One of New Zealand’s leading non-bank mortgage lenders says the recent collapse and mortgagee sale of large-scale Auckland homeware store Nido, illustrates the caution commercial property investors need to take when putting their money into new developments.
Alpha First Mortgage Investments Director Scott Massey, says the mortgagee sale of the building which housed Nido in west Auckland, showed investors who choose to put their money directly into commercial property, whether through a syndicate or on their own, also take 100 percent of the risk.
The Nido development syndicated by Maat Group, formed Central Park Property Investment to own the property. Mortgage investor Pearlfisher, partly owned by Jarden, loaned $25 million secured by a mortgage.
When the Nido business which tenanted the property closed down in March this year, the lender called a mortgagee sale to recover its short-term financing. The buildings conditional sale for $46.3 million however came in well sort of the total $62 million paid for the property, leaving investors in Central Park Property Investment out of pocket.
“The fact that the lender will get paid before the building owners shows how in this type of situation there is more risk to investors in the property ownership rather than the mortgage lenders,” says Mr Massey.
“It highlights if you invest in commercial property whether by syndication or by yourself you take 100 percent of the risk on the value of the property.”
Mr Massey said in commercial property ownership, the real risk was generally in the last 20 to 30 percent of the value of the property.
Mortgage lenders like Alpha First, only lent to 50 or sometimes 60 percent of the commercial properties value, meaning there was far less risk for investors choosing to invest their money in lending rather than ownership.
“Syndicates have done a very good job of providing an avenue for people to invest in commercial property, long term the value will always go up, but it is always dependent on the tenant being able to pay the rent.”
Mr Massey said if investors were looking for an alternative option to property syndicates, the returns from mortgage lenders were generally just as good and sometimes better.
“We generally achieve around an 8 percent return on our mortgage investments but we’re only lending on a short term of around one year and at 50 to 60 per cent of the property value, so there is less total risk to investors,” said Mr Massey.
Syndicate investors did stand to gain in the capital growth on a property over the long term, which was not available through investing with a mortgage lender, but as mortgage lenders were generally short-term investments, when the investment was returned, new investments could be made, he said.
“When you go into a syndicate you’re also locked into that investment long term and there’s limited opportunity to exit,” said Mr Massey.
An estimated $3b plus investment funds has gone into property syndicates in the last 5 years while probably less than $1.5b has gone into non-bank mortgage lenders according to Massey.