Questions and Answers

1. Sophisticated Investors

A Sophisticated investor is generally defined in Corporations Law as;

  • A person who has aggregated net assets of $2.5 million
  • or has total gross income for each of the last two financial years of at least $250,000 per annum.

A qualified accountant must certify that the person satisfies this criteria and this certification must be no more than two years old.

However as our structure of Unit Trusts does not come under Corporations Law these rules do not apply.

2. Infill Sites

An infill site is one that is located in an established suburban area between other residential or commercial properties. With infill sites we often have to remove older structures to make way for a new development.

Careful attention needs to be given when developing infill sites to the set backs of adjoining developments as our development may be restricted by these existing buildings. The size and location of mature trees can be critical to the final building envelope available on redeveloped sites.

Other important matters may also include site contamination, flood levels, slope and orientation of the land, planning zoning and overlays in the planning scheme.

3. What makes a successful Property Development?

A successful development is easy to see once achieved, however the factors that go to make a project work are the key.

Some of these are;

  • A professional approach where all pertinent factors are reviewed, analysed and their impact assessed by the relevant expert.
  • A team of experts that have a solid track record of achieving their stated goals.
  • Checks and balances are put in place to ensure all decisions are appropriate and taken in the best interests of the unit holders and the success of the development.
  • Timing is critical; advice is sort from experts about the current state and the future prospects of both the macro economy and the micro real estate market of a proposed development.
  • Purchasing in areas of steady growth and avoiding the boom/bust areas. As projects can last two years, some growth is expected to enhance the initial analysed returns.
  • Expectations need to be fully disclosed at the outset to ensure each member of a property syndicate is wishing to achieve the same goals.
  • Appropriate financing of the project to ensure costs are kept to a minimum, loans are non recourse, presales are at an appropriate level and pressure is not felt to act in a way not conducive to the best interests of the development.

4. What if interest rates rise?

The RBA has lifted the cash rate by 1.5% since October 2009. The Banks have quickly transferred this increase to the standard variable rate and added a small margin. These increases are used as a monetary tool to dampen demand and inflationary pressures and slow down what is seen as a hot property market. These increases have been widely regarded as bringing the rates back to a base level. They were discounted to revive the economy back in 2009.

While some industry pundits feel rates have peaked and the next movement will be down, most feel that there will be further small increases later this year.

Investors can insulate their investments by locking in a fixed rate for up to 5 years. Your finance specialist is the best professional to advise you on what approach is best for your circumstances. This can largely be dependent on your appetite for risk and your view of future interest rate movements.

You should receive a refund for any interest paid on a property investment as it is tax deductable. So increases will be buffered by any rebates due.

5. What areas are good to invest in?

Many areas of Melbourne are highly suitable to invest in; generally the middle to inner suburbs and the Bayside suburbs is where the growth in property values is the highest. Growth often cascades from the better areas to the outer areas with the rise in values dissipating as the distance for the sought after area increases. Some of these better areas can initially be outside the affordability of a lot of investors. Hence location selection is vital when considering where a property cycle is.

Given the lowering of interest rates, the continuing immigration and the current undersupply of housing ongoing growth can not be guaranteed but is very likely. The important thing is to not miss the next wave of property growth.

6. What is a Unit Trust?

A unit trust is normally a fixed trust where the unit holders are identified by their holding units in a manner similar to the holding of shares in a company. Property can be held in trust for the beneficiaries who receive income and other benefits from these assets without actually owning them. The trustee is the one who manages the trust for the beneficiaries.

Unit trusts are common for property and investment trusts and joint ventures. They were developed for commercial type ventures where a clear transferable interest in the trust is sort.

7. Unit Trust versus a Family Trust

A discretionary Family Trust is generally used amongst family members while a Unit trust is used in Commerce.

The benefits of unit trust are;

  • tradeable (can buy and sell units/equity in unit trusts)
  • set annual and final entitlements to capital and income, these are fixed and not able to be altered by the trustee.
  • a Unit Trust can have discretionary units. However the discretion is restricted to income (not capital).

A Family Trust can own units in a Unit Trust.

A husband and wife normally control a Family Trust. They have complete discretion each financial year to whom they distribute income. The income from such a trust is not usually shared outside a family! Hence the need for a Unit Trust!

8. Unit Trust versus the company

While the ownership of a Unit Trust and a Company are similar, the High Court in Charles v FCT has held that a unit in a Unit Trust is fundamentally different to a share in a company. A Unit Holder has a proprietary interest in all the trust property subject to the Trust Deed. A share confers upon the holder no legal or equitable interest in the assets of the company.

Points of difference include;

  • A trust comes into existence as the result of a private rather than a government Act.
  • A trust is not a separate legal person. A company is a legal entity in itself and offers less flexibility.
  • There is less governmental regulation of trusts.
  • The Trustee holds the investments on behalf or the Unit Holders who are regarded as equitable owners or beneficiaries under a trust.
  • Property such as shares in a company is held on trust for the Unit Holders in a Unit Trust by the Trustee.
  • A unit trust has more flexibility in regards to the relationship of ownership. The Memorandum and Articles of the company link together by contract the shareholders, while investors in a Unit Trust are not necessarily in any contractual relationship with other unit holders./li>
  • A trust is not a corporation or company, but a company may be a unit holder in a trust.
  • You can sell both units in a Unit Trust and shares in a company.
  • A Unit Trust can be set up so that you have to offer your units to other unit holders before you sell them on the open market. While shareholders in a company using a shareholder’s deed can incorporate similar restrictions.
  • A unit holder can lodge a caveat over land held in the Unit Trust. A shareholder in a company has no such right.

9. Distributing income within a Unit Trust

Income is distributed at the end of each year, to the Unit Holders in proportion to the units that the beneficiary holds. The Trustee has no discretion.

Individuals, Family Trusts or companies may hold these units.

In some cases an apartment from a trust can be transferred to a separate entity in lieu of cash, however individual circumstances may apply.

10. Selling units in a Unit Trust

Recording procedure;

  • The ownership of the trust funds is divided into a number of equal units.
  • The units are recorded on a register and
  • These are transferable like shares in company.
Some of the factors which may work against this are:

Unit Trusts should include mechanisms for cashing in (redemption) and transferring the units. The procedure for determining the price at which units are to be redeemed is of particular importance. Units in the Unit Trust are readily tradable and people holding them can share in the profits of the business on a pre determined percentage.

An appointed accountant ensures all these procedures are followed.

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