The Financial Markets Authority (FMA) plans to pull proportionate property ownership schemes fully under the broader regulatory umbrella by not renewing their exemption notice from the Securities Act when it expires on September 30.
In an announcement today the FMA said it proposes to "overhaul" the class exemption notice for Real Property Proportionate Ownership Schemes.
"The current Securities Act exemption notice expires on 30 September and FMA does not propose to grant further similar exemptions, Sue Brown, the FMA's head of primary regulatory operations, said
"Instead, all issuers will be required to register a prospectus and investment statement, and appoint a statutory supervisor. FMA intends to issue guidance to assist market participants with the disclosure requirements of the prospectus and investment statement as they relate to these schemes."
Brown said "significant risks" particular to Real Property Proportionate Ownership Schemes need to be better understood.
“These changes will provide investors with the information they need to make informed decisions before investing in these schemes.”
Bryce Barnett, the managing director of New Plymouth-based KCL Group which is merging with the Cheryl Macaulay owned and run Commercial Investment Properties creating an entity with about NZ$800 million of property under management and up to 900 investors, told interest.co.nz in June he was worried about "cowboys" targeting the property syndication market given the current low interest rate environment and banks' willingness to lend.
The changes will come into effect on October 1 this year. Offers commencing before then will still be able to use the existing exemption notice. The FMA is seeking comments on the proposal and on a new limited exemption to address two specific issues applying to proportionate ownership schemes relating to developments on property.
Property syndications have been operating under the Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002. This means, until now, they haven't been required to produce a registered prospectus or investment statement. Instead, they have to provide what's known as an "offeror's statement" and a registered valuer's report before signing up investors.
A NZ$2 billion market
In its consultation paper on the changes proposed the FMA said the standard disclosure requirements of the prospectus and investment statement address the material matters prospective investors need to understand. Furthermore, the registration of a prospectus will provide a valuable public record of investments offered to the public, and a statutory supervisor will provide useful support to the management of these schemes.
"FMA proposes a new limited exemption to address two discrete issues applying in the case of proportionate ownership schemes relating to developments on real property: An exemption allowing extension of the prospectus for allotment of interests in schemes. This is because often development timeframes will be expected to exceed 18 months. An exemption that takes account of the fact that where there is a long period of time between subscription and allotment, market movements, and other events, may mean that the prospectus is no longer up to date at the time of allotment," The FMA said.
Although the scope and size of the sector is hard to determine, the FMA estimates there are up to 400 syndicated property vehicles operating in New Zealand with total investments of about NZ$2 billion. See interest.co.nz's page listing proportionate ownership schemes, and commercial property syndications here.
Although the market is dominated by a handful of big operators, a group of smaller operators occupies the lower end of the market. Mostly based in provincial areas, these entities are well situated to capture the investments of retired customers given they're yield focussed, the FMA said.
"High profile failures in the early 2000s appears to have led to a decline in the sector but issuance has surged in recent years - possibly as a result of the decimation of the finance company sector - particularly for the sector of the investing public that seeks the apparent familiarity of a property related investment (but without necessarily appreciating the full implications of investing in these financial products)," said the FMA.
"We expect that trend to continue - for example, as the redevelopment of Christchurch gets underway and the demand for property development monies increases."
Law firm now sees 'a lot of pressure on the financial viability' of property syndication
Law firm Minter Ellison Rudd Watts said based on talking with clients and others in the industry, it sounds like the additional costs of a full prospectus process, and the take-on and ongoing costs of appointment of a statutory supervisor, will put "a lot of pressure" on the financial viability of proportionate property ownership schemes.
"Going forward, promoters of property syndicates will have thee main options: full compliance - register a prospectus, produce an investment statement and appoint a statutory supervisor exemption - applying to FMA for an exemption specific to their offer (although it is likely that this will not be available in most cases, given FMA’s signalled approach), or private offer - structuring the offer to fall within the excluded or exempted categories under the Securities Act (for example, restricting investors to the certificated 'wealthy' or 'experienced' categories)," Minter Ellison Rudd Watts said.
The FMA said both it and its predecessor the Securities Commission have received a "significant number of complaints" about property syndicates. The complaints have covered a wide range of issues including inadequate governance, deficient management and poor disclosure.
"Complaints also clearly demonstrate that the disclosures provided have failed to provide investors with a full appreciation of the nature of their investment, the additional liabilities that investment in the scheme may carry by way of maintenance contributions, or the issues and risks raised by common ownership and lack of autonomous decision making control," the FMA added.
(Update adds comment from Minter Ellison Rudd Watts).