Saturday, 8 March 2008

not so blue chip

today saw the inevitable retaliation for the retaliation, retribution for retribution, revenge on revenge. the attack on a jewish religious school is tragic though entirely predictable, and it seems the gandhi warning of "an eye-for-an-eye will make the world go blind" is becoming increasingly true. there certainly seems to be a high level of blindness that allows hate and anger to continue the killing of innocents. the peace talks will apparently continue, in spite of the latest attrocity. maybe this latest round of violence will spur them on to actually come to a conclusion.

the investors of blue chip have a rough time ahead of them. blue chip was involved in selling auckland apartments as an investment. the problem was that the apartments were sold to investors at a price well above their market value. the valuations were apparently carried out by in-house valuers, there were in-house accountants and lawyers, and the sales were not made by agents registered with the real estate institute.

our firm was made aware of one of these investments a couple of years ago. we were strongly against it at that time, due to the incredibly high level of fees being charged, and concerns around future cashflows. the initial couple of years of losses were to be funded by extra borrowing, which is never good. investors were lured by the usual carrots of high capital gains, and the ability to offset tax losses against other income. but as i've said in a previous post, tax losses are cash losses ie you must have the cash to cover them. if you have to borrow to cover your annual losses, you go down a debt spiral very fast.

and in this case the valuations didn't stack up. the result is that many investors borrowed significant amounts of money, well over what their apartment was worth. they are now at risk of losing their own family home in order to pay off the debt. it seems almost criminal that banks were willing to lend money on these investments without independent valuations. martin dunn (in the radio nz piece i linked to above) is alleging collusion of bank managers in the whole scheme.

in this case, potential investors would have saved themselves a lot of grief if they had gone for independent advice, and then taken that advice. i believe that any sensible chartered accountant would have advised against this investment, just as we did. some background research on the values of similar appartments already on the market should have been done as well. and it would also help to remember the maxim that if it looks/sounds too good to be true, it almost definitely is.

and i'm hearing more stories of banks trying to push debt on to their customers. with the collapse of so many finance companies, people have been taking their money back to the safest investment they know - a good old bank term deposit. with all that money coming back in, the banks are desperate to lend it out. all i can say is avoid the pressure if it is being put on you, and be very careful of overextending yourself if you're thinking of buying a rental property.

i'm off to the interfaith forum tomorrow, so may not be able to post for a few days. i've also got a spot on radio nz's "the panel" on monday, so wish me luck!

No comments: