Private credit providers and the same old problems they always face.
As the saying goes, ‘the more things change, the more they stay the same”. It’s just part of the investment cycle that when times improve, investors start looking for ever higher returns and this inevitably leads them to property trusts.
What could go wrong? There is nothing safer than investing in property, right? Wrong.
Some time ago APRA and ASIC tightened the rules governing who the four Australian banks could lend to and in doing so, reduced the available funding to a raft of property developers and speculators.
This created so called ‘private credit’ providers. These firms create managed funds supported by large financial institutions and sometimes the private offices of wealthy individuals.
Then they line up investment opportunities with property developers and promote these opportunities to individual retail investors, who are convinced that their investments are back by property and so are safe.
These funds typically operate well when times are good. Property developers borrow finance to build a new row of townhouses or apartment buildings, the fund does its due diligence and if they are happy, extend the funds to finance the project.
Each project is assessed on its merits and should be completed profitably. But it can quickly get out of control. Developers want ever more funding for ever more projects and fund managers who typically make most of their money on upfront fees, want to fund more and more projects to fund.
As the gravy train moves on, the due diligence processes become more and more relaxed until suddenly there are projects that are receiving funding when they should not. When they are too high risk, when there is uncertainty as to whether the project will be completed, when there is a risk of the builder over committing and going bust.
Developers start failing to complete their projects successfully and money starts to be lost on one project after another. Fund managers take in money which is usually invested in a way so the owner of those funds can ask for them back at any time, and yet the funds are lent out on projects that could take years to complete.
In this way they borrow short and lend long, which is all very well while things go well but when things start to go wrong and investors start to panic and increasingly want their money back, fund managers have no option but to freeze or stop withdrawals.
This is happening now. A string of large, high profile property developers have gone bust. The giant Sydney based property developer the Bathla Group is the latest, following Jon Adgemis’ Hospitality Group, Melbourne based Caydon Property Group and Punvex Group are just a few. More will follow.
If you’ve invested with one of these ‘safe’ property financiers and your funds are frozen. Stay calm. Hopefully your fund manager is in control of the situation and any freeze is short lived.