KEY POINTS:
Tower says increased competition from banks and greater uncertainty in the property market has forced it to close a $242 million mortgage investment fund but other providers say they won't be closing theirs, despite the tough environment.
Yesterday Tower announced the Tower Mortgage Plus fund, which is owned and issued by Trustees Executors, would be wound down with its loan book either sold off or paid back by borrowers to pay out its 5700 investors. The fund had been operating for 18 years and invested in residential, commercial and rural first mortgages.
But Tower Investments' chief Sam Stubbs said the product was no longer a relevant and competitive investment in the current environment where banks were competing so aggressively for deposits.
"In an environment where banks are offering 9 per cent and above, this fund will continue to pay below those rates. We can see that going forward it will be uncompetitive in that environment. We believe it is prudent to act early in these circumstances." The fund paid interest of just over 7 per cent for the last year.
Stubbs said increasing loan defaults were also cutting into its returns to investors because it had to leave more provisioning for bad debts.
Of the fund's 450 mortgages, 9.1 per cent are currently in arrears by more than one month.
Stubbs said he expected the fund to catch-up on payments for a lot of those but with growing pressure on mortgage holders, defaults were expected to keep increasing. "I would expect there generally to be a trend in one direction and that is up."
Of the 450 loans, around 75 per cent are residential mortgages, two thirds of which are Auckland-based.
Stubbs said the fund had a further $22 million or around 10 per cent of its loan book in cash. He expected the loan book to be attractive to the major trading banks and said he had already received one enquiry.
But he could not give a final date for when investors would be paid out.
"We will seek to wind it up as soon as we can while acting in the best interests of unit holders.
"But it is very difficult to give a timeframe right now."
The company has said it will make its first payment within 30 days and then quarterly thereafter but the money coming back will depend on the sale of the loans and others being refinanced and paid back.
Stubbs said the current situation of high interest rates combined with a shaky property market had never happened in the 18-year history of the fund. The fund has also become less tax efficient since the portfolio investment entity regime came in last year and Stubbs said it would be hard to convert it.
He said Tower might consider re-launching the product if the market changed but it did not believe this would happen any time soon.
But others in the industry were not looking to close down similar products.
Louise Edwards, chief executive of Perpetual Trust, said she still believed there was a place for mortgage funds in a balanced portfolio.
