Halcyon days coming to an end for unregulated property syndicates with Financial Markets Authority oversight looming

Halcyon days coming to an end for unregulated property syndicates with Financial Markets Authority oversight looming
Augusta and Bayleys are selling up to 192 slices of Countdown Westgate on the fringes of West Auckland for up to NZ$9.6 mln.

By Gareth Vaughan

As another property syndicate moves to raise NZ$9.6 million from the public, the sector’s halcyon days of falling outside the regulatory net are drawing to a close with the Government's new financial super regulator set to have oversight of them.

Mark Francis’ Augusta Funds Management is looking to raise NZ$9.6 million by selling 192 slices in a scheme at NZ$50,000 each to help purchase Auckland’s Westgate Countdown supermarket. It's offering the carrot of projected pre-tax cash returns on investment of 8.5% per annum. But the offeror's statement notes the offer is exempt under the Securities Act from the requirement to issue a prospectus or to appoint an independent supervisor to monitor investors' interests.

Risks of the scheme listed in the offeror's statement include "single asset risk" in that the scheme is exposed to a single asset and if it fails to perform the returns to investors will be hit and can't be offset through exposure to other assets. Other risks include the commercial property sector weakening meaning the value of the supermarket falls and investors can't recoup their original investment, or the tenant defaults on lease obligations.

Augusta’s latest offer follows its recent successful raising of NZ$9.15 million in a property syndication of Tauranga’s Fraser Cover Countdown supermarket. Based on interest.co.nz research, if Augusta’s Westgate supermarket offer succeeds, it’ll be the eighth property syndicate the firm has launched since October 2005, raising a total of NZ$64 million in initial investor funds with another NZ$24.6 million of funding borrowed from banks.

Several other groups are also active in the property syndication market. The Timaru-based Commercial Investment Properties Ltd has been looking to raise NZ$8 million from up to 160 investors to help fund the purchase of a Bunnings Warehouse in Whangarei from the DNZ Property Fund. This deal includes a NZ$6.1 million five-year loan from the BNZ.

Elsewhere 25 investors are being sought by Bayleys Real Estate, on behalf of a company called MyFarm, to stump up a minimum of NZ$250,000 each into the syndication of a yet to be developed Canterbury dairy farm.

Farm prices 'can only rise'

On its website MyFarm has a list entitled ’10 reasons why farm prices can only go up’ which contrasts greatly with recent comments from the Reserve Bank, which said despite a fall of at least 15% from their mid-2008 peak, it’s likely farm prices will need to fall further to see “substantial buying interest rekindled.” 

Securities Commission general counsel Liam Mason told interest.co.nz Bayleys, which is marketing the dairy farm offer, had told the commission the offer was available to people described as "eligible investors" under section five of the Securities Act, ie those considered sophisticated investors, or those who aren't considered members of the public under section 3 of the Act. That's even though Bayleys' press release said it was marketing the offer to the public.

"On the basis that it is not a public offer, no prospectus would be required," Mason said.

The Securities Commission warned investors last year that property syndicates could be risky. The commission said such schemes, where ownership of a property is split into equal shares with individuals buying one or more shares each, aren’t required to produce a registered prospectus or investment statement. Instead, they must provide a disclosure document, called an “offeror’s statement”, and an independent registered valuer’s report – before signing up investors.

“These schemes work differently to other kinds of investments, and their risks need to be understood,” the commission said.

The regulator also cautioned that investors need to think about how to get out of a scheme.

"Given the lack of a formal market, it might be difficult to on-sell your interest, particularly if the scheme isn't performing well. Find out how it will eventually be wound up. Some schemes continue indefinitely until investors vote to wind up. In this case, you need to understand how many votes are needed - if a majority vote is enough, the scheme might be wound up against your wishes."

And the commission also said those investing in a property syndicate could end up sharing its debts.

"Someone investing in this type of property syndicate may also be agreeing to share its debts and liabilities, jointly or severally. This means that if the syndicate can't pay its debts or fund repairs, investors may have to make up the shortfall. In fact, each investor may be liable for the whole amount. You may end up owing money to the syndicate."

FMA to have new powers

The Financial Markets Authority (FMA), the Government's new financial markets "super regulator" due to come into existence next April, will have oversight of property investment schemes such as syndicates, viewed as "unregulated anomalies" until now. A greater regulatory focus on  property investment schemes is understood to be, at least in part, related to the demise of Blue Chip, which collapsed in 2008 owing at least 3000 investors about NZ$84 million. A Securities Act review currently underway is also likely to drag property syndicates within the regulatory net.

The FMA is consolidating regulatory functions of the Securities Commission, the Government Actuary, the Companies Office, and some from sharemarket operator NZX as the Government strives to restore the confidence of mum and dad investors in the financial markets after the demise of 61 financial entities since 2006 putting NZ$8.5 billion held in nearly 239,000 deposits at risk. See our Deep Freeze list here.

