Property lease-back deals under ASIC scanner

Leaseback property deals, often targeted towards self-managed superannuation funds (SMSFs), are under the securities regulator’s review. 

The deals typically involve buying a residential investment property — house or apartment — with guaranteed tenancies that promise returns of around six percent, well above bank deposit rates or inflation numbers, according to a report in the Australian Financial Review.

The new owners lease back the properties to the developer who then acts as a landlord or engages a third party to rent and manage the property. Usually, these contracts are around three to five years and promise generous returns for the length of the contract.

Demand for the deals is growing among retirees looking for a regular, above-inflation income from the rent as well as the prospect of capital growth, the AFR reported.

The Australian Securities and Investments Commission stepped in to investigate because it wants property investors to fully understand their financial risks and responsibilities.

ASIC deputy chairman Peter Kell was cited in the report as saying that the watchdog is monitoring promoters of the schemes as part of a broader nationwide review of property spruiking and real estate deals on offer to SMSF investors.

"If these deals are done through self managed super, then it falls into the category of advice," Kell says.

Typically it involves the buyer of a property entering a leasing agreement with the seller. Yields are usually around three to four times the inflation rate of 2 per cent, or double returns on most fixed-rate deposit accounts.

The term is often three years but there is usually an option to extend the lease by six months for a maximum of two to three times.

But promises of such guaranteed rental returns are sometimes used by developers to lure investors to a weak market or masking an overpriced offer, warns a post on hotspotting.com.au.

“Developers offer them when they're struggling to sell apartments at the prices they want,” the post says. 

Recent prosecutions of spruikers are reassuring the regulator it has the legal power to close down unfair property-linked investment deals, despite it not being directly responsible for real estate.

"Get any deal reviewed by a lawyer and financial adviser before committing," said Anthea Digiaris, an associate with legal firm Slater and Gordon Lawyers, about the need for doing your own due diligence, the report said.

But Daren McDonald, a partner with management and property consultancy ShineWing, told the AFR that lease backs are common in commercial and retail sectors and can also work well for a short-term investor who enjoys the higher yield before moving into the property.

But Ben Kingsley, chair of industry lobby group Property Investment Professionals of Australia, echoes the advice from Hotspotting and warns investors to be careful.

"Times are tough for many developers because deals are not coming through. Rental deals are regularly offered by selling agents whose interest is to get a deal done for the developer, not look after the buyers' interests," says Kingsley.

The onus is on the developer to find the tenant.

"If they can't find a tenant, then the extra costs caused by no rental income will come from their margins. That means any rental guarantee will be included in the price the buyer pays."

Those considering a deal should answer these questions before completing a deal:

•Has the value of the property been inflated to cover the high yield?

•Do banks and other lenders impose tougher conditions around lease-back deals, such as stricter terms on interest rates, ability to repay, loan to value ratios?

•Who pays for property servicing contracts, body corporate fees, insurance, rates and maintenance during the lease?

•What happens at the end of the lease? Can the lease be extended? Who is responsible for restoring the property to its original condition?

•What happens if there is a contract breach by a tenant or the developer? Is there a structure to resolve disputes?

•Is there demand for this type of property?

•What rent can you achieve at the end of the developer's lease?

•Will the value of the property decline if the original lease no longer exists?