By David Hargreaves
There are signs that the property syndication scene is warming up again after a quiet few months over summer.
This is perhaps not surprising given that such schemes, the so-called "proportionate ownership" schemes can promise investors pre-tax yields in excess of 8% at a time when banks are offering more like 4%.
However, in the past such schemes, which will typically offer investors a share in an industrial building, office building, or 'big box' building such as a supermarket property enjoying a long lease, have attracted adverse publicity at times. And there has, at times been a perception that proportionate ownership was too lightly regulated.
Well, certainly not now.
At the end of August last year the Financial Markets Authority said that it was not extending the exemption notice dating from 2002 that proportionate ownership schemes enjoyed. Under the exemption notice such schemes were not required to issue a prospectus to raise funds from the investing public.
Previously money had been raised from investors for such schemes via an "offerer's statement" or "information memorandum", which had a lower level of disclosure than a prospectus. Organisers of such schemes argued that this was sufficient as they dealt with investors looking for direct investment in property, not shares as was the more usual usage for a prospectus.
No exemptions
But the FMA decided, after reviewing practices of "real property ownership schemes" in the marketplace, to not grant any further exemptions.
At the time the FMA's head of primary regulatory operations Sue Brown said there were "significant risks" particular to such schemes that needed to be better understood.
The FMA said the scope and size of such schemes was not well defined, but it estimated there were between 350-400 syndicated property vehicles in the country with total investments of around NZ$2 billion. So it is a sizable sector. See interest.co.nz's page listing proportionate ownership schemes, and commercial property syndications.
The FMA also said that some high profile failures of syndicated schemes in the early 2000s had led to a decline in the sector, but issuance in such schemes had "surged" in more recent years "possibly as a result of the decimation of the finance company sector". "We expect that trend to continue - for example as the redevelopment of Christchurch gets underway and the demand for property development monies increases."
The FMA therefore decided that from October 1 last year any new schemes required a registered prospectus, though there were some transitional arrangements put in place. Additionally, the schemes now require a statutory supervisor.
Whether it just be a kind of natural summer hiatus, or whether scheme operators were digesting the new rules, there has been something of a pause in syndicated activity. However, there are signs now activity is warming up.
Oyster goes first
The first company to undertake a scheme through issuing a full prospectus was the Oyster Group. It manages a property portfolio worth in excess of NZ$500 million and has an investor client base of over 600 people. It went down the full prospectus route when it sought to raise NZ$11.5 million for the purchase of 181 Grafton Road in Auckland, which is on a long-term lease to Orion Systems International.
Oyster's chief executive Mark Schiele says the company is fully supportive of anything that gives investors more confidence in the industry generally "and really the changes that were made were aimed at that".
The offer opened in February and closed oversubscribed, with settlement of the full NZ$21.5 million purchase price taking place at the end of last month.
“Look, it went well," Schiele said.
"Obviously the offer itself was oversubscribed early, which is good, but that’s really the quality of the offer than anything to do with the legislative structure around it.
"We were not so much a guinea pig but we were the first cab off the rank so we had to go through the process somewhat blind in terms of understanding what the FMA would be looking for and how the prospectus is best structured. It was a robust process and I think we went through it as well as we could under the circumstances. It took us a longer period of time and it cost more to do so but that was always expected under that regime."
Added costs
Schiele agreed with other industry player estimates that doing the full prospectus had possibly added about NZ$30,000-40,000 to the upfront cost for the scheme, while there will be ongoing costs from having the supervisor. Oyster has taken on Covenant Trustee Co, which will be paid NZ$6000 a year.
And the new regime is more time-consuming.
"It probably puts a bit more stress on the property purchasing process because to give ourselves the amount of time that we would need to put together a prospectus and raise the equity adds a bit more time to that, so we’ve just got to be a bit more careful when we purchase property in terms of settlement dates and any conditional dates etc,” Schiele said
It was probably difficult, based on the Orion experience, to judge just how much longer an offer took to get together under the new regime, he said.
"We purchased Orion pre-Christmas and then we had the Christmas break and then we had the new legislative requirements and so we were probably more elongated on that one than we wanted to be. But it would probably be two weeks to a month [longer].
“We are trying to narrow that down as much as we can but certainly with the prospectus itself there are certain legislative timeframes in terms of FMA review and working with the statutory supervisor through the creation of that process that you can’t change. That is just the way it is.”
