Investors' appetite for lightly regulated property syndicates is on the rise again in the wake of the high-profile collapse of finance companies and the promise of returns higher than bank term deposits.
It's a trend that is concerning market regulator the Financial Markets Authority which has been warning for the past couple of years about the risks for mum and dad investors in proportional ownership schemes.
The last time property syndication was popular was in the 1990s but it fell away after the property crash later that decade. A number of factors are driving its rise in popularity, including low interest rates on offer from bank term deposits; less faith in finance companies following the spate of failures a few years ago and reduced offerings from those remaining; and investment capital being sought for redevelopment projects, particularly in Christchurch.
A form of collective property investment, proportional ownership schemes typically see each investor receive a certificate of title to their share of a commercial property. The property is managed by a professional manager who collects rent from the tenants and pays a stated return to each investor.
The big established players in the market are KCL Property, listed firm Augusta Capital, Oyster Group, and SPI Capital (see box for their fees).
Oyster Group managing director Mark Schiele said proportionate ownership schemes make up the majority of its $300 million syndication portfolio.
Its most recent offer investment of a Mitre 10 property in Pukekohe closed "grossly oversubscribed" on July 16, he said. It purchased the property at an 8 per cent yield and the projected annual return to investors was a net 9 per cent, once fees were taken out. Its management fee is $30,937 plus GST in the first year to be recovered from investors.
Augusta is in the process of offering a proportionate ownership scheme that will be the largest syndication in its 10-year history. It has entered into an unconditional agreement to buy the ASB building on Dominion Rd, Auckland, for $25.03m. It is also offering investors a projected net 9 per cent annual return. That's after costs including a $55,000 management fee, $8500 for auditing and $4500 for valuation.
Augusta's managing director Mark Francis said proportional ownership schemes allowed investors to buy quality assets they normally wouldn't be able to because of their cost. These schemes were popular among investors at the moment, but so were many other property market opportunities.
While the market conditions offer opportunities for established players, they were worried about "cowboys" coming into the market, he said.
KCL managing director Bryce Barnett said banks were willing to lend up to 60 per cent on some commercial properties and combined with a low interest rate, this was attracting dubious companies, he said.
All they want to do is "collect as much money as fast as possible . . . They don't understand people's expectations nor do people understand what that manager is expecting to achieve out of that property."
The FMA has been keeping an eye on the schemes currently being offered and referred any concerns to the Serious Fraud Office.
It said pitfalls include that investors signing up to these schemes may agree to its debts and liabilities, jointly or severally. On other types of investments, when things go sour, investors might lose their principal and interest but are not then also forced to contribute more funds.
Potential investors should also know who the tenants are, how much they pay annually, whether their payments were usually up to date, and how long leases had left to run.
Given the lack of a formal market, it might be difficult to get out again by on-selling your interest, particularly if the scheme starts under-performing, the FMA said.
Shareholders Association of New Zealand's Des Hunt said he wouldn't touch these types of schemes with a bargepole.
There has been a history of failures, he said. Often the investor had to cough up for upfront scheme costs , then when it fell over, there were no buyers and discounting on capital.
"My advice would be to read things carefully before investing. It's easy to get in but hard to get out."
Proportional property ownership syndicates operate under the Securities Act Exemption Notice 2002. This means they don't have the investor protection most other forms of investment do as they aren't required to produce a registered prospectus or investment statement.
Instead they provide a disclosure document called an "offeror's statement" and an independent registered valuer's report before signing up investors.
However, this exemption notice expires on September 30. The FMA is about to begin a second round of public consultation about exemption notices.
LAST TIME AROUND
In the 1990s there were three big players in property syndicates: Waltus Investments, St Laurence and Dominion Property.
Near the end of the 1990s, investors began to become wary of the pitfalls of such investments after several syndicators reduced or postponed their yields to divert funds to building maintenance and attracting new tenants.
The industry's reputation began to come under fire as well when the Financial Markets Authority's predecessor, the Securities Commission, began looking into how returns were promoted in investment statements. St Laurence was placed into receivership in April 2010 owing $245 million to investors.
Waltus turned into Urbus and was absorbed by ING Property which shifted focus to listed property. Neither ING nor Dominion manages syndicates now.
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