Price Slump Exposes Australian RE Schemes
In an article titled "Developing Storm", the Sydney Morning Herald puts the spotlight on RE deals that are turning into ponzi schemes. "In recent years, money has been pouring into property-based debenture and finance companies offering a range of high interest rate securities. 'High-yield debentures are a risky investment, and there is no guarantee that investors will get their money back,' the Australian Securities and Investments Commission said."
Apparently, these firms are allowed to 'revalue' their properties upward at will.
"'When the market is trending down, you naturally know that land values and development sites will trend down much quicker than the market,' Bill Moss said."
"In Sydney, Moss estimates site values have come down by between 30 and 40 per cent from their boom highs."
"In these circumstances, there is no flow back of cash from the developer to the debenture issuer until the development is completed. In the meantime, investors in these debentures are paid only from the cash raised from other investors."
"Given that unsecured investors stand last in line, there is no recourse available if assets are sold and used to satisfy first mortgagees."