Discuss about the Real Estate Contemporary Property Investment Plane.
The case study revolves around the awful truth surrounding the land-banking fantasy. It follows the investment case that Grace Monka made of eighty percent of her super in a high-risk land banking scheme. Monka is pictured below:
Monka, pictured above, was a single woman in her early fifty when she first got the information about land banking. She became concerned about her financial security. Because she only had few assets and her mother was sickling whom she had to care for. She was thus keen at putting her super to work in a way that might would deliver returns over a long-run. She got the concept of land banking explained to her by Jamie McIintyre in a 4-day seminar. It was explained that the concept encompassed purchasing “wholesale options” over undeveloped land and then waiting for the rolling of windfall gains.
Monka was urged by the salesman and got persuaded to withdraw $60,000 which was about eighty percent of her super. She then established a self-managed super fund and subsequently invested her lot in a land-banking scheme outside Shepparton after convinced in the seminar that the place would be a lovely estate, with parks as well as everything. However, Monka seemed to have lost her lot as seven years later, the land remained undeveloped (Frost 2016).
To make it worse, the developer is even in liquidation with assets purchased by another McIntyre firm that shows no signs of success. Indeed, Monka’s dream of supplementing her retirement income was dealt a blow and set out to share her story as a means to save others from falling into such a trap. It was an investment without an exit and hence much riskier which is only suitable for wealthier individuals. This is because it offers nearly zero liquidity, and based on underlying land quality, it is further, highly speculative. Thus, land banking is never an appropriate for the ordinary investor. This is because none of the land banking scheme has gone to maturity in Australia.
There is a higher probability that the developers may mislead the private investors about the prospects of land development. Some developers provide land as a form of investment with no information on how they will acquire council authority for its development. Developers sometimes fail to inform the private investors the required restrictions on the method of land development. Where development approval is not permitted, the investors will remain with the investment which sale less in the market than the original amount paid for the investment.
The planning approval require huge amount of money and it may also take several years. During the process, on-going planning and legal costs eat the money set aside for the development funding and may cause the development industry to become insolvent. If the company become insolvent, option holders like the private investors will lose the amount which they have invested in the business.
The developers may scam the private investors if they offer them with option in land which is not for the company.
Individuals should try to seek for the advice and guidance of a financial planner because they provide additional strategies that offer assistance to individual’s lives in respects to their financial positions. Some of the more significant strategies that the financial planners may provide to an individual include:
Manage and organize finance- many individual experience complex financial difficulties, yet luck enough expertise, discipline, time and objectivity of putting their financial household in order. Financial planner can therefore examine individual overall financial situation and net worth, help individuals to identify their objectives and goals, and advice on the best strategies to assist people toward achieving their goals.
Receiving a financial windfall- getting a considerable amount of money or a win in lottery often includes other non-financial and financial factors. Therefore, it may be advisable if the money is put toward debts, or individuals may decide to distribute some through donations to charity. Independent outside Financial planner may be required because inheritance is often accompanied with family conflicts and deep emotional issues.
Planning for retirement- Decisions related to investments are naturally a vital elements of retirement planning. Individuals often experience challenges on how to withdraw and spend their money once they retire, and on the type of retirement they intended to live. The assist of a financial planner can help individuals to set their vision, and then come up with strategic plan that can help them achieving their vision (Frost 2016).
Facing a financial problems- serious illness, loss of jobs, a natural disaster and a legal problem might force individuals to seek the help of a financial advisor.
Running a business- A financial planner can assist in setting up benefits and a retirement plan for the employees and owner. This may make help in creating achievable succession plan when the owner of the business retire or die.
Estate planning- A financial planner can assist individual put the draft documents that are related to their financial circumstances and also help them in setting their vision on how to run the estate dispersed. Financial planner can help in the discussion of strategies for trust, life insurance, power of attorney, living wills and other issues in relation of estate planning like the distribution of properties.
Insurance review- A financial planner can help individuals to analyse their insurance desires and look at options such as long term care and disability income in relation to their goal and overall financial situations.
Career advice- Financial planner can assist in the provision of advice that are related to financial problems for the change of career, separation packages or compensation, retirement plans and employee stock options.
Financial planner can also help their clients in the approximation of their living expenses especially when they retire and discuss amicable strategies for the assets distribution following the retirement.
Financial planner also checks their clients and discuss with them present and future economic conditions.
Financial planner will advise the investors on how to select the right superannuation fund. Choosing the correct superannuation fund especially on their retirements will require the investors to seek the help of a financial planner. In most cases, it is advisable to select the super fund that the investors want the compulsory contribution to be paid into.
The major types of super funds that the investors will have to enquire about can be group into three:
Industry super funds – this type are run specifically on profit member.
Corporate funds- this type of the super fund are only managed by the company or the employer.
Retail super funds or Commercial- they are mostly being provided and run by insurance Companies and banks.
Financial planner helps the investors in choosing the superannuation fund that satisfy their needs. The factors that the financial planner will consider include:
Once the investors have made the selection of the right super fund, the financial planner will then help them on the process of joining the account.
Asset allocation will require the investors to seek the advice of the financial planner. The investors will have to separate their money according to different classes of assets, such as bonds, stocks, and cash alternatives, for example money market account. The assets classes have variety of potential returns and risk profiles.
The financial planner advice to Investors will help them offset any losses and replace it with gain. This enables the investors to reduce the risk that are associated with the portfolio.
Determining the most appropriate mix- the most suitable asset allocation depends on the investor’s situation. It is mostly being determined by two major elements.
Asset allocation is an important building block in portfolio creation. The strong knowledge of asset allocation is being provided by the Financial planners to the investors thereby enable them to consider the appropriate investments for their long term-strategy.
The table below shows an example of the three major asset classes and how it has performed.
