Some comments on those 'wholesale investor only' property syndicates advertised in NZ.
It has been difficult to get investment returns from 'income' investments, with term deposit rates being so low (and virtually no returns on ordinary bank accounts. Although interest rates are increasing, this means that people holding bond or fixed interest funds will see capital losses (as the investors won't pay as much for the investments held because there are new investments available at better rates).
A lot of people are nervous about investing in equities (a flash word for shares) even though we are in the 11th year of a bull market and equities have provided great returns for many years.
As a result those advertisements in the newspapers advertising returns of 5%, 7%, 9%, 11% or higher can seem enticing. They usually have a warning that these investments are 'FOR WHOLESALE INVESTORS ONLY'. What this means is that you will need a minimum of $50,000 or $250,000 of funds to invest. The term 'wholesale investor' is defined in the legislation, but simply means that you are certifying that you can invest and make decisions on your own and that you don't require any investment advice.
Unfortunately, there are a number of issues with these property syndicates, and having seen a rash of collapses in the late 1990's through to the mid 2000's, Moneyworks have not seen any that we are comfortable recommending to clients at this stage.
Some of the main issues include:
1. Lack of diversification of tenant or buildings.
2. A large amount of debt, which is very susceptible to increases in interest rates.
3. No clear way to 'take your money out'. While some offers suggest that there may be a 'secondary market' for sales of your units, in practice we have not seen this work effectively.
Nido Homeware store collapse
The collapse of the Nido homeware store was a good example of how things can go wrong, with investors receiving only 14.1% of the original capital invested,. meaning that investors lost $30 million. Remember, lenders get paid before investors do.
More information can be found here.
Diversification is the key
The best advice is ensure that you have good diversification in your investments between different asset classes and different types of investments.
And if you aren't a trained and skilled investor, don't assume that you can't get value from financial advice. Just because you have skills and expertise in other fields does not mean that you should be a 'wholesale investor'.
Finally, remember that 'if it looks to good to be true, it often is'.
