When Gearing Turns Really Negative

Sydney Morning Herald

Tuesday September 1, 1992

Anne Lampe

MANY INVESTORS who bought property trust units by taking out bank loans to pay for them must be ruing the day they made such a decision.

For some of these investors the decision was made after receiving advice that the capital gains on those investments would more than compensate them for any short-term shortfalls between returns and interest charges on their loans.

In some cases the advisers promoting these negative gearing arrangements received commissions of up to 24 per cent of the gross amount actually invested.

In the Senate last week, Senator Cheryl Kernot (Dem., Qld) highlighted some of the financial distress suffered by some such investors and brought to her attention by the Australian Investors' Association. This association has received at least 50 complaints from investors adversely affected.

As the value of their property trust units plunged to below 80 per cent of the loan amount, the lender required that the loan's security be topped up. Where the investors have no other resources, some have had to put their homes on the line.

Senator Kernot mentioned the Advance and Challenge banks in particular as two banks which marketed loans targeting negatively-geared property trusts and now calling up loans which did not have sufficient security cover.

According to the president of the Australian Investors' Association, Mr Austin Donnelly, none of the four major banks actively promoted loans for negatively geared property trust investments, although they did provide financing for negatively geared property investments.

Senator Kernot, in the Senate, criticised so-called independent advisers who had recommended these schemes and who, she said, had in many cases derived their income primarily from commissions.

"In negative gearing schemes they earned commissions of up to 24 per cent of the investors' capital," Senator Kernot claimed in the Senate.

"For an investor with capital of $30,000 they would earn $7,200 for, at most, a few hours' work, often done by people completely without qualifications in accounting, finance or an allied field.

"By contrast, if they had recommended low-risk investments they would earn commissions of about $300 and, on medium-risk investments, they would earn$1,200 to $1,800."

Senator Kernot cited some investors suffering losses of up to 200 per cent of their capital and now facing margin calls to pay cash to the banks or to provide acceptable securities.

"In the event of their not being able to meet the margin calls, the whole of the debt which was scheduled for repayment two years or so ahead can become immediately due.

"The final result is that they could lose the investment, namely the property trust units, and still owe to the bank an amount that may be as large as their original capital."

Mr Russell Hooper, the managing director of Advance Asset Management Ltd, confirmed that his company, in conjunction with its parent, Advance Bank, had made "several thousand loans" based on property trust investments as security. He said some of these loans involved property trust units managed by Advance Asset Management, and that in some cases the property trust unit values have fallen by "as much as 50 per cent".

Investors whose property trust investments have fallen below the required level have been invited to put up other security, including shares, bank guarantees and homes to meet the gap between the outstanding loan and the value of the property units.

Mr Peter Wallace, Challenge Bank's general manager group credit, said that there were a number of inaccuracies in Senator Kernot's information and that the bank had written to the senator to clarify these. He would not detail the inaccuracies for the Herald.

He said Challenge had no subsidiaries that marketed or managed property trusts and the loans were for a mix of share and property investments managed by unrelated companies.

© 1992 Sydney Morning Herald

Back to News Index | Back to Home