Real estate lease-back deals under review by ASIC

Monday 27 February 2017

Source: Australian Financial Review

 

One of the most popular forms of leasing deals for an investment property is arranged through self-managed superannuation funds (SMSFs) and these deals are under scrutiny by the securities regulator to find out whether investors fully understand their financial risks and responsibilities.

The deals involve buying an investment property with a guaranteed tenancy of between 3-5 years with generous returns, around 6%. The new owners then lease back the properties to a developer which then acts as a landlord or engages a third party to rent and manage the property.

Demand for these deals is growing among yield-starved retirees looking for an average, above-inflation income from the rent as well as capital growth. It can also work well for a short-term investor who is looking for a higher yield prior to moving into the property.

Deputy chairman of the Australian Securities and Investments Commission (ASIC), Peter Kell says the watchdog is monitoring promoters of the schemes as part of a broader nationwide review of property spruiking and real estate deals on offer to SMSF investors.

Recent prosecutions of spruikers are reassuring the regulator it has the legal power to close down unfair property-linked investment deals, despite it not being directly responsible for real estate.

Lease-back deals, incentives, types of property and costs vary widely between developers, mortgage brokers & financial advisers.

"Get any deal reviewed by a lawyer and financial adviser before committing," advises Anthea Digiaris, an associate with legal firm Slater and Gordon Lawyers, about the need for doing your own due diligence.

"It's no point coming to me having signed the deal and asking me to get you out of it because you did not know it was going to be like this," she says.

The onus should be on the Developer to find a tenant, if they don't find a tenant, extra costs caused by no rental income may come from their margins which means any rental guarantee will be included in the price the buyer pays.

Those considering a deal should answer these questions before completing a deal:

  • Has the value of the property been inflated to cover the high yield?
  • Do banks and other lenders impose tougher conditions around lease-back deals, such as stricter terms on interest rates, ability to repay, loan to value ratios?
  • Who pays for property servicing contracts, body corporate fees, insurance, rates and maintenance during the lease?
  • What happens at the end of the lease? Can the lease be extended? Who is responsible for restoring the property to its original condition?
  • What happens if there is a contract breach by a tenant or the developer? Is there a structure to resolve disputes?
  • Is there demand for this type of property?
  • What rent can you achieve at the end of the developer's lease?
  • Will the value of the property decline if the original lease no longer exists?

 

ASIC's focus on investment properties will be the quality of advice provided by the financial adviser.

"[The investigation will focus on] whether it is given in such a way [that] SMSF investors understand their obligations, requirements and experience needed to make a decision," Kells says.

It will also focus on whether investors understand investment costs, additional administration involved with owning the property through an SMSF, asset allocation and whether the value of the assets justifies setting up a fund, he adds.

The regulator will review files and written advice from advisers as well as verbal recommendations made directly to its undercover officers pretending to be clients.

ASIC is concerned unscrupulous property spruikers could persuade gullible investors to set up an SMSF and use their superannuation assets to buy an investment property despite lack of diversification, high commissions and vulnerability to volatile property markets.

SMSF limited-recourse borrowing – which ensures the creditor has limited redress in the case of default – is very popular with business owners or professionals (such as dentists or lawyers) using the schemes to purchase their work premises, providing valuable tax breaks and the prospect of capital growth.

Financial advisers and mortgage brokers claim there has been a decrease in some of the more flagrant violations, such as lunch-time seminars aimed at encouraging investments, typically off-the-plan apartments.

But there are still offers circulating on the internet and direct offers from real estate agents and developers to advisers and investors, some encouraging scheme members to set up property development companies.

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