After long period of industry speculation over Westpoint Group’s operations in the risky business of apartment developments, the corporate regulator last week took action against companies within its property empire.
After long period of industry speculation over Westpoint Group’s operations in the risky business of apartment developments, the corporate regulator last week took action against companies within its property empire.
Last week the Australian Securities and Investments Commission sought to wind up and appoint a provisional liquidator to York Street Mezzanine Pty Ltd, which is undertaking a Sydney apartment development.
While Westpoint’s founder, Norm Carey, is reported to have said that investors’ money was safe and that the group guaranteed the investments, ASIC has claimed that 900 investors in the Sydney project were at risk of losing more than $75 million.
ASIC has also sought orders for lodgement of annual reports from several other Westpoint companies, including Emu Brewery Mezzanine Limited, and Paragon Apartments Ltd, both Western Australian projects.
Westpoint has set up mezzanine finance companies around projects that raise money to fund projects. In return, investors receive promissory notes for their money. The finance company obtains a second mortgage over land, with mainstream bank debt securing a first mortgage, giving investors a lower priority if things go wrong.
While the nature of mezzanine financing is higher risk for higher return, it was reported recently that Westpoint has acknowledged that 22 per cent commissions are paid to financial planners to encourage retail investors to partake in the mezzanine fund raising.
ASIC is now questioning the ability of Westpoint to be able to repay investors their money.
Burgess Rawson head of residential marketing, Paul Durkin, told WA Business News that mezzanine finance structures were commonly deployed for large residential apartment developments, and it seemed that Westpoint had been caught up in an escalating cost environment.
“These mezzanine funding vehicles offer an uncharacteristically high yield, so therefore come with a correlating high risk,” Mr Durkin said.
“Investors go in with their eyes wide open, and providing all the disclosures have been made, this sort of financing is not out of character.”
This is not the first time ASIC has taken issue with Westpoint’s promissory notes. Earlier this year, ASIC halted plans to raise debt to fund the Emu Brewery Project, requesting that the Supreme Court rule on whether Emu Brewery Mezzanine Ltd should have offered promissory notes as debentures or financial products under the Corporations Act.
A mixed ruling was received and is subject to appeal.
Escalating construction costs across the country have hit the residential apartment market in the past few years, and while the sector remains relatively strong in Perth, the market has slowed significantly in Sydney and Melbourne.
Construction delays, drops in value and questions of oversupply have dogged the east coast market, making new projects harder to get out of the ground.
Westpoint’s York Street project has experienced long delays on the back of the cooling off of the apartment market and these delays have caught ASIC’s attention.
In July, Westpoint obtained approval to build a $250 million development with 1,010 residential apartments over two towers on the Emu Brewery Site.
Mr Carey last week said the project would still go ahead.
Development plans for the four-hectare development site, which has been empty for a decade, also included 2,319 square metres of retail floor space, 1,372sq m of office floor space, 1,239sq m of restaurant floor space, a tavern and health club facilities.
Property industry sources suggest that anywhere between 40 and 70 per cent of the Emu Brewery apartments have already been pre-sold, however the fewer that have been sold the better for Westpoint to cover escalating costs.
As well as seeking the winding up and appointment of a liquidator to York Street, ASIC is also alleging misleading and deceptive conduct by York Street and applying for declarations against Westpoint Management Ltd, including Mr Carey, on the basis that they knew of or were a party to the alleged misleading and deceptive conduct.
Established in 1985, Westpoint has current and completed development projects valued at more than $1.7 billion, and currently owns and/or manages retail and commercial properties with a total value of more than $300 million.
Westpoint has net assets of about $75 million.
