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Financing a LPT

Discussion in 'Shares' started by matrung, 18th Jan, 2007.

  1. matrung

    matrung Member

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    hmm just wondering if there are any banks/lenders out there who would consider lending 100% against an LPT/ or direct property trust.

    I've found many LPT/property trusts that provide excellent income 10% and decent growth 8-10% per annum and that's been an average for 7+ years .. pretty strong ...

    So i'd propose to the lender ..

    OK i've found Direct Property Trust ABC .. paying above interest on average

    Wouldn't this be very similar to financing 100% against a residential property
    If things go wrong, you can just sell the units,

    but if things go right .. well lets look at the numbers

    100,000 borrowed @ 7.5%
    10% income
    10% growth

    end of year 1

    asset worth 110,000 and cashflow before taxes is $2500.

    hmm ...
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You probably need to look at some of the structured offerings from the likes of MacqBank. They are the only types of 100% gearing products I've seen - not that I've looked!
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    Yeah but lenders want you to have some "skin in the game" i.e. there's some equity you've contributed to be burned through before they take a loss on realisation of the assets subject to the security.

    The fact you can get up to 95% LVR on residential property vs 75% on the best securities via margin loan gives some indication of the banks' view on volatility. (I also suspect the fact that the average asset size for property is higher than for typical margin loan funded purchase is a factor. That means that 5-20% equity is much more in absolute terms on the average property purchase than on the average share purchase).

    As Sim' mentioned there are some structured products around involving 100% loan BUT nothing for nothing. Rest assured the higher interest rate and fees (including for any capital protection) will make this a more expensive option for you. I wonder whether all these arcane, indecipherable investment products are better than keeping things simple with a good old margin loan geared to a safe level combined with solid stock selection?

    Just my 2.2 cents worth.

    Cheers
    N.
     
  4. matrung

    matrung Member

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    Macquarie Bank hey .. I might have a look .. just to see of course ... :rolleyes: ;)
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Just be sure you read the PDS very very carefully ... these guys are geniuses at financial engineering ... their products are brilliantly structured and very clever indeed ...

    ... the problem is that many of them strongly favour the fee collector (Macq), at the expense of returns for the investor.

    You take on all the risk - they take all the cream from the returns, leaving you with average returns at best.

    Of course, that's my opinion only - I have not invested in any of these products, nor have I investigated them in any great depth ... I took a bit of a look and put them in the "too hard" basket because of the sheer complexity of the investment and fee structures. They may well suit your needs - and I'd be interested to hear if you have success with any.
     
  6. -T-

    -T- Well-Known Member

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    Hey matrung

    These Macq Bank products offer 100% gearing on the basis of capital protection and threshold management. Using derivatives and/or cash balancing for risk management, they eliminate the risk of capital loss. While that sounds good at first, the interest payments over the life of these loans generally exceed capital anyway. So while your capital will be returned if the fund performs poorly, you're still down just as much in interest without considering time value and opportunity costs. So people really have to consider the fundamentals of the fund aside from the facility available.

    As Sim said though, they're doing some pretty tricky things these days. I particularly like the idea of threshold management that targets individual funds within a fund-of-funds (forgetting the case against fund-of-funds for a moment). Basically it means if their structured product has exposure to four underlying funds, you will still be returned any capital loss on one if the others have done very well. You could triple your $ over the life of the fund and still be returned extra $ if one portion didn't do well. These funds are now giving the option of exposure on up to 12 separate funds/markets/countries, including LPTs. So in one product you can diversify between property, infrastructure, equities, commodities, trading, global, Australia, etc. To access that many markets (albeit with one fund manager) and get 100% gearing is pretty cool I think.

    In saying that, I think if anyone was going to provide 100% gearing directly on an LPT, they'd want similar assurance/insurance (cap protection or similar). It may work well with an unstapled LPT though, because threshold management works best with less volatile securities. For the CFS Aust geared fund, it would have cut the returns in half (over x years) according to one PDS. But for many other less volatile funds, it has cost very little or sometimes nothing at all.

    So you can get 100% gearing on an LPT through these products, but they are fund-of funds products in which you have to expect higher fees. It would be interesting to really compare one of these products with a standard managed fund investment over a range of returns and volatilities. Maybe the fees are worth not having $ tied up. Especially once you get into reasonable amounts of money. Say for $1m, the difference is needing $250k down, or needing nothing down. Then there’s the addition of threshold management, which can be detrimental to a volatile portfolio or great for a combination of funds. Hmm… I might run some numbers this weekend.

    Anyway, check them out if you’re interested.