Plans for the $200 million-plus scheme at Flat Bush. Photo / Supplied
A temporary stop order by The Financial Markets Authority against a $20 million fundraising scheme has been welcomed by industry and finance experts.
But they also expressed surprise at Monday's action against The One Management GP and James Law Realty for The One in Longhorn Partnership Fund, planning a $210 million Flat Bush townhouse scheme and promising wholesale investors 50 per cent over three years.
Katrina Shanks, chief executive of Financial Advice New Zealand, backed the authority's actions.
"We are fully supportive of a strong regulator which results in the maintenance and building of public confidence and trust.
"The stop order is a significant move by the regulator who must have serious concerns regarding false or misleading information which is being disclosed or advertised to the public.
"It is important for the public to be able to have confidence and trust in any financial information which is disclosed which could influence their decisions to invest. It will be interesting to understand the component of disclosure or advertising which the FMA has obtained concerns on," Shanks said.
Massey University's Professor Christoph Schumacher also backed Monday's move.
"The job of the FMA is to protect investors. If it believes companies are overselling their product to a level that it constitutes false advertising then it needs to step in," said Schumacher.
He is a professor of innovation and economics and a director of Knowledge Exchange Hub.
"A very well-established investment concept is the risk-return premium - projects with higher risk require higher returns," he said.
People need to be compensated for taking on more risk.
"Turn this around and it means that high return projects are necessarily higher risk. The materials offer minimal risk but record high returns. If I read this, then my alarm bells are going off. If something is too good to be true, it often is. Fifty per cent return is huge and potentially too optimistic, especially when the risk is perceived to be low. I can understand the FMA," Schumacher said.
The information memorandum showed the developers wanted the $20m for the townhouse development at 38 and 48 Longhorn Dr, Flat Bush.
"The property will settle in December 2022," the information memorandum said, explaining the partnership had only made an offer to buy land but did not yet own it.
Mark Francis, chief executive of Centuria New Zealand which is owned by ASX listed Centuria Group, also welcomed the regulatory action.
"This is a subject I have taken a personal interest in over the years. It is really encouraging that the Financial Markets Authority has stepped in to ensure the interests of investors are protected," Francis said.
"Regulation of the real estate investment market is essential to provide security and credibility, giving investors confidence in the industry, whether they are wholesale investors or retail investors. The industry as a whole benefits from this type of market regulation," Francis said.
Law told the Herald he could not say how much of the $20m had been raised nor where any money was being held.
"The FMA says to put it in a trust. They're awaiting instructions," he said of his clients.
Asked what security investors promised the 50 per cent returns were offered, Law said: "The BDO letter [in the information memorandum] says it's the property that the co-owners have by way of a GSA [general security agreement]. So whatever is in their name is used as security or guarantee. Whatever is under their control - companies, personal assets, are used as security for the $20m."
Asked who else the developers were borrowing from, Law said it was "a couple of second-tier finance companies", but he refused to say who. "Everyone developing these days is borrowing from second-tier finance companies. Banks aren't lending."
Tung Wei Ling is the founder and a director of The One Property Group.
The BDO letter is from partner Wayne Lee and calculated directors involved in the scheme had assets valued at $22.45m.
The calculations were partly based on reports from valuers Darroch and CBRE.
Ewe Leong, a partner at law firm Anthony Harper, acts for the partnership.
Leong said today he could make no comments about how much of the $20m was raised, nor pass on contact details for his client.
On Monday, the authority issued a notice saying a temporary stop order was put on the scheme.
This is a regulatory tool the authority can use to ban or prevent advertising or disclosure that is false or misleading or is likely to confuse consumers or investors, on matters that influence their investment decision.
The authority can issue an interim order, which typically lasts for 15 working days, while it considers if a full stop order is warranted.
It said it was concerned about statements by The One Management GP regarding the fund's returns payable to investors and the level of risk in the investment.
The press release on the scheme was headed "Leading property group offers minimal risk, high return investment opportunity".
The fact the scheme was high risk yet promoted as "minimal risk" is understood to be one of the issues the FMA was worried about.
Marketing also linked to a previous Herald article about the same people.
"The One Property Group is following up its successful 133-home Flat Bush development with an exciting new project in nearby Longhorn Drive – and calling for investors," the statement with the $20m capital raise said.
"In August 2021, 80 of the modern terrace homes in the group's The One in Flat Bush development pre-sold in just eight hours, stunning property experts. Since then, the group has acquired another parcel of land in this sought-after greenfields suburb and plans are underway for a $210 million development, to be named The One in Longhorn," this month's press statement said.
The Herald quoted Tung Wei Ling, chief executive and founder of the One Property Group as saying last August of the other 80-unit Flat Bush scheme: "I am absolutely shocked by this. Another agency told me it will take nine months to sell down this project. We have now hit our sales target months ahead of our schedule. Our funders are ready. There's no way we will be cancelling this project."
What the FMA will do next about the $20m scheme remains uncertain.
Its options are to lift the temporary ban and allow it to continue, or put a permanent ban on the scheme.
It is saying nothing more in the meantime about the situation.
Reserve Bank says leaving banks to their own devices hasn't worked.