Advice needed - St Martins Lane (Icon Central Ltd)

[xlancer]

Dear all,

I have attended a property marketing seminar event in Singapore which covered investment properties in NZ. The property promoted was St Martins Lane in Auckland.

The units were marketed at about NZ350-400k for a 1-2 bedrm apartment (roughly 55-59sqm) and it came with a guaranteed rental yield of 8% (net) for 2 years. We were told that the developer had signed a long term master lessee arrangement with Waldorf to manage the service apartments and we have nothing to worry about in terms of rental. The deal provided an upfront 2 year payment of the guaranteed rental (2 x 8%) so effectively the upfront payment is reduced by 16%.

This is being marketed by Austpac International (David Yuen) and the pitch was that by taking up an interest only loan the investor is gaining a net positive return from the rental.

To my horror, i found out about the Blue Chip fiasco and that St Martins Lane is one of the affected developments. From my understanding the marketing company Blue Chip is insolvent and so is the developer Icon Central Ltd (wholly owned subsidiary of Paxton Pacific?).

I'm not sure if this is a liquidation sale / fire sale or am I getting myself embroiled into all these mess. The agreement on my document states that the Vendor is Icon Central Ltd and upon the Vendor's agreement to the sale and purchase i would have to pay up the 10% deposit, and then the date of settlement is within 14 days of the transfer of strata.

Can anyone advise if this is a legitimate deal or if i should forfeit my deposit and stay away from it all?

Thank you for all your advice in advance.

[captaincrab]

Xlancer
I bet the Unit is zero rated for GST and it has attached to it a Management Lease with a Fixed Rate return guaranteed. If so I would not buy it. All it will be worth on the secondary market is a price based on the ACTUAL (Not guarantee amount) income the Unit earns after all expenses at a Cap Rate of 10-12 %.
Generally NZers dont buy these at all. Thats why they are selling them in Singapore....
The market here is littered with examples where returns have not been paid to investors and David Yuen has sold Units in some of those.
In my view even with the discount the price will be too high and if they offer you a guarantee ask them to back it with a Bank Bond.
I am surprised that a 10% deposit would suffice for finance. But I guess if they call the (2 x8%) 16% "rebate" as part of your deposit and manage to fool a Bank about that, it might be done.
Some Mtge broker here may like to comment on finance LVRs for serviced and managed apartments.
Did they say you could claim GST and put that in as deposit too? Or straight into your pocket.

[xlancer]

Hi captaincrab,

Thanks for your response.

I bet the Unit is zero rated for GST and it has attached to it a Management Lease with a Fixed Rate return guaranteed. If so I would not buy it. All it will be worth on the secondary market is a price based on the ACTUAL (Not guarantee amount) income the Unit earns after all expenses at a Cap Rate of 10-12 %.

Sorry am a little lost here with your comments. What do you mean when you say the unit is zero rated for GST? We were told there is a 30 year agreement with Waldorf as the service apartment manager and 8% returns (on the purchase price) is guaranteed for 2 years. Thereafter it is negotiated on a yearly basis and the same rental yield applies for all units with St Martins.

What reputation does David Yuen have in the NZ market anyway?

For the guarantee its supposedly paid up front to the buyer (2 x 8%) and that could be knocked off the purchase price.

So assuming the purchase price is NZ400k, and its 70% loan, then the upfront is 30% x 400k = 120k. The rental guarantee paid upfront would be 16% x 400k = 64k so the nett upfront by the buyer in cash is actualy 120-64 = 56k. Makes sense?

Could you elaborate more about these GST etc that may affect the calculation? Was told there's no property tax, income tax etc.

I'm very curious myself why these units are not being marketed in NZ if they are good in the first place.

Any advice would be appreciated!

[captaincrab]

Yes, your figures make sense. I've seen this structure before.What you probably dont realise is that the prepaid guarantee is a device to convince a Bank about the size of the cash component in the deposit.
Lets put the GST aside for a moment.
I think you should do some research on what the actual returns will be after the guarantee return period is over. My experience indicates 0-2.5%. The Managers tend to take all the cash first.
Google Holiday Inn, The Westin. There are others.
However I'm still stuck on the idea of someone paying $400,000 for a 55 square meter apartment!!!
No wonder they can gift equity for the sale.
Apartments here outside a Lease sell for $4000 to $5500 per square meter. Stuck in a Lease it takes a year to get of or longer they sell for a lot less. If they sell at all. 55 x $4000 = $220,000.
Seagar and Partners are very reputable valuers here and have a lot of expertise in the apartment market. Get some advice from them as to value. I reckon they will save you your money because I think if you do this you will lose all your deposit and more.
Theres no way that Units worth $400,000.
Or has the Vendor "organised" a valuer for you?

[Wayne]

That sounds reasonable - $250k for 55sqm. I agree $400k for that is just crazy!

[xlancer]

Hi Captaincrab,

thanks again for your response.

No valuation has been provided by the marketing company yet. I've trying o check what is the fair market price of such a unit but have not spoken to a valuer. So based on what you are saying 6400nzd psm is way too expensive?

Just curious how did you obtain 0-2.5% returns?

You could be right that the 8% is a bait and the actual yield could be way below, that's something I am trying to validate at this time.

I feel cheated :-(

[speights boy]

xlancer

I see you have paid SGD 5k deposit; about NZD 5.2k

I agree with the others; run for the hills ( if you can )
A lesson; but if you do purchase it will be a lot worse.

SB

[captaincrab]

So based on what you are saying 6400nzd psm is way too expensive?

Just curious how did you obtain 0-2.5% returns?

