Articles on investing

August 2009

Proportionate property ownership schemes - understand the risks and what you could owe

One form of property investment currently offering higher returns than deposit-takers like banks and finance companies is a type of property syndicate. Known as real property proportionate ownership schemes, they are increasingly being publicly offered. Investors, though, need to know what they are getting into. These schemes can be risky.

How do these schemes work?
These schemes see ownership of a property split into equal shares. Individuals buy one or more shares each, becoming part owners. Sometimes shares are held by a nominee whose name appears on the title on behalf of all the investors.

Properties are usually commercial - industrial parks, office buildings or shopping complexes. They tend to be tenanted and yielding rental income, but sometimes development work is needed.

This type of property syndicate isn't required to produce a registered prospectus or investment statement. Instead, it must provide a disclosure document, called an "offeror's statement", and an independent registered valuer's report - before it signs up investors. The statement must include information on those making the offer, how much it will cost investors, and what the likely risks and returns are, as well anything else relevant to someone considering investing in the scheme.

Look carefully at the risks
These schemes work differently to other kinds of investments, and their risks need to be understood.

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.

Compare this to other types of investment where, although investors might lose principal and interest, they are not expected to contribute more funds. Liability varies from scheme to scheme, so we strongly recommend investors clarify the extent of their liability before investing.

Since you'd be investing in real property, you should pay attention to everything you would normally consider when buying any property - the independent valuer's report, the land information memorandum, and any covenants, conditions, restrictions or easements on the title.

Who are the tenants?
These schemes usually derive most, if not all, of their income from rent. Potential investors should know who the tenants are, how much they pay, whether their payments are usually up to date, and how long leases have left to run. How difficult would it be to replace a tenant, if, for example, their premises' fit-out made it unsuitable for other types of business? The statement of offer should include these details.

Management powers
It should also identify the scheme's manager and key terms of the management agreement. Read this carefully to satisfy yourself the fees are fair and the manager's powers reasonable. Think about what happens if investors are unhappy with the manager's performance. If necessary, can the manager be directed and/or replaced? If managers and others, such as those making or promoting the offer, stand to gain from the scheme, the statement should disclose this too.

It may also include forward-looking financial information. This should clearly explain directors' assumptions in planning the scheme's future performance, and you should weigh up whether they seem reasonable. Be aware that circumstances change and all forward-looking information is uncertain.

Getting out of a scheme
Finally, 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.

Look hard at any real property proportionate ownership scheme you're considering, and if there's anything you're unsure about, get independent financial advice.

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