Buying into commercial property through syndicates is proving popular when bank deposit rates are so low

Tuesday, 17 September 2019

The Spark building in downtown Wellington sold for $197.5m in 2018 to syndicators Mitchell Mackersy which raised part of the money to buy it from investors.

Buying into commercial property through syndicates is proving popular when bank term deposit rates are so low.

A property syndicate pools money from individual investors to buy property and share the rental income. Syndicates are set up through a formal legal structure. Investors usually buy 'units' or 'shares' in the property.

Returns of 5 per cent pre-tax and greater are pulling in the punters on the hunt for investments that can beat the paltry returns from term deposits like 2 per cent to 2.7 per cent for a one-year term.

Colliers International syndications specialist Charlie Oscroft says investor appetite for buying into commercial property through syndicates has never been bigger.

'I don't think we've seen as big an appetite ever as there is now,' Colliers International syndication specialist Charlie Oscroft said.

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'While interest rates are at where they're at I don't see that changing, ' he said.

The appeal is regular monthly returns and the ability to buy into an asset class with often substantial returns that is unaffordable for many investors to purchase on their own.

Oscroft said the major syndicators purchased and raised about $450 million of capital for properties last year from investors. There were plenty of other small and private syndications that happened as well.

'So far this year it's up around $400m already, in September. '

The major property syndicators are Oyster Property and Augusta Capital. Other well-known syndicators include Silverfin Capital, Taurus and Mitchell Mackersy.

Oscroft said Augusta had done over $100m property syndications this year, but that was less than last year's $160m, as the company was changing its business model to more funds management.

Retail investors looking at investing in syndicated properties were often people not comfortable with investing in the sharemarket or the bond market. They were seeing property syndicates as a way to achieve cash flow.

However, the cost of properties had risen so that meant yields or returns to investors were decreasing and for quality real estate the yields were much lower than three years ago but still better than a term deposit.

There are several property syndications on offer at present. Colliers is acting as marketing agent for a new industrial property fund, Oyster Industrial, which is seeking investors for two newly developed industrial properties in the Auckland industrial suburb of Wiri. The minimum investment is $50,000 with a forecast yearly pre-tax cash return of 5.25 per cent.

Property syndicators Erskine and Owen have recently launched a syndication of the Wattie's National Distribution Centre in Hastings offering a pre-tax cash return of 8 per cent a year. It is immediately adjacent to Wattie's processing plant and has been purchased for $29.1m, half financed by BNZ bank.

In Christchurch, syndicators Taurus are seeking investors for a large industrial property in Hillsborough leased to leading South Island transport and logistics company Hilton Haulage. The minimum investment is $10,000 and the forecast return is 8 per cent pre-tax, paid monthly.

The country's financial markets regulator, the Financial Markets Authority, warns, on its website that it could be hard to sell out of a syndicated property and get your money back.

CBRE senior research director Zoltan Moricz says properties that are syndicated are not often sold and are seen as a long term investment.

Oscroft said liquidity - the ability to buy and sell quickly and easily - was far more advanced now for syndicated property than it was five years ago. There were plenty of people looking to buy investments in syndicated properties from those wishing to cash up.

Oyster's average sale time was three days to sell an investment in a syndicated property to another investor.

'The secondary market is a lot more liquid than people give it credit for,' Oscroft said.

'They all look at five, eight, ten years ago when that was a barrier to entry, so to speak, for people psychologically.'

But Oscroft stressed a property syndication investment was not a short-term investment and not an investment seeking capital gain.

'That's not what it's about. It's about cash flow.'

There would always be people at some stage who needed their money back for various reasons. 'So the market is much more mature and if it's good stock you will be able to sell your units.'

This new industrial property at 12 Harbour Ridge Drive in Wiri, Auckland, is being offered by Oyster to investors to buy shares in for a minimum outlay of $50,000.

Property syndication attracts billions of dollars of investment

Real estate firm CBRE research reveals just how large the syndicated property market has become in New Zealand over the past 10 years.

CBRE tracks sales of properties worth more than $5m each year in the main centres but not all sales over $5m.

Its research shows that syndicates have accumulated $2.4 billion of property over ten years from 2009 -19. Syndicated property is not often sold.

Asked what the risk was in accumulating this much property in ten years, CBRE senior director of research Zoltan Moricz said 'I don't see that there's a risk with that accumulation.'

Syndicates were not big players in the commercial property market. They were steady buyers, long term investors and occasionally sold property.

For retail investors, returns were relatively low from other passive investments like managed funds so higher returns from property could be quite attractive.

In the first half of 2019, CBRE said syndicates were net buyers with $144m in net purchases, about 7.6 per cent of market sales.

Financial Markets Authority advice

.It can be hard to get your money back if you need it as property syndicates don't usually have a fixed term.

.However, syndicate managers might help you sell your unit(s) to another investor.

.You may have to invest more money, such as costs and debts, if there is not enough money in the pool to meet these obligations.

.Investors in property syndicates pay fees to cover specialist services such as property management, legal and financial services. These fees can be high and and increase further over time.

.Look for a licensed provider - some syndicate managers are licensed by the FMA, which means they need to meet certain minimum standards.

.Make sure you read and understand the investment information, documents explaining how the syndicate operates and what the risks are.

.Read these documents carefully, including the 'product disclosure statement', 'deed of participation' and valuation report for the property.

.The product disclosure statement should explain how the syndicate operates and what the risks are.

.The deed of participation should include the terms and conditions you will have to follow if you join the syndicate.

.The valuation report will help explain how the property's value has been calculated.

. FMA recommends you ask yourself the questions covered in its property syndicate investing checklist, and strongly recommend you get professional financial advice before investing.

.A financial adviser can help you understand whether a property syndicate is right for you, and give you advice about how much to invest.