You could be right that the 8% is a bait and the actual yield could be way below, that's something I am trying to validate at this time.

I feel cheated :-(

Well it probably cost that to build but to actually sell today?, yes its too expensive.
Have a ring around some Real Estate agents and ask them. Ray White Inner City, Barfoot and Thompson Fort St, City Sales are a few.

How did I obtain the returns? Accrued knowledge. I've seen a lot of these types of Projects and you should ask the Agents in the above RE firms what their experience is, and I'm sure many on this blog have a view...

[xlancer]

xlancer

I see you have paid SGD 5k deposit; about NZD 5.2k

I agree with the others; run for the hills ( if you can )
A lesson; but if you do purchase it will be a lot worse.

SB

Thanks Speightsboy and captaincrab for your comments.

@Speightsboy - your advise to stay away - is it because the returns (beyond the guarantee period) will be very slow? Would like to understand what u mean by alot worse? The assurance (in my mind) is that the strata title deed will be under my name, so the worst case is zero yield beyond 2 years. Or is there something I'm not seeing? Thanks.

[speights boy]

What I meant xlancer was you may be paying too much.
But that is your decision.
The Captain is correct, ring some specialist agents and ask them.

By your figures the mortgage would be about 280k. Are you sure they will lend that amount?.

Basically , if you pay too much it doesn't matter if you get 2 or 8% return. It may still not be worth it.

cheers
SB

[speights boy]

..... so the worst case is zero yield beyond 2 years. Or is there something I'm not seeing? Thanks.

I believe there have been cases in other hotel leases where the yield have become negative.

ie. The expenses have exceeded the income.

SB

[xlancer]

I see. That sounds bad

Btw came across an article on propbd.co.nz that mentions the plan to market in SG.

Pricing as indicated was to be $4400-5800psm, pretty close to what you guys are saying should be the market norm as well.

While the court wrangle goes on, the liquidators of Icon developer Paxton Pacific Group Ltd (which went into liquidation on 7 August as a solvent company in the breakup of the 2 directors’ partnership, along with 3 subsidiaries) and the directors of Perron, Cameron Marsh & Mark Perriam, have begun marketing units on which Blue Chip investors aren’t going to settle.

The new prices are about half the figures those Blue Chip investors signed up for. At the Icon (now the St Martins Waldorf Apartment Hotel), the Blue Chip price was about $9500/m² but the 150 units will go to the market this weekend priced in a range of $4400-5800/m². The Stadium units were priced around $6500/m² (story originally said $10,500/m²) for the Blue Chip investors (it’s now the Stadium Waldorf Apartments Hotel) and in Singapore have averaged around $6000/m².

For Singaporean investors, at least, the investment is an economic proposition, with a rental guarantee from Waldorf of 7% for the first 3 years, against the ability to borrow in Singapore for the investment at around 2%.

[Keithw]

xlancer
I can understand that you are now sitting there very confused as to whether to proceed or walk away.

Capts comments are very valuable and come from someone active in the market and who is able to manage his own investments.
As he said, it probably cost $6k psm to build the complex, but the NZ apartment market has taken a dive due to banks not being willing to fund purchasers, so right now the buy prices are probably well below the build price, and not much more is being built because of it. This will restore prices in years to come, but maybe not during your 3 year gaurantee period.

The killer in these managed places tends to be the administration costs that the owners are charged, regardless of whether there are tenants or not.
Then on top of that there tends to be high Body Corp fees.
So if you are borrowing the whole purchase price, that can mean your costs exceed your income, even at just 2% interest.

The question you then need to answer is how much is it worth subsiding your investment for possible future capital gain, which could be many years away.
If you believe in property as a long term investment then you may be willing to carry your investment because everything is taken care of for you while you wait.
On the other hand, if you want to get more involved in selecting a property, finding a property manager to look after it for you, and take a little more risk as far as vacant periods etc, then there are better investments available.

it totally depends on your willingness to get involved and your risk profile.
If you are in it for the long term, and it is not your only investment, then paying a little too much upfront for the convenience of having everything taken care of for you, should be recouped over time and you still come out on top.

Whatever you do, dont let 1 near miss put you off investing in a property somewhere. The naysayers will always tell you how risky something is, & whats wrong with a deal, and how they predict the world is going to end, but you often find they have been paralised by fear & never done anything at all.
Listen to those with real experience, but make up your own mind.
If you pluck up the courage to do something you willl end up well ahead of the naysayers in the long term.

[graemeh]

You also need to be aware that these properties are normally "zero rated for GST" when you buy them.

This means that if you take them away from the management company (hotel) because you are not happy with their performance you will have to pay GST. This is currently 12.5% and will increase to 15% from 1 October 2010.

When you are comparing with other sales or properties for sale you need to allow for this. Properties that are not part of a managed complex like this normally include GST.

[eri]

in the old days the hotel would pay to build the hotel and own it

but nowadays they would rather get investors to pay for the build

and they contract to operate it for a few years to see how things go

if things go well and they have high occupancy they renew the contracts

if things only middle along, they only renew the contracts of the most popular rooms

if things go badly, they don't renew anything and walk away

lots of reading out there

http://www.nzherald.co.nz/nz/news/ar...ectid=10502200

here's a typical investor in a managed hotel apartment trying to get out

Out of Hotel Pool!

Auckland Central, 702/188 Hobson Street


Asking price $210,000 - Government Valuation $320,000
Modern apartment in excellent condition - concrete building!
- 2 double bedrooms
- 1 bathroom
- balcony
- 55.91 m2 floor area
-Sky TV, air conditioning
- Rental return $450-$480 pw
Walking distance to Casino, shops and restaurants
Viewing by appointment only