JVs but not REITS

Discussion in 'Investment Strategy' started by The Y-man, 29th Oct, 2019.

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  1. The Y-man

    The Y-man Moderator Staff Member

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    Something that has puzzled me a bit for a while....

    One of the reasons people argue against putting money in a REIT is (rightly so) the lack of direct control ~ as a private investor would be unlikely to wield much voting power.

    Yet, those same people seem to quite happily contemplate a JV ~ I would have thought that even a 50/50 split JV would not carry a majority in any case so a resolution will not be reached?
    And I assume the reality for those looking at a JV (looking for experience and additional mullah) would have a minority stake anyway so they would definitely have no direct control?

    The Y-man
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    You could use the same argument for not buying strata property, shares, syndicate or other joint investment
     
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  3. Momentum

    Momentum Well-Known Member

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    I think the main reason people avoid REITS is because they really get hammered hard when there's a financial crisis.
     
  4. The Y-man

    The Y-man Moderator Staff Member

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    That's interesting - conversely in a JV commercial project, would they get hammered just as hard? Potentially more due to a smaller portfolio (one smaller project that may go vacant)

    The Y-man
     
  5. Big A

    Big A Well-Known Member

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    I am no expert on the history of Reits as my experience only dates back to the last few years. But from what I read and understood some did get hammered during the GFC. But I wouldn't call the GFC a standard event and the chances of the same event occurring twice in a row I would think is unlikely.

    I believe the ones that got hammered had high gearing levels and were also working on development stock. If you go with a reputable manager who has 50% or below gearing and the assets they hold in the fund are not development sites, but rather completed and tenanted assets, that should mitigate the risks associated with a GFC style event.

    Many managers and even lenders I believe learnt a big lesson from the GFC. Make sure you have you multiple lender options & build a strong relationship with your lender. I think the panic that ensued during the GFC hurt many managers and probably just as much the lenders due to knee jerk reactions by everyone at the time. As long as you have an asset that has quality tenants that continue to pay the rent then who cares if there is a GFC or any other event. Keep collecting the rent, pay your obligations and get your return.
     
  6. The Y-man

    The Y-man Moderator Staff Member

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    Similar boat to you... :D

    I would actually be interested to know how a single building unlisted fund went through the GFC.
    Being illiquid, really the unit prices can't be "hammered" as such.... and if the property was located in a major Australian capital city with big tenants, I am thinking the valuations would not have changed much..... even if they were quite highly geared.

    The REITs that did hit the headlines were indeed highly geared but had exposure to the US and Europe ~~ where AFAIK the tenants did go bust (eg empty shopping centres)....

    The Y-man
     
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  7. Big A

    Big A Well-Known Member

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    I have heard that there were many horror stories but when I try and find specific examples and the details of exactly why they went pear shaped, there's not much info out there.

    I will give you an example that I heard from a property manager. So there was a property manager that managed a number of funds. Some completed and tenanted assets producing handsome income. And some funds were development funds. GFC hit and covenants were breached on a number of the funds. Values drop and they no longer meet the original set bank covenants. Lender had no faith in this manager and decided to call in all there loans. The investors in one particular fund reached out to another manager who was more reputable in the game and that manager agreed to take over the fund and asset and managed to get the same lender to continue on with the lending for the asset. They continued to manage the asset as per normal. Continued making there loan repayments as per normal. Now I understand distributions might have reduced or even stopped for a while in order to pay down more of the loan and reduce the gearing. But over all a good result. GFC passed and the assets values went back up and life went on. Today those assets are worth much more and investors are still collecting the yield from rent. And they all lived happily ever after.

    THE END!
     
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  8. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    REITs that had issues last time around included Stocklands, GPT and a few others that have since emerged and changed names etc. Liquidity can kill any investment. These issues led to suspended trading for listed REITs and a lack of market making for unlisted. Mortgage trusts fared much worse. Some investors got trickle fed their redemption requests with others waiting many years. Here is a example -11 years !! before a relisting and partial value was reinstated.

    Fund suspensions | Super & Investments | OnePath
     
  9. The Y-man

    The Y-man Moderator Staff Member

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    Thanks Paul - I wasn't able to figure out (just skimmed through) - were these "funds of funds" or reits holding properties directly?

    The Y-man
     
  10. Scott No Mates

    Scott No Mates Well-Known Member

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    Mobs like Centro who were a complex web of trusts but they managed to go under, rebranded etc and IIRC are currently called Vicinity Centres
     
  11. Big A

    Big A Well-Known Member

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    Thanks @[email protected] ,

    The link looks to be mostly about mortgage funds and possibly 1 appears to be a property trust. Being that I invest in both mortgage funds and property trusts I paid close attention to the liquidity risks and this is how I asses them. With Mortgage funds I don't do pooled assets. That there is your single biggest problem come a major event and everyone runs for the doors. Single asset, with a 12-18 month term and they are all to developers with 65% or less LVR. Now if there is a major market event and the properties cant be sold by the developer who they lend to, then yes there could be a delay in getting your funds back. In saying that with an LVR of 65% and normally a set amount of pre sales before lending you would imagine that they should you should be able to flog off the properties in the development heavily discounted and still get back most of your money.

