Property syndicators face a tougher road ahead

POSTED BY Andrew Wallace
10 September 2012

posted in Business | Property Law | FMA

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If you're involved in arranging syndicated property investments or have been thinking of investing in one, you need to be aware of a significant move signalled by the Financial Markets Authority (FMA) last week.

Known as "real property proportionate ownership schemes”, these schemes see ownership of a property (usually an office building or a shopping complex) split into equal shares with investors buying one or more shares to become part-owners of the property and earn cash distributions from rental income earned on the property. To date, the promotion and sale of the schemes to the public has been undertaken using an exemption from the Securities Act which allows for a short form "offeror's statement” to be used instead of a full form prospectus and investment statement which would otherwise be required.

Syndicators appear to have been fairly successful in selling these schemes. The FMA estimates that there are currently 350-400 syndicated property vehicles in operation in New Zealand with total investments of around $2 billion. However, over the years the schemes have come in for quite a bit of criticism. Usually it focusses on the concentration of risk in a single asset, an investor's potential liability to the scheme, and the lack of a developed market to use to exit the investment. Then there have been cases where schemes have just simply been poorly managed.

When the FMA exercises its exemption power it looks to facilitate the development of our capital markets, while balancing the need to ensure investors are fully informed. In reviewing the current exemption notice the FMA concluded that no substantial exemptions from the usual rules are justified or required for proportionate ownership schemes. Accordingly, it's not proposing to renew the exemption notice when it expires on 30 September. For investments offered from 1 October onwards, syndicators will need to prepare a full form prospectus and investment statement, and appoint a statutory supervisor to perform certain duties to assist in looking after investors' interests.

To put this in context, the changes proposed by the FMA come from a routine review of exemption notices which are due to expire this year. The wider securities law review is still underway with the Select Committee Report on the draft legislation due this month. The changes proposed in this review will have a far-reaching impact on the way businesses access funding from the private and public markets and how businesses that offer and manage financial products operate. While we know the general direction in which our securities laws are heading, we don't know enough of the detail yet. More of that detail is expected to become known soon with a release of a further discussion paper on draft regulations, which will likely be followed by draft regulations themselves early next year.

As for proportionate ownership schemes, it's timely that the FMA's announcement was made on the eve of Money Week, since the schemes are a classic example of where education and awareness can mitigate problems for investors and those offering the investments. Syndication through the use of proportionate ownership schemes can have its advantages, but investors need to fully understand the structures and their risks, and be in a financial position to be able to tolerate those risks. It will be interesting to see if the business model survives the increased costs and time that will be incurred in bringing the investments to market, as well as the greater disclosure that will be required and the greater scrutiny their offering documents are likely to be given by the FMA.

 

This article was first published in the Your Law column in the Sunday Star Times on 10 September 2012

POSTED BY Andrew Wallace
10 September 2012

posted in BusinessProperty LawFMA

VIEWED 3524 TIMES

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