to the stability of the market and the effect on rental and capital growth, he says.

If supply exceeds demand, the price of property will decline and a broad understanding of the market is critical for anyone considering investment in property.

This is even more important now because the pace of change is so rapid that what was once good property can quickly become less attractive.

To illustrate his point, Rankin cites these examples of development activity which have redefined the Auckland market:

* The shift of Auckland's CBD from Queen St towards the Viaduct.

* The shift in retailing from Manukau to Botany Downs.

* The emergence of Albany as an industrial precinct.

* The rapid development of residential areas on the North Shore.

Add to that the changing needs of people, the commercial drivers of business and the impact of technology and you begin to peel away at the mystery of property investment, which is fundamentally about meeting the aspirations of different people.

That is the secret of property, Rankin says. It is all about people - where they want to live, how they want to live, where they want to work, how they want to work, where they want to shop, where they want to spend their recreational dollar.

The key figures are developers, tenants or occupiers, and investors. Developers bring product to the market. Having property that performs well means having tenants who are successful in their field of business. Investors put money in, to provide cash for development, and a buyer for the end product. Investors are looking for property that will generate good rental returns and eventually capital growth.

"The secret to value is scarcity and use. If you have a property that people want to use, you have the essential ingredients to wealth accumulation in property," Rankin says.

So what are the risks and how can they be minimised? Some are insurable and others are not. Examples of risks are:

* A property crash or widespread downturn.

* Loss of a tenant through business failure, expansion, the demand for better space or a corporate takeover.

* Sudden or continuing building needs, capital works and compliance issues.

* Local factors such as an area decreasing in value or a change in neighbourhood activities.

* Changes in town planning rules which could cause a property to be devalued.

* Development costs exceeding budget on a new development.

* The risk that the sale of a development brings less than expected, again in the case of a new development.

"Many smaller investors have experienced losses in property investment for one of the above reasons," Rankin notes. "Many new investors enter the business via syndication or multiple ownership structures or some property bonds."

Before buying these products, assess investment risk and answer these questions: How much capital do I invest? What return do I want on my money? What am I prepared to lose? What is my time horizon? What is my security? How can I get out of the investment?

T O ASSESS property risk, answer these questions: What is the quality of the property? What is the quality of the income? What is the track record of the developer? What fees are paid to the promoter? What are the management fees? What is the value of the property? What level of rent is being paid? Who is the tenant? What do they do? What are the key terms of the lease/occupancy agreement? Who is the manager?

The whole philosophy of investing is to create wealth, Rankin says.

"With the share market you are relying on the performance of companies to create wealth on your behalf. The investor is simply a provider of capital. Companies generally have a record you can evaluate before the decision to invest is made."

Unit trusts such as Kiwi Income Property Trust and the various AMP products also have a record that you can evaluate, Rankin notes.

"But in all of these investments, you lose control except to the point that you can make a decision to get out at any time because there is a structure that allows you to buy and sell.

"The property market is not like that, although many of the products being developed have the notion of transferability."

Investing in property brings many risks, he says. Leaving the investment decisions to others is a risk, and dealing with a multitude of owners makes decision making cumbersome and slow.

"We recommend direct ownership by a small number of owners with a common purpose and strategy. That is the safest and most profitable investment structure."

Beresford