Slow start but hopes high

Photo: The Press

Lindsay Hay, of Real Property KiwiSaver Ltd, outside his Christchurch motel.

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The manager of the only direct property KiwiSaver scheme on the market says it can survive despite attracting only a few hundred thousand dollars of contributions and having no property to its name 16 months after its launch.

But perhaps the slow start is only natural – Lindsay Hay, of Real Property KiwiSaver Ltd, also owns the Azena Motel in Christchurch and he told the Sunday Star-Times he had been spending more time taking bookings and greeting guests than he had on managing the KiwiSaver fund.

"It is time for me to stop being a motelier and start doing what I am good at," he said. "I'm running motels down here, which isn't really helping." He said he hoped to sell up soon and get back to managing the scheme.

What Hay says he is good at is commercial property, a track record established in 30 years of setting up private property syndicates for wealthy habitual investors through his private Millenium Property Group.

Those syndicates now contain some $150 million, he said, though as they "fly under the radar" needing no offer documents under securities law, verifying that figure is impossible.

The Real Property KiwiSaver scheme was set up to woo KiwiSavers dubious about investing in assets like shares which form the bulk of most long-term superannuation schemes, an aim Hay believes still has currency.

But by the end of June, the scheme had pulled in just $335,200, bulked up by contributions from the Crown and employers to $400,129, way less than is necessary to buy the commercial properties the scheme was to invest in.

The entire assets of the scheme are invested in cash at Kiwibank, but following the manager's 1.4% fees, the after-tax profit that went to investors in the 11 months to the end of March was just $8873, or 2.2%.

In the following five months to the end of August, the financial statements reveal that unit prices went up by just 0.006%.

"It's hard work. I'm not pretending it isn't. We are not a default provider so we are on the back rank to start with," Hay said, though he vowed the scheme would not fall by the wayside as many smaller KiwiSaver schemes are tipped to do.

The scheme manager was talking to several potential distributors however, which could see contributions jump, he said, including a building society and an iwi. "On our own we are not going to get the critical mass," Hay said. "We haven't got a $5 million marketing budget."

Hay said the scheme needed to get to around $1m in unitholder funds before it could realistically buy a property, though he had been looking. "We've been looking for the past six months, but we haven't found the right thing yet," he said, adding the scheme's first buy had to look good in a photo for the scheme's marketing material.

"We are looking for something that looks pretty. The money is where the industrials are, but they don't look good in pictures. We are looking at retail because they look quite presentable in a photo."

One avenue being explored was the scheme buying property as a co-owner, something its trustee had said was fine, provided it bought a controlling stake, Hay said. The scheme could also borrow up to 40% of the purchase price of a property.

The state of the property market isn't helping with attracting investors, although Hay said a slump was the best time to buy.

Indications are that the commercial property market has been undergoing its worse period since 1993, which will not make it easy to persuade people to put their retirement savings into it, although, frustratingly, that makes now a perfect time to buy.

According to the Property Council of New Zealand, CBD offices posted the lowest returns in 16 years, with a -5.2% total return in the year to June 2009, a sharp fall from the 14.7% total return posted in the previous year.

The main reason for this was collapsing prices and an 11.6% drop in valuations in the 12 months to June, although, on the bright side, rental income has held up.

Other commercial property sectors could be far worse, but the Property Council decided to keep its total return indices for the other New Zealand property sectors like industrial and retail under wraps for the period ending June "due to a lack of valuation evidence from market participants".

But with the operating expenses of the scheme paid for out of the manager's fees, the Real Property KiwiSaver company which runs the scheme is making mounting losses, although Hay said those were being shared around a number of shareholders in Real Property KiwiSaver Ltd, so the pain wasn't too great.

The tiny $3358 the manager took in in fees didn't come near to meeting the accounting costs of $6378, trustee fees of $18,750, and auditor's fees of $10,000.

REAL PROPERTY KIWISAVER SCHEME:

Founded in May 2008 to invest in direct commercial property. By the end of June this year, it had just over $400,000 of unitholder funds, all on deposit with Kiwibank. Manager fees of $3335 ate up more than a quarter of the pre-tax and fee return to unitholders of $12,231. The manager was responsible for paying just over $35,000 in audit, trustee and accouting fees in the first 11 months of the scheme's operation. The scheme has yet to buy a single property.