Plans for the proposed Flat Bush townhouses. Photo / supplied
Promoters of a planned Auckland residential project are telling investors they will get a record 50 per cent three-year return just as regulatory focus sharpens on wholesale investment schemes.
The One Property Group recently announced a scheme to raise $20m to help fund the purchase and development of a 3.6ha Flat Bush site for a 198-residence project called The One in Longhorn that does not yet have resource or building consent.
Eligible investors are being offered units in a limited partnership established by a subsidiary of One Property Group, whose directors are Tung Wei Ling and Manna Wang.
Offer documents say investors "will get a fixed 50 per cent return before tax over a maximum period of three years, paid regardless of whether the development is ultimately profitable".
The offer opened on February 28 and closes on April 30, seeking minimum amounts of $250,000 as long as investors meet the definition of wholesale investors and sign a document saying they are wholesale investors.
The One Longhorn wants the $20m for its new partnership fund to buy the land.
James Law of James Law Realty is promoting the project: "We've been working on this for almost half a year. One thing to note is that the directors are putting absolutely everything they have in their personal guarantee.
"The lawyers have been scrutinising every single word in the information memorandum and frequently asked questions for the last three months," Law said.
The Financial Markets Authority said it did not review such offers before they came out but they must all comply with the law.
Regulatory requirements include fair dealing provisions in the Financial Markets Conduct Act that apply broadly to conduct governing anyone offering financial products to the New Zealand public, an FMA spokesman said.
In the context of the fair dealing provisions, the FMA has issued guidance on its expectations for the advertising of financial products. Those must only have information about forecast returns when there are reasonable grounds to make such forecasts.
The basis of any forecast return should be made clear and references to where further information on the underlying assumptions can be found should be included, the spokesman said.
What might constitute reasonable grounds would differ depending on each situation, including the nature and type of financial product on offer.
The FMA spokesman cited examples:
• For an advertisement of a managed fund, there may not be any reasonable grounds for forecasting short to medium-term returns and, even if there are, the disclosures required to ensure that the forecast does not give a misleading impression may be difficult to achieve;
• Managed investment scheme providers should not advertise forecast or expected returns unless they can demonstrate it is in their members' interests to do so;
• Forecast returns used in an advertisement should be stated net of fees and costs. Where the level of fees or costs is variable, either the maximum fee or cost should be deducted, or a "reasonable estimate" should be used along with disclosure of the fact it is an estimate and the basis on which it was made;
• If advertised returns are subject to change, this must be clearly indicated.
Care should be taken where forecast cash distributions are advertised, as the word distributions is not necessarily synonymous with returns.
Fair dealing provisions prohibit misleading or deceptive conduct, including conduct likely to mislead or deceive, false, misleading or unsubstantiated representations and offers of financial products in the course of unsolicited meetings, the FMA spokesman said.
Law said the development is planned at 38 and 48 Longhorn Drive.
"This minimal risk, high return opportunity is personally guaranteed by the directors of The One Property Group - Tung Wei Ling and Manna Wang, and secured against the properties," a press release from Law said.
"The limited partnership mitigates risk by securing borrowing via a registered mortgage over the Longhorn property and a general security agreement over all the assets of The One Longhorn. The limited partnership has also obtained personal guarantees from Tung Wei Ling and Manna Wang, who are the sole shareholders in The One Property Group and trustees and beneficiaries of the trust that owns The One Property Group Holdings," the statement said.
The information memorandum with the offer said it had been made under the terms of the Financial Markets Conduct Act 2013.
Documents would be issued under that act and the money had to be in by April 30, it said.
Under a section answering questions about risks, investors were told they could lose part or all their money if the borrower defaulted, market conditions changed, due to macro-economic factors, political changes and a recession.
They might not get all the 50 per cent interest due to other factors, the IM said.
A letter from accountants BDO said The One Property Group had a combined net worth of $22.47m.
The offer came just days after the FMA's new chief expressed concerns about wholesale schemes generally.
Samantha Barrass, chief executive of the FMA, told a finance industry conference that wholesale schemes were a priority because they were on the edge of its regulatory remit.
Barrass said during her regulatory career over the last 10 years one of the things that had made her want to put her head in her hands and weep was the harm that had been caused by people's inappropriate access to markets and products that they simply did not understand.
"They go into them without advice and support and have lost a lot. This is a very important area to get a grip on.
"Frankly it's less around does someone have $100,000 or whatever it is to invest, but that genuinely sophisticated and knowledgeable people should be the only ones that are accessing the wholesale markets."
Many other wholesale funds are already on offer, including a new $100m fund from ex-prime minister John Key, son Max and ex-strip club owners John and Michael Chow who last month announced they were launching such a wholesale fund to get money for their residential schemes in Auckland.
Barrass said the FMA wanted to better understand who was investing in those products and the level of risk for investors.
"We are particularly focused on whether and the extent to which vulnerable consumers and people who are in practice retail investors are accessing wholesale markets and the harm this may cause them and their families."
Barrass said it had requested information from the industry and would publish a report on its findings this year.
Asked about the concerns Barrass expressed, Law said these were precisely why it had taken so long to make the offer, "pushing extremely hard to get the personal guarantees from the directors".
Of FMA concerns, Law aid: "I think their worries are genuine. Some rogue operators could take advantage of this. Personally knowing the people behind this offer, I am pretty confident they are legit. That's why we made them get the personal guarantees in place before we start promoting them."
"You're largely on your own" the FMA's Paul Gregory warned last year after the authority told Auckland property developer and investor Du Val to remove advertising for a mortgage fund which gave the impression it was low risk.
Offers to wholesale and eligible investors can have far fewer protections than other types of offers, Gregory warned, so people need to consider them harder and ask more questions.
Wholesale investment offers can promise attractive returns but don't have the same protections as retail investment offers, he stressed.
Reserve Bank says leaving banks to their own devices hasn't worked.