
	Advanced Search

Offers of Unlisted Interests in Commercial Properties - A Review

1. INTRODUCTION

1.1 Private investment in commercial and residential property has been a significant feature of the New Zealand economy for many years. Traditionally, this investment has been in the form of direct ownership or ownership through private "syndicates". However, more recently what has been described as "genetically modified real estate"¹ has been promoted in New Zealand. By April 1999, the Ernst & Young Real Estate Group estimated that the total size of the "syndicated" property market was approximately $1 billion compared to the listed property market at $2.6 billion².

1.2 In August 1999, the Commission announced that it was proposing to review the disclosure of rates of return and other related disclosures in offer documents of interests in commercial property. The Commission was concerned, on the basis of its own enquiries and on the basis of complaints, that the information contained in the marketing documents of offers of interests in commercial property was not always clear. The Commission said that it proposed to address these issues and consider whether it should propose guidelines to the industry. The Commission has completed its review. This report sets out our comments on the review.

1.3 In summary, the Commission considers that the law relating to offer documents is adequate for offers of interests in commercial property. However, we think that promoters should be more careful 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.

Methodology of Review

1.4 In order to cover the bulk of the market, the Commission wrote to ten promoters of interests in commercial property. We also wrote to a number of other individuals who we knew were interested in the promotion of this form of investment. The promoters were asked for copies of their current offer documents and those for securities they have promoted in the last three years. In all, we received, over a period of time, some 65 prospectuses and 39 investment statements. These were reviewed on a selective basis to ensure adequate coverage of the main promoters and with a greater level of attention paid to more recent issues.

1.5 The promoters and interested individuals were also asked to respond to a list of questions on the disclosure of returns and other related information in offer documents. The questions are set out as Appendix 1. We have incorporated the responses to the questions in the analysis in Section 4.

1.6 Our review was limited to unlisted securities for interests in commercial property. Focus has been placed on "stapled" securities made up of mortgage bonds and shares in the issuer as these appear to be the most popular structure being used to promote interests in commercial property at present. In addition, it was particularly the expression of a rate of return on the combined stapled securities under offer and the disclosure of related information that prompted the review.

1 See "Genetically Modified Real Estate - The Evolution of Real Estate and the Individual Syndicate Investor", a research paper published in November 1999 by Ernst amp; Young Real Estate Group. return
2 See "Property Syndication - Leading the Way" a research paper published in April 1999 by the Ernst & Young Real Estate Group. return

CONTENTS | PREVIOUS | NEXT