    With property funds I invest in, I go in knowing they are not liquid. I see that as a positive and have put my faith in the manager to know how to best and when to best dispose of the asset. As long as they are managing it well and collecting the rent / paying me my distributions I have no need for liquidity. That's how I view it anyway.
     
  12. Big A

    Big A Well-Known Member

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    Yes I remember the change from Centro to Vicinty. But does anyone know exactly why they went under? To Much debt? Did they breach LVR covenants when prices tanked? Were they still meeting all there loan repayments? I cant imagine a well managed property trust that was producing income and meeting its obligations went under that easily. There must of been serious underlying issues.

    I know Charter Hall managed a number of property trusts through the GFC and all came out intact. Yes values dropped and distributions suffered for a while, but if that's the worst of it after such an event then that's not a bad result.
     
  13. The Y-man

    The Y-man Moderator Staff Member

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    My understanding of Centro was a large scale exposure (with borrowed money) to US REITs which went under or came under stress in the GFC.

    VCX these days (my understanding) is that they are now purely an Australian play

    One reason I have largely exited from CMW due to their increasing exposure (admittedly showing some very glittery yields) to Euro/Brit/Eastern Euro assets and REITS.

    The message I am getting is avoid REITS that hold other REITS as a big part of their asset....

    The Y-man
     
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  14. Big A

    Big A Well-Known Member

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    Thanks @The Y-man. That makes sense. Having exposure to reits via another reit means you have no direct ability to analyse the risks. I like to asses each property trusts on its own merit and wether the risks are acceptable. I don’t see any of the ones I’m in having the level of issues or risks they hurt particular reits during the gfc.
     
  15. The Y-man

    The Y-man Moderator Staff Member

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    This is interesting. I just had a quick skim looking at SGP.
    Pre gfc crash, if I was looking at SGP at the time with my current rule set:

    1. yield - would have been a yes on the run up as it was still yielding 6% up to maybe the year of the crash
    2. Property portfolio - exposure to UK ~~ I have a "no non-australian property" rule now, so this would have been an exclusion
    3. NTA - this would have been the real red flag - the shares were trading at some 60% premium to the NTA at peak..... I aim to buy and hold much closer to the NTA.
    Of course I am sure the next "big crash" will bring on a completely new angle I haven't mitigated for... :confused:

    The Y-man
     
  16. Big A

    Big A Well-Known Member

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    Say what :eek:. 60% premium. Well if you are buying at 60% premium then you should not be surprised when your stock price crashes 60%. Or even 70%. Funds trade at slightly below NTA all the time. So I would imagine its property funds such as this that went down during the GFC that gave out the property trust horror stories that people still warn you about today. I would imagine an investment in any reasonably sensible property trust bought at a reasonable price and operating within reasonable metrics should be able to survive through a major downturn if not actually do well compared to equities. Is that a reasonable conclusion? :D
     
  17. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The term REIT is often misused and misunderstood.

    Better to start with MITs - Managed Investment Trusts. (tax terminology) or Managed Funds (ASX term) and Listed Companies.

    Listed managed funds fall into five broad classifications according to the ASX.
    Many people call things REITS when they can even be a LIC ....A company and a trust are quite different.
    • Listed investment companies (LICs) and trusts (LITs)
    • A-REITs (Australian real estate investment trusts)
    • Infrastructure funds.
    • Absolute return funds.
    These can be listed and unlisted. Some ETFs have exposure to a pool of the above.

    Understanding the balance sheet of each entity is important. eg Is the REIT a pool of other holdings to diversify or is it a one shot wonder ? I recall a well known fund which had exposure to three Commonwealth Govt offices in the ACT. Treasury, DFAT and something like Defence., All moved out and wanted to rebuild within months of each other as part of program to upgrade offices. That trust was obliterated as the properties all had to be sold / demo'd and had to pay out a CGT gain to all investors and there was nought they could do to stop it. My clients couldnt sell and was forced to wait 2.5 years and then was automatically redeemed with a massive CGT gain. They werent happy. They were non-residents and received no CGT disc. The USD movement for them was even worse and meant their US tax was terribly affected.
     
  18. The Y-man

    The Y-man Moderator Staff Member

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    Check out GMG (Goodman Group) ~~ some great properties BUT the NTA is $5.34 and trading today at $14.34 :eek::eek::eek::eek:

    The Y-man
     
  19. Big A

    Big A Well-Known Member

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    That’s ridiculous. Who buys at these prices. Never a shortage of idiots out there. Unless there’s some major growth potential we don’t know about. But at those prices highly unlikely.
     

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