The tale of two property investors
Two groups of property investors wish to withdraw their funds from the sector. The first group are the investors in mortgage trusts who wanted to to redeem their shares in those trusts in November 2008. The second group are the international banks which we are told wish to withdraw from syndicated loans to property investment companies. The contrast in the Federal Government’s assistance to these investors is quite interesting.
The Government guarantee of Australian bank deposits was introduced in October of last year. Soon after the mortgage trusts and other property trusts ran into difficulty meeting requests for redemption of units. Many of the trusts were unable to free up enough cash and were forced to freeze redemptions.
The investment managers of the mortgage trusts and groups of individual investors appealed to the Federal Government for help. They claimed that the flood of redemptions resulted from the implementation of the deposit guarantee. No proof of that assertion was proffered, but nonetheless, it was generally accepted that by guaranteeing $800 billion of deposits the Government had created a problem for the investors in the $20 billion mortgage trust sector.
The Government saw no reason to provide liquidity support for mortgage trusts. I thought the Government was correct in not offering support. Property trusts are vehicles for mutual investment in an illiquid asset class. In ordinary circumstances investors in the trust are pooling their liquidity risks. Just when one investor has a negative liquidity shock and needs to withdraw money from the trust, another has a positive liquidity shock and needs to invest in the trust.
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