New light cast on collective property investing

A shadowy form of collective property investing looks likely to be brought into daylight through law changes.

Investors in proportional ownership schemes and property syndicates have long been one of the least-visible forms of collective investment. Yet some estimates suggest well over $1 billion has been sunk in such schemes.

Groups of investors are brought together by a scheme manager to buy a commercial building, or group of them, often through networks of financial advisers and accountants, though real estate agents often promote them too.

They are more lightly regulated than other forms of collective investment, but have experienced a lift in popularity because interest rates are low, and there are bargains to be had in a struggling property market. These can be picked up and offered as investments with yields well in excess of that offered by the bank.

But light regulation will begin to change from December 1, as the Securities Commission says all those running such schemes and syndicates will be deemed to be providing a financial service and hence must register on the Financial Service Provider register. They will also be forced to join an approved dispute resolution scheme to which investors can make complaints, and which will be able to award compensation where it is due.

"The issuer of the scheme [the manager] will need to register under the FSPR because the interests are securities, and will need to join a dispute resolution scheme," a statement from the commission reads.

Those running proportionate ownership schemes do not believe they technically have to join an authorised complaints resolution body, though the largest of the scheme managers has vowed to do so regardless of whether he's forced to or not.

Bryce Barnett, managing director of KCL, which has nearly $500 million of syndicates and proportionate ownership schemes under management, said KCL will be joining one, even though "technically we probably don't have to".

He said the group was serious about acting in the interests of its investors and was happy to support the spirit of the new legislation.

Changes suggested in a Ministry of Economic Development discussion document on the future of securities regulation would also catch the schemes and syndicates, and change the way they do business.

This could include requiring the schemes and syndicates to have an "exterior supervisor" with clear fiduciary duties to investors, something Barnett said would bring no new protections given the track record of such professionals theoretically overseeing other forms of collective property investment.

"Some of the properties we have bought in the last two years, if I was on the other side in the listed property trust or managed fund that sold them, I would cringe, but because they were desperate and were accountable only to a board or a trustee, they could do it."

He contrasted that with a proportionate ownership scheme with an annual general meeting and a chairman selected from one of the investors, where attempts at undervalue sales would be greeted with fury.

"I think this is one of the most incorrectly read industries out there," he said.

"I think it is seen as a very high risk sector and I appreciate there is a potential lack of liquidity."

In reality, he said, its investors had fared far better than investors in other sectors, and most operators had behaved well, though he said KCL was one of the "more prudent or conservative".

The discussion document also suggests all collective investment schemes should report quarterly to the Financial Markets Authority, a super regulator being set up in tacit recognition of the failure of oversight that allowed schemes like Blue Chip and the worst of the dodgy finance companies to thrive for as long as they did.

As well as KCL, other operators in the syndicate and proportionate ownership scheme sector include law firm Glaistor Ennor, Augustus, SPI and Commercial Property Investments.

As well, there are a number of smaller "below the radar" operators.

- © Fairfax NZ News