Simon Botherway, chairman of the FMA Establishment Board, says the new regulator will also have so-called "call in powers" enabling it to pull in financial products structured to stay outside regulation.

Putting the NZ$9.6 million Augusta is looking to raise for the Westgate Countdown deal into context, it's more than the NZ$7.2 million raised from the public in the high profile sharemarket initial public offering earlier this year of scented candle maker Ecoya. The only other sharemarket float so far this year was that of DNZ Property Fund, which raised NZ$45 million.

Augusta aims to fund about 45% of the supermarket purchase through a NZ$7.4 million five-year loan from the ANZ, for which it currently has an "indicative" offer. The syndicate will pay interest only during the five-year term of this loan with the full loan amount repayable on maturity. Interest is still, however, expected to be paid to ANZ at 6.28% per year, or NZ$465,138 per annum.

And Augusta as manager and offerer will receive significant fees. These include;

-An initial offeror’s fee of NZ$326,800 plus GST for negotiating the contract to buy the property from Westgate Properties Ltd for NZ$16.34 million plus GST.

-A NZ$3,500 fee plus GST for preparing prospective financial statements.

-An annual fee for managing the scheme from year two. This will start at NZ$35,000 plus GST and be increased on an annual basis by the greater of the Consumer Price Index or 3%.

- A fee for management of the property equal to 51% of the fees for managing the scheme.

Augusta says the scheme has no fixed term but can be terminated at any time if investors representing 75% of the total interests in the scheme decide to do so at a properly constituted meeting.

* This article was first published in our email for paid subscribers earlier today.  See here for more details and to subscribe.

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Yeah, f*$& the economy, let's regulate, regulate, regulate and let Humphrey Appleby run it into the ground finally. Once government got to the position of being bigger than the private sector it was over rover anyway. The free, prosperous society: hell, obviously we don't give a shit.

But just so you do know, again, this is what politicians, bureaucrats and the Kim Jong manderins in the typing pool who produce sites like this do to an economy (and to freedom):

Britain's Trillion Pound Horror Story (and our's): [Hattip NotPC].

Part I

http://www.youtube.com/watch?v=7gd6-zfeeaM&feature=player_embedded

Part II

http://www.youtube.com/watch?v=KrASFrpi8zA

Part III

http://www.youtube.com/watch?v=thUrVB7bFdE

Part IV

http://www.youtube.com/watch?v=-kotac3meVM

Part V

http://www.youtube.com/watch?v=ZPtayYoHoCY

 

Sad really.

  

Nah....it's not that bad Tribeless....it's like having law to stop bastards robbing people...doesn't stop you from throwing your dosh away does it...?

Mark : As of November 2011 the Gumby Party ( Goofy / Klinger / Cunny )  will be back , running the country further into the ground anyway . It's either Tweedle Dumb ( the Gumbys ) , or its the Tweedle Dumberers ( Shon-Key and Wild Bill ) .

" Red tape is fun " , said Bernard Woolley , trying to placate the minister . Have some fun , Mark . Have alot more fun coming your way !

Gareth...  again you write bullshit..... Property syndications are NOT unregulated - they exist thanks to an exemption under the Securities Act, which is quite a different thing...

You are touting yourselves are specialists in this area, but you clearly don't even understand the basic facts.  

Get educated.

Horace,

I know you have a name to live up to but as the story notes property syndicates are exempt from having to issue a prospectus or to appoint an independent supervisor to monitor investors' interests. So if the proverbial hits the fan, what recourse does the Securities Commission (other than warning investors of the dangers), or investors themselves, have?

My concern, based on the glossy advertisements for property syndicates in the weekend newspapers, is they are targeting the same type of investor drawn to finance companies three, four or five years ago. And, there are significant risks in this form of investment that aren't necessarily understood by ma and pa investors.

I hope to see a well resourced FMA keeping an eye on this space to a greater extent than the Securities Commission has. In fact my understanding is the Securities Commission has no one specifically monitoring this sector even though, based on research by interest.co.nz publisher David Chaston, property syndicates may have raised up to NZ$2 billion from investors over the past decade.

Unfortunately, most people aren't as well informed as you Horace, but fortunately (for me) most aren't as abusive either.

Here's a litmus test , would these syndicates be allowed to operate across the Tasman ? Would ASIC grant them approval ...........

BZZZZZZZZZZZZZZZZZZZZZZZ ......... No !

gareth - have you ever read one of the offering documents for a property syndication?  the ones referred to in your article are very well written, with all the relevant facts an investor needs.  People need to take responsibility for themselves.  With respect to the risks and opportunities they are all presented as well as they would be in a prospectus for a listed equity.  Listed companies are more complex, so they are longer, but essentially you are not more or disadvantaged with access to the information in one of these syndicates.  I will admit not everyone does as good as job as bayleys does however.

