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from the Sunday Star Times
06 February 2005
The sod has not turned as well as some property Investors Forum backers had hoped. Garry Sheeran reports.
The lure of sharing fat profits usually pocketed by professional property developers has instead brought heartache for once-enthusiastic investors.
Attracted by the prospect of buying into developments at prices 20 per cent below market value, they signed up with a property investors' network called the Investors Forum.
Instead, they find themselves dipping into their pockets to stump up with extra cash to meet massive cost over-runs.
After so much was promised, their less than glittering prize from the now-waning property boom has angered some members of the 2000-strong Investors Forum.
One said he signed up enthusiastically with the Forum when it came to town three years ago with bright new ideas on property investment and a slick seminar to match.
"I did so despite being told by my own lawyer that everything in the document was designed to protect 'them' and not 'us'," he said.
The Forum promised investors they would be able to share in valuation gains made while a property was being developed. In a rising property market, that proved tremendously attractive to many investors.
The flipside was that they had to share in any cost increases during that time.
"I went in with my eyes open, so I can't complain now if costs went up," said the investor.
"But costs went up so much, and the project was so late, that what should have been a very successful investment is turning out to be something else again."
He said some causes for cost increases were factors beyond the Forum's control.
Another said there appeared to be no cap on fees the Forum could charge, and while investors became, in effect, mini-developers in the project, they could get no answers to questions when things went wrong.
"And at least one project turned into a nightmare," he said.
"We feel that once we signed up we were treated pretty shabbily as customers."
Since April 2001, around 2000 people have joined the Forum after attending property seminars organised by Auckland developers and father-and-son team Dan and Kelly McEwan.
The Forum has channeled many millions of dollars into projects worth an estimated $400 million in and around some of New Zealand's hottest residential spots.
Dan McEwan said the Forum allowed ordinary investors to become mini-developers by getting into property developments at the ground floor.
"That way they are able to share in development profits," he said.
The McEwan Group, a vehicle of McEwan family interests, has undertaken a number of projects either as sole developer or in partnership with other developers.
But some disillusioned investors are not the only ones soured by events.
Property-related professionals contacted by the Sunday Star-Times also questioned a governance model which exposed small investors to proportionate liability for risks usually shouldered by professional developers.
They also question a property development scheme that relies on valuation increases for capital gain.
"That's fine in the market we have seen over the past few years, but what about in future?" one asked.
Several investors contacted the Star-Times with their concerns, and others have willingly spoken, also on condition of anonymity.
"We have signed confidentiality clauses and are still involved with Forum projects," said one.
With 39 projects under the Forum's belt, founding director Dan McEwan said most had exceeded their original cost estimate.
"This is normal in property development," he said.
In the past two years building costs had increased by up to 50 per cent.
"Development projects, however, are currently selling at double the price that was indicated four years ago."
McEwan said the Forum had experienced problems with the development of 18 classic Wellington villas in the capital's Aro Street, around which some discontent had gathered.
The Star-Times understands original investors in Aro Street were told construction costs would be $260,000, but had now ballooned out to $400,000.
That increase, and a lengthy completion delay, left one investor lamenting that what could have been a healthy double-digit return had become single-digit.
Other Aro Street investors have not been so dismayed.
Alex Grant, who has invested in several developments through the Forum, was a late participant in Aro Street when anticipated construction costs had risen to $350,000.
He said completion was a year later than anticipated, but he had still doubled his equity - "higher costs have been matched by higher valuations".
"I knew the extra risks I was taking on board, but I also knew the potential for a greater return," he said.
"I'm happy."
Grumblings have also emerged from investors in Queenstown, where the Forum has several projects under way, including the Pounamu development which involves the demolition of the historic Bottle House to make way for a luxury 68-apartment and hotel development.
Investors who earlier paid a deposit on an apartment were told they would cost $550,000 to build, and had a valuation of $700,000.
That cost had risen to $630,000, and similar apartments in the tourist spot were now fetching $680,000.