Such extra costs as there are through issuing a full prospectus come out of the administration of the scheme itself, so could potentially have some impact on the returns. Of the NZ$11.5 million raised from investors in Oyster's Orion offer - which was sold in 115 "interests" at NZ$100,000 each - some NZ$621,500 went toward issue costs. The biggest components in this were $488,750 - Oyster's fee for setting up the deal - NZ$60,000 in legal costs and NZ$60,000 in marketing costs. But Oyster's still forecasting pre-tax returns of a touch over 8.5% for the individual investor, which on the face of it compares very favourably with rates of around 4% being offered by banks.
Good environment?
Does this therefore mean the environment is good at the moment for proportionate ownership schemes?
“It is," Schiele agrees. "But at the end of the day though the investors are investing in direct property. So, as long as they understand that, and that the income is dependent on the leases and the quality of the tenants and ultimately the property itself, then that is fine. So, it is not a direct swap [with bank deposits], but we are certainly seeing a lot of investors that have money in different areas – obviously bank deposits, but in other areas too, saying well 3% or 4% is not really what we are wanting to achieve and if I understand direct property I am prepared to invest in whatever direct property syndicate I choose.
“So, we are certainly seeing demand. [But] it doesn’t necessarily mean that everybody’s tipping the money out of the banks and coming into our schemes.”
Another large player in the property syndication market is KCL Property, which says it was the largest syndicator of property under the old rules and handles about NZ$750 million worth of property investments in total.
Managing director Bryce Barnett indicated that the company would soon be issuing a prospectus for its first proportionate ownership scheme under the new regime, though he did not want to divulge details publicly till the prospectus was issued.
However, KCL has subsequently circulated an email to would-be investors registered through its website indicating that it will be offering $50,000 units in the Vodafone building in Manukau, Auckland on which there is a 12-year lease from February of last year.
The email also says it is "prudent" for KCL to point out some differences in how information will now be conveyed to investors under the new prospectus rules.
Longer time
"Firstly, the time required to put together a prospectus will take longer than the previous 'offerors statement' that we produced. As this investment is intended to be offered by way of a prospectus, the prospectus must be checked and approved by the Financial Markets Authority and it is also subject to an audit. It will also be reviewed by an independent statutory supervisor. All of these aspects add to the timeframe and it is therefore likely to be several weeks before we are able to forward the investment statement and prospectus to you before you confirm your investment. Please be patient with us during this process as it is our intention to make sure that everything we do complies fully with the requirements of law and gives full disclosure to investors. We will keep in touch with you throughout the process.
"We will undertake to all those investors who express their interest to come back to you as a priority the moment FMA approval is gained to ensure you do not miss out on this offering. KCL staff will be on hand at all times to answer questions or queries about the property once the prospectus is released."
Publicly listed property company Augusta Capital, which has property investments of around NZ$100 million in its own account, as well as around NZ$200 million worth of syndicated properties is also in the process of launching syndication on a Penrose, Auckland industrial property it purchased prior to Christmas for NZ$14.2 million. It has a 10-year lease to Carter Holt Harvey.
In an earlier interview with interest.co.nz, KCL's Barnett said there had been something of a delay in syndicators getting schemes off the ground while details of the new regime were taken on board.
“Everybody’s probably been slow out of the starting blocks because they’ve all been waiting for the first prospectus to go out there.”
Problems with smaller deals
He thought that the new regime was likely to make syndications of property for anything under NZ$8 million difficult to do and possibly uneconomic.
“That doesn’t mean to say that we won’t do them, but that’s where it becomes marginal to do it to a complete syndication. If you get it at the right yield, fine, but we try to focus now over that NZ$8 million.”
Barnett said that while the new rules were somewhat different for the property syndicators, a lot of the work required was already being done by the larger players.
"We were doing most of that work before. Though I’m not saying we were subject to the same rules or whatever.
"I know there has got to be a statutory supervisor and all that now. But in my view there was a few of us who had a high standard and we were doing that before.
"It is probably more understanding and getting acceptance from the FMA as to the format. And there’s a few little idiosyncrasies there.
"...But for the three or four big operators, I think we were achieving roughly the requirement level. Not in the form, but the requirement level. People below that, they’ll be in a difficult situation because they weren’t getting that level of detail before. So they will be the ones that in my view will be struggling."
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