As the financial crisis and market crash of 2008 illustrated all-too painfully, stocks and other “safe investments” do not always go up. Sometimes they fall spectacularly. Few saw the implosion coming or warned of it, so what’s a prudent investor to do?
With bonds ending a 25-year bull run and many experts predicting poor future returns for equities, interest is growing in the alternative property investments category, which encompasses mortgage funds and real estate equity.
When people hear alternative, they immediately think exotic and risky, says David Kaufman, president of Westcourt Capital Corp., a Toronto-based investment fund specializing in income-generating funds tied to real estate and equity investments not correlated to the ups and downs of the stock market. Kaufman, who has hosted a series on alternative investing for the Business News Network and is a regular contributor to CBC’s Lang & O’Leary Exchange, says clients have a simple mandate: “The number one goal is capital preservation.”
Firms such as Westcourt allow high-net-worth clients, typically business owners, to get away from the inevitable ups and downs of stock and bond markets in favour of investments that steadily and conservatively create a revenue stream. Westcourt’s products include mortgage investment corporations that invest in residential mortgages, real estate investment trusts (REITs), and more unusual investments such as Canadian farmland.
While many business owners often buy their places of business and then look to purchase other commercial properties as a source of income, Kaufman says this one-off approach is fraught with risk. Besides the lack of diversification, “There is a total lack of liquidity, lack of expertise, they pay too much on the way in, and receive too little on the way out.”
The lesson that not all property investments are created equal has certainly been the experience of Chris Biasutti, a Vancouver-based exempt market representative who established his own business four years ago to advise clients on the various investment options available in the exempt market and their suitability. In the past seven years, he’s put money into everything from mortgage income corporations, single mortgages, private REITs, and raw land syndications.
Biasutti’s success investing in the alternative space has led him to teach investors about alternative real estate and provide research on alternative investment products. “The government, with its regulations, really lumps this whole marketplace into what they call highrisk investment but the reality is that there is a whole spectrum of risk,” running from large, stable mortgage investment funds to speculative land syndication.
“Raw land is very illiquid,” he adds. “If you pay too much—and have some debt on it—and your intention is to develop it, there is a very high probability that you won’t be able to complete the project if you don’t have deep pockets.”
That unfortunate scenario played out in 2008 when Biasutti put approximately $50,000 into a land development project just outside of Calgary with a projected annual return after five years of 15% to 20%. Following the recession, the developers struggled to service debt on the land. They are now restructuring and attempting to proceed with mixed-use development.
“It was supposed to pay out in five years,” he says. “If it doesn’t go completely sideways, it now probably won’t pay out for seven to 10 years.”
Biasutti’s lessons from that deal? Experience and a clear understanding of the business are key. You should understand the risks and how to mitigate them. “Obviously the market played a factor. Compounding that was the inexperience of the management group. They hadn’t done one of these deals before, and they misallocated their funds by continuing to proceed with the development instead of paying down the debt.”
Perhaps the most famous example of a land development deal done wrong was the Reichmann family’s Canary Wharf project in London. The world’s largest property development, wound up, in the end, too big and ambitious a project, and remained half empty when the worldwide economy slipped into recession during the early ’90s. This turned out to be a major gamble that ultimately sunk the Toronto-based real estate development giant, Olympia & York.