"I am sure the Queenstown property market will hold up, but those two numbers are getting uncomfortably close together," said an investor.
McEwan confirmed the cost increases, but said valuations on the Pounamu apartments had risen to $800,000.
Southland born and bred, McEwan has been active in property developing, investing and financing since the mid 1960s.
After a decade in Australia, he returned to New Zealand in 2000 to establish the Forum as an education tool for investors.
By mid-2001 the property sector was starting to hum, and people were wanting more than seminars on property.
The Forum then began sourcing property investment opportunities and offering alternative structures beyond the standard sale and purchase agreement where investors were protected from having to meet development cost increases.
Some Forum projects like Aro Street were structured as bare trusts where a group of investors came together to act as joint participants in the project.
While this brought the liability for extra costs, it also meant they could benefit in growth in valuations.
McEwan said this more sophisticated structure was promoted to more experienced investors.
"Early on, we may have let a few less sophisticated investors slip through that we shouldn't have," he said.
The Forum also offers a co-development structure where investors are not liable for extra costs, but their deposit money is lent directly to the project rather than put in a trust.
This provided an opportunity to share in development profits as well as buy and then either rent, or on-sell units later.
This structure will be used in one of the Forum's latest projects, the $100m-plus redevelopment of the Waiwera thermal area into an international spa.
Also on the Forum's agenda are plans to invest in the unfinished Sheraton Hotel in Rarotonga which nearly bankrupted the Cook Islands when it folded 11 years ago amid Mafia and murder allegations.
"We are working on ways in which we can de-risk that project," McEwan said.
He said the Forum would continue to use the bare trust and co-development structures where they were appropriate.
He said bare trusts especially were more suited to a smaller group of investors rather than large numbers on bigger projects.
The risks they entailed had been underscored by the fact that the Forum had used them at a time when costs were increasing significantly.
But so too had valuations and property prices.
"At the end of the day we want repeat business from members who have been happy by what they are achieving through the Forum," he said.
The sod has not turned as well as some property Investors Forum backers had hoped. Garry Sheeran reports.
The lure of sharing fat profits usually pocketed by professional property developers has instead brought heartache for once-enthusiastic investors.
Attracted by the prospect of buying into developments at prices 20 per cent below market value, they signed up with a property investors' network called the Investors Forum.
Instead, they find themselves dipping into their pockets to stump up with extra cash to meet massive cost over-runs.
After so much was promised, their less than glittering prize from the now-waning property boom has angered some members of the 2000-strong Investors Forum.
One said he signed up enthusiastically with the Forum when it came to town three years ago with bright new ideas on property investment and a slick seminar to match.
"I did so despite being told by my own lawyer that everything in the document was designed to protect 'them' and not 'us'," he said.
The Forum promised investors they would be able to share in valuation gains made while a property was being developed. In a rising property market, that proved tremendously attractive to many investors.
The flipside was that they had to share in any cost increases during that time.
"I went in with my eyes open, so I can't complain now if costs went up," said the investor.
"But costs went up so much, and the project was so late, that what should have been a very successful investment is turning out to be something else again."
He said some causes for cost increases were factors beyond the Forum's control.
Another said there appeared to be no cap on fees the Forum could charge, and while investors became, in effect, mini-developers in the project, they could get no answers to questions when things went wrong.
"And at least one project turned into a nightmare," he said.
"We feel that once we signed up we were treated pretty shabbily as customers."
Since April 2001, around 2000 people have joined the Forum after attending property seminars organised by Auckland developers and father-and-son team Dan and Kelly McEwan.
The Forum has channeled many millions of dollars into projects worth an estimated $400 million in and around some of New Zealand's hottest residential spots.
Dan McEwan said the Forum allowed ordinary investors to become mini-developers by getting into property developments at the ground floor.
"That way they are able to share in development profits," he said.
The McEwan Group, a vehicle of McEwan family interests, has undertaken a number of projects either as sole developer or in partnership with other developers.
