Land investment product definition drafted

The problem definition of a land investment product finally has some clarity with a  proposal to make the definition narrow around complex land investment schemes rather than broad capturing basic investment.

The Cabinet Economic Growth and Infrastructure Committee (EGI) paper says the central objective of including the LIP in the Financial Advisers Act 2008 (FAA) was to ensure that property schemes that are set up in such a way that they are not securities, such as some of Blue Chip's products, are still subject to the FAA.

It suggests a narrow definition of LIP be made where basic investments in land would be excluded.

The committee believes the definition should be targeted at complex schemes for investing in land capturing products where the value of the investment depends to a high degree on factors not directly tied to the value of the land - on factors beside rental income and capital appreciation.

"In particular, relevant schemes expose investors to the risk that the promoter of the scheme could become insolvent," says the paper.

New Zealand Mortgage Brokers Association (NZMBA) chairman and chief executive Darren Pratley says mortgage brokers will have to clearly understand when they cross the line into giving advice on investment schemes, as it is a category 1 product.

The EGI committee also recommends that a comprehensive policy process be completed by the end of 2011 to assess whether the definition of the LIP works in practice.

It says the three key points to consider will be whether the definition should be wider to prevent products that should be caught evading the regime through careful structuring, whether any land investments are caught inadvertently that should not be subject to adviser regulation and whether advice on land investments more broadly should be subject to the FAA.

The Ministry of Economic Development says it is in the drafting process of the LIP definition at the moment which is a high priority and it will be made certain as soon as possible.