 

No one is arguing that these arent more risky.  but investors are being told everything.  it's up for them to decide - not the socialist demagogue bernard hickey

Yes Keyser, I have read offerors documents. I agree, the ones for the syndicates covered in my story are generally well written. In fact, the Commercial Investment Properties Ltd scheme actually has a prospectus, even though it doesn't need one.

None of this, however, changes the potential risks associated with property syndication for unsophisticated investors such as how they can get out of a scheme, whether they can sell their interests, dump the manager, potentially end up sharing the scheme's debts, or put all their savings into one asset, whose value could fall.

Sure, listed companies can have their issues too but the disclosue should be, and generally is, good and there's a market to sell your shares in.

If you have taken time to understand the Securities Act requirements, then you would know that there should not be any 'unsophisticated' investors investing in these things. They all need to be qualified - experienced, wealthy etc.

Call me cynical if you like Property Man, but I don't quite buy that no property syndicate has ever targeted unsophisticated investors. Haven't you seen the adverts in the papers?

unsophisticated investors (being 95% by count of all equity traders) had probably 5 or 10 trillion dollars wipped out in the equity markets that were essentially a pozi scheme.  the risks are the same.  just because its property it draws your ire.

I check this website very rarely now on account of the overt bias in the articles.  And i'm not the only one - according to Google Trends for Websites the number of daily unique visitors to this website has declined from around 11,000 per day in late April 2010 to about 6500 now - and the decline has been steady and a straight line. 

That is by the way a 40% decline.  Much more than house prices.

I agree HtC - too many reporters out there with an axe to grind and not enough real reporting!

It is thanks to these syndicate type investments that we are able to diversify our investments in property without sinking everything into one venture.

Key things to consider are

1) Does the investment stack up - only idiots invest without doing their own due diligence

2) Is the Management Company reputable - agian due diligence.

 

 

 

A property syndicate I've been in for past 15 or so years has just sold up, glad to be out of it.

My experience is that the property management has an interest in just ticking things over and taking its cut, was a bit of a mission to get it up for sale.  Had a number of Asians bidding at initial auction but they weren't NZ GST registered so that  was a waste of time. Didn't make much capital gain, did have a yearly rent of over 8% net.

Caveat Emptor - Be careful - I've seen this before - it's not new - heres how it works. Imagine you are a developer with a prime bit of commercial land .. you build a nice commercial building for total costs all up say $5 million .. with profit you want $7 million .. you look for a marketer who is called an aggregator (or syndicator) who can pull together a syndicate .. sell the property into the syndicate at $10 million .. all nice and legal .. fully documented .. proper legal contracts .. the valuation of the property would be lucky if it could justify $8 million tops .. but with a locked in lease to a lead tennant it could possibly be justified .. anyway the syndicate is paying a current price plus 10 years inflation .. they are investing in inflation and will have to wait 10 years to break-even and get their money back .. meanwhile the developer and the syndicator get their money at the front .. now .. the next part .. the syndicator offers a secondary market which allows syndicate members to offer their syndicate share for sale .. the moment they list their share for sale (assume the buy in price was $50000) a bid will eventually come forward within a month or two or three or four offering to buy it at $30000 .. no prizes for guessing who the bidder/buyer is .. examine the augusta funds management site (above in the main article) .. then click on the secondary market .. yep a seller for 10 units and they've been there for 3 months now .. no buyers .. its a pretty thin market .. a feature was done on this syndicator here in interest.co.nz about 3 months ago .. the dilemma when buying into a syndicate for $50000 is, can you afford to obtain an independent valuation on a $10 million property?

Spot on!

* Valuation above actual supported by high rent -Did the occupier get a kick back?

* No liquidity of resale.

Compare to investing in quoted property shares. I can sell mine today if I want to and they are already at a discount to valuation

An investment that has good returns, has an inflation hedge, good security and immediate liquidity is the ideal.  But most 'good investments' will struggle to tick all four boxes.  Investment syndicates into farm land have been about for many years, and not all have been successful.  But in general good farms, a conservative balance sheet and a focus on generating strong cash returns have all been strongly correlated with good investment outcomes.  Liquidity isn't ideal but again shares sales in good syndicates are normally mopped up within the group.  If quality proposals come up, then how else does an individual get exposure to one of NZ's most successful industry's?  As stated by Rabobank recently - watch out for India entering the dairy commodity market over the next few years.

cowcocky,

I would find it difficult to find any farm investment that ticks even two of your criteria.

Even one tick out of four wouldbe a challenge right now.

BB

Last time I looked dairy farms were earning a profit margin of 50% of income or about $3000/ha.  That's an 8% return in the South Island.

Even after the bust farmland has appreciated at about 8% p.a for the past four or five decades.  returns in the next few years could be flat but there is a soft commodity price boom on that should underpin future growth.

An investment in land with minimal debt is fairly safe!

But it isn't a liquid investment for sure.

Three out of four?

Investing in agriculture isn't for everyone but NZ Super is about to invest in it on all our behalfs so lets hope it goes well!