But some disillusioned investors are not the only ones soured by events.
Property-related professionals contacted by the Sunday Star-Times also questioned a governance model which exposed small investors to proportionate liability for risks usually shouldered by professional developers.
They also question a property development scheme that relies on valuation increases for capital gain.
"That's fine in the market we have seen over the past few years, but what about in future?" one asked.
Several investors contacted the Star-Times with their concerns, and others have willingly spoken, also on condition of anonymity.
"We have signed confidentiality clauses and are still involved with Forum projects," said one.
With 39 projects under the Forum's belt, founding director Dan McEwan said most had exceeded their original cost estimate.
"This is normal in property development," he said.
In the past two years building costs had increased by up to 50 per cent.
"Development projects, however, are currently selling at double the price that was indicated four years ago."
McEwan said the Forum had experienced problems with the development of 18 classic Wellington villas in the capital's Aro Street, around which some discontent had gathered.
The Star-Times understands original investors in Aro Street were told construction costs would be $260,000, but had now ballooned out to $400,000.
That increase, and a lengthy completion delay, left one investor lamenting that what could have been a healthy double-digit return had become single-digit.
Other Aro Street investors have not been so dismayed.
Alex Grant, who has invested in several developments through the Forum, was a late participant in Aro Street when anticipated construction costs had risen to $350,000.
He said completion was a year later than anticipated, but he had still doubled his equity - "higher costs have been matched by higher valuations".
"I knew the extra risks I was taking on board, but I also knew the potential for a greater return," he said.
"I'm happy."
Grumblings have also emerged from investors in Queenstown, where the Forum has several projects under way, including the Pounamu development which involves the demolition of the historic Bottle House to make way for a luxury 68-apartment and hotel development.
Investors who earlier paid a deposit on an apartment were told they would cost $550,000 to build, and had a valuation of $700,000.
That cost had risen to $630,000, and similar apartments in the tourist spot were now fetching $680,000.
"I am sure the Queenstown property market will hold up, but those two numbers are getting uncomfortably close together," said an investor.
McEwan confirmed the cost increases, but said valuations on the Pounamu apartments had risen to $800,000.
Southland born and bred, McEwan has been active in property developing, investing and financing since the mid 1960s.
After a decade in Australia, he returned to New Zealand in 2000 to establish the Forum as an education tool for investors.
By mid-2001 the property sector was starting to hum, and people were wanting more than seminars on property.
The Forum then began sourcing property investment opportunities and offering alternative structures beyond the standard sale and purchase agreement where investors were protected from having to meet development cost increases.
Some Forum projects like Aro Street were structured as bare trusts where a group of investors came together to act as joint participants in the project.
While this brought the liability for extra costs, it also meant they could benefit in growth in valuations.
McEwan said this more sophisticated structure was promoted to more experienced investors.
"Early on, we may have let a few less sophisticated investors slip through that we shouldn't have," he said.
The Forum also offers a co-development structure where investors are not liable for extra costs, but their deposit money is lent directly to the project rather than put in a trust.
This provided an opportunity to share in development profits as well as buy and then either rent, or on-sell units later.
This structure will be used in one of the Forum's latest projects, the $100m-plus redevelopment of the Waiwera thermal area into an international spa.
Also on the Forum's agenda are plans to invest in the unfinished Sheraton Hotel in Rarotonga which nearly bankrupted the Cook Islands when it folded 11 years ago amid Mafia and murder allegations.
"We are working on ways in which we can de-risk that project," McEwan said.
He said the Forum would continue to use the bare trust and co-development structures where they were appropriate.
He said bare trusts especially were more suited to a smaller group of investors rather than large numbers on bigger projects.
The risks they entailed had been underscored by the fact that the Forum had used them at a time when costs were increasing significantly.
But so too had valuations and property prices.
"At the end of the day we want repeat business from members who have been happy by what they are achieving through the Forum," he said.
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