THE VALUE IS NOT THE VALUE

31st May 2007

THE VALUE IS NOT THE VALUE
Why investors lose millions in property.

by Neil Jenman

There is a simple reason why thousands of investors have lost hundreds of millions of dollars in the property sector.

They do not understand the meaning of the word value.

My mother-in-law, Daph, is a classic example.

Like thousands of elderly folk, Daph thinks she understands value. For instance, she's got a few shares in Coles. When she wants to know their value, she checks the newspaper.

And there it is - $16.68 per share (last night) - clear and simple.

Daph has never looked up "value" in the dictionary where it's defined as "monetary worth". She doesn't have to research the word. All her life, Daph has known a simple truth - value is the price for which you can sell something.

Except when it comes to property.

People like Daph don't realise that the value of a property has often got nothing to do with the price for which it can be sold.

This is especially true when it comes to "values" being touted by those trying to persuade others to invest in the property sector.

Whether it's investing their savings in companies such as Australian Capital Reserve (ACR) or buying apartments through The Aldy Group, investors will often be shown a valuation to reassure them that their money is as safe as houses.

Everybody knows that property is valuable. So, when people like Daph are shown what is called a "sworn" or a "certified" valuation, they think of their Coles shares.

But this is where the stock market and the property market part company. It's where true values (as in "monetary worth" like Coles shares) become false values (as in ACR or Aldy).

You see, in property, the value is often what some sharp operator has managed to manipulate through dishonesty, corruption or incompetence.

In the property industry, valuations are regularly rigged.

Now, for some specific examples.

First, for those who are investing their savings in "debenture" or "notes" or "mortgage" schemes.

In the Money section of yesterday's Sydney Morning Herald, among the many fine articles, were several advertisements offering rates from 9% to 12.5%.

Such ads appear almost identical to the ads once placed by ACR which collapsed this week after having attracted more than $330 million from investors, many just like my mother-in-law. People who thought they knew the meaning of the word value.

In the ACR prospectus, there was a list of multi-million-dollar properties, all of which were "valued" at what ACR described as "current fair market value".

The investors did not know that the values were not the values.

For example, one property was stated as having a value of $120 million. There was a first mortgage of $24 million (almost certainly from a bank) and a second mortgage of $68.3 million (from investors like Daph).

So, in essence, investors were led to believe that a property with a value of $120 million had loans against it totalling $92.3 million. Safe as bricks and mortar. Or so it seemed.

The valuation of $120 million was not the "monetary worth". It was merely a figure ACR had managed to get a certified valuer to swear it was worth.

The true value (i.e. its real monetary worth) was about $40 million. This was like dangling all the investors over a cliff secured by a frayed rope.

And this was just one property.

When the ACR rope broke this week, 7,000 investors plunged to their financial doom.

Now, let's look at a second example with what happens to thousands of people who buy an investment property.

A single mother was persuaded to buy a soon-to-be-built apartment through The Aldy Group which claims to be selling half a billion dollars of property every year. Aldy commenced business in 2001.

They tell investors that wealth can be created by buying properties from Aldy.

They tell their salespeople that, "There is no limit to what you can earn with The Aldy Group," and their properties are so good that "many agents out there are willing to sell their first born baby to get some of your listings."

In this case, which began back in 2004, the property was priced at $375,000. Around the same time that elderly folk were putting their savings into ACR, this young mother paid a ten per cent deposit of $37,500 to The Aldy Group.

Now, three years later, local agents say the true value (the amount for which they can sell the property) is, at best, $250,000 but, in reality probably around $225,000.

This single mother is financially and emotionally devastated. She faces the loss of her deposit and her family home.

But, hey, maybe all is not lost.

The Aldy Group recommended a mortgage broker who, last month, arranged a valuation.

Suddenly, the property is now valued at $345,000. Good news, you only lose $30,000 (plus expenses) instead of $150,000 (plus expenses). All that's needed now is to find a lender.

But no, that's unlikely.

When the young mother told a local agent about the "valuation" he was astounded, especially when he saw that it was prepared by one of the state's most well-know firms.

"Impossible, I reckon it couldn't be be sold within a hundred thousand of that valuation," he said. "It's a joke."

No, it's not. This is deadly serious. It's the reason why so many decent people are losing so much money.

On May 28, in a voice-mail message, the boss of the valuation company said, "One of my colleagues will look into the matter tomorrow".

Five days earlier, on May 23, the boss of The Aldy Group, Eric Triu (as in "true"), said, in an email, "We will look in to matter [sic] immediately."

And that's what investors should do before they invest in the property sector - look into the matter of value before they invest.

If they look hard, they will soon realise that, unless they employ their own independent valuer, they're almost certain to join the thousands of investors who, collectively, are losing hundreds of millions of dollars.

Property is not like the stock market where small investors, like my mother-in-law, know the true value of their shares.

In property, the value is not the value.

***************

FOOTNOTE:For property investors to be truly protected, the property market needs to be treated more like the stock market where investors know the true value of what they are buying at the time they invest.

Yesterday, the new boss of the Australian Securities and Investments Commission (ASIC), Tony D'Aloisio, was asked why it had taken three major property company collapses before ASIC decided to increase protection for investors. He replied, "The simple answer is that I wasn't there."

So where was Mr D'Aloisio, the man who could have protected the investors?

He was the boss at the Australian Stock Exchange.

Mmm, maybe, one day, it will be safe for my mother-in-law to invest in property.

***************
Further Reading.Today's Sydney Morning Herald: New ASIC boss bares teeth. http://www.smh.com.au/news/business/new-asic-boss-bares-teeth/2007/05/30/1180205339453.html

***************

This Consumer Alert is taken from the Alerts section of the Jenman website.


<< Back to Latest News

Articles