
	Advanced Search

Offers of Unlisted Interests in Commercial Properties - A Review

5. CONCLUSION

5.1 The preceding discussion sets out the Commission's comments from our review of the offer documents of selected promoters of interests in commercial property.

5.2 We think that the law relating to offer documents is adequate for offers of interests in commercial property. The problems lie, we think, with the way the law is being applied in practice.

5.3 In our view promoters should exercise more care in applying the law. In particular, there should be clear, comprehensive, consistent and balanced disclosure of:

the bases and qualifications related to the stated rates of return;
the major assumptions underlying prospective financial information; and
the risks associated with the investment.

5.4 While disclosures in the prospectus should be comprehensive, we believe the investment statement may also need to contain some detail because of the complex nature of the securities under offer.

5.5 We do not suggest a single best method for disclosing returns in offer documents. That is a matter for individual promoters to decide. However, we believe a key factor in any description of a property investment is the balance struck between risks and returns to investors for the period of the investment.

5.6 It is worrying that some promoters of commercial property investments:

tend to highlight the combined rate of return on the investment in the initial forecast period without also giving equal prominence to any deficits that the issuer expects to incur in the period;

tend, while contending that the investment should be considered a medium to long-term investment, to focus on the short-term cash returns of the investment, excluding information about the medium to long-term nature of the investment;

use unclear and inconsistent language in offer documents, particularly in relation to returns and prospective financial information;

do not always make it clear from a stated rate of return whether it has been promised, forecast or projected;

do not always make it clear that the stated rate of return relates to a limited period of time and not to the whole investment period;

do not always clearly state the qualifications relating to a stated rate of return;

do not always state all material assumptions underlying the prospective financial information in a clear and comprehensive manner or indicate where they can be found in the offer documents; and

tend to highlight the positive aspects of the investment without giving equal prominence to the risks associated with the investment.

5.7 It is up to the individual promoter to decide the manner in which risks and returns are disclosed in an offer document. However, whenever prospective rates of return are disclosed, the offer document should also contain information about the expected financial performance of the issuer, the method of calculation, material assumptions and qualifications. These should be clearly stated.

5.8 Promoters should ensure that the wording of offer documents is clear and consistent when describing the risks and the returns. All rates, but in particular headline rates, should be appropriately and clearly qualified. The qualifications should, as a minimum, state:

what the rate relates to (interest rate of return on the bonds, dividend rate etc);
whether the rate is promised, forecast or projected;
the period for which the rate applies; and
where the major assumptions on which the rate is calculated can be found in the offer documents.

5.9 We do not think that it is necessary to further prescribe terminology or guidance for the preparation of prospective financial information. We think that the guidance in FRS-29 is sufficient and should be applied in respect of all prospective financial information that is included in offer documents. Promoters should exercise greater care in choosing the words that are used to describe returns and to ensure that these are used consistently throughout the offer documents. We think that the appropriate use of technical language in offer documents is useful where the terminology is already established and generally understood.

5.10 We think that promoters need to be careful about balancing the prominence of any information disclosed. The potential to mislead or confuse arises when one piece of information is highlighted, usually the positive aspect for marketing purposes, to the exclusion of other, usually negative aspects. Where factors are not taken into account in the prospective financial information, we think that they should be clearly included as part of the risks associated with the investment.

5.11 Promoters should ensure the offer documents are not likely, as a whole, to deceive, mislead or confuse the prospective investor.

5.12 The Commission encourages promoters to give serious consideration to the comments set out in this paper in drawing up future offer documents.

5.13 nvestment in the commercial property sector through "genetically modified" corporate structures has grown rapidly in recent years. It is important that promoters follow high standards of disclosure in offering investment opportunities to the public. On the evidence so far there is considerable room for improvement.

5.14 The funding of the Commission has been increased in the present financial year. We expect to be able to allocate greater resources to the surveillance of investment market activity. We expect the Commission to be much more active than in the past in drawing attention to offer documents which it considers are likely to deceive, mislead or confuse investors, and in taking action in appropriate cases.

CONTENTS | PREVIOUS | NEXT