Stocks are denoted by S&P 500 total return, and an unmanaged index which are considered to be a representative of United State Stock market. Bonds are denoted Citi group corporate Bond composite index. Cash are denoted by Citi group Treasury bill.
The best asset allocation for the investor’s age- the old thumb rule requires individual to subtract their age from 100 and the result will represent the portfolio percentage that the investors will have to sustain in stock. For example, if an investor is 40, they should keep 60% of their portfolio in stocks. If an investor is 60, they should keep 40% of their portfolio in stocks.
However, with United State different financial planners recommend that the rule should be made closer to 110 or 120 being subtracted from individual age. This is because individuals need to make their money to last longer, and therefore, require the extra growth being provided by the stock.
Illiquid issues- this refers to the situation whereby the security or other different assets cannot be exchanged in term of cash easily without making loss. The investors have to seek the help of the financial planner in order to advice the on the correct illiquid assets to be purchased.
Strategic Asset Allocation: This option creates and then follows the “best policy mix”. This is a proportionate merger of assets depending on the anticipated rates of return for every class of assets. For instance, where stocks have returned 10% yearly in the past while bonds have historically returned 5% per annum, the investor will have a 50 percent stock and fifty percent bonds anticipated to return 7.50 percent yearly.
Constant-Weighing Asset Allocation: Strategic asset allocation means a purchase-and-hold mechanism, as the value of asset shifts triggers a drift from the originally created policy mix. Thus, one could prefer to embrace a constant-weighing option to asset allocation. With this option, one continually rebalance her portfolio. For instance, where a single asset is diminishing in value, one would buy more of such an asset. And in case that asset value is surging, then the investor will set it thus making profits (Shin 2015). No hard-and-fast rules for timing rebalancing of a portfolio in constant-weighing or strategic asset allocation. Nevertheless, a shared rule of thumb is that an investor must ensure that a portfolio is rebalanced to its initial mix where any particular asset class moves beyond five percent from its initial value.
Tactical Asset Allocation: A strategic asset allocation approach, over the long run, might appear comparatively rigid. Hence, one could find it essential to from time to time involve in short-run, tactical deviances from asset mix hence capitalizing on the exceptional or unusual opportunities for investment. Such a flexibility include the element of market-timing to portfolio, permitting the investor to partake in economic situations more favourable for a single class of asset than for other classes. This method is designated as the abstemiously active option, because the overall general asset mix will be returned to where the anticipated short-run profits are accomplished. This approach requires certain levels of discipline, as the investor has to initially acknowledge where short-run opportunities have stopped and subsequently rebalance their portfolio to long-run asset stance.
Dynamic Asset Allocation: This is also an active allocation option. Here, the investor can continually adjust the asset mix as markets fall and rise, and as economy weakens and strengthens. Here, the investor can sells his assets that are diminishing and buy asset that are rising. This option is the polar opposite of the constant-weighing alternative. For instance, if the stock market is indicating signs of weakening, the investor will sell stock in expectation of continued plunges; and where a market shows indication of strength, the investor buys stocks in expectation of sustained market surges.
Insured Asset Allocation: With this option, the investor will create a portfolio value base upon which portfolio has to be permitted to decline. So long as portfolio hits a return beyond the established base, an investor will start exercising active management. This management will rely on analytical research, judgment and forecast as well as experience to make a decision on what securities she can purchase, hold and even sell, with the intention of surging the value of the portfolio as far as feasible. When, nevertheless, the portfolio should ever decline to base value, the investor will invest in assets that are risk-free, like Treasury (particularly T-bills) to have a fixed base value.
At such a point, the investor will consult with her advisor on the reallocation of assets, maybe even overhauling her investment strategy. The insured asset allocation could be appropriate for risk-averse individual with a desire of some degrees of active portfolio management, however, still appreciate the security of creating a guaranteed floor under which the portfolio is never permitted to plunge. For instance, an investor that wishes to create a minimum standard of living when she retires could find an insured asset allocation option the best strategy to manage her goals.
Integrated Asset Allocation: With this option, the investor will consider both her economic anticipations and her risk in creating an asset mix. Whereas all of the above-discussed options consider expectations for the coming market returns, not each of them consider the risk tolerance of the investor. The integrated asset allocation, conversely, encompass elements of all strategies, considering both expectations and real alterations in capital markets and the investor’s risk tolerance. It is the wider asset allocation method. However, it must be noted that this strategy is unable to include dynamic and constant-weighing allocation because apparently, an investor might never wish to implement 2 strategies which are antagonists.
The best asset allocation strategy chosen for the master degree graduate is the integrated asset allocation. The reason this strategy has been proposed is that it will help the graduate consider both economic expectations and his risk as he establishes his asset mix. Moreover, this strategy takes into account both expectations for future returns and graduate’s risk tolerance which is lacking in other strategies. Moreover, it encompasses aspects of all strategies and consider both expectations and actual alterations in the capital markets together with risk tolerance.
Conclusion
In conclusion, it is true that no land-banking scheme has gone to maturity in Australia. Whereas this scheme might seem lucrative in seminars, as witnessed by Monka, it is a higher risk which is strictly a preserve for wealthier people who can wait for years without returns. Therefore, the ordinary investors should learn from Monka’s case not to invest in this kind a no exit investment.
References
Frost J., 2016. Inside the Land Banking Fantasy, Australian. Financial Review Personal Finance, February edition, p34-39.
Frost, J., 2016. The awful truth about the land-banking fantasy. FINANCIAL REVIEW, pp. 1-4. https://www.afr.com/personal-finance/the-awful-truth-about-the-landbanking-fantasy-20160106-gm0i8l
Shin L., 2015. The 1-Page Financial?Plan, Forbes. www.forbes.com_sites_The1pageFinancialPlan.pdf
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