Priced-out investors opt for syndication

Thursday, 3 March 2016

Spark Place, in central Auckland, was a recent Augusta syndication.

Imagine walking through the centre of Auckland and seeing a company such as Spark moving into a building you partly own.

For those of us who do not have tens of millions of dollars to invest, it seems virtually impossible.

Bryce Barnett, of Augusta Capital, says syndication appeals to a variety of property investors.

But growing numbers of 'mum and dad' investors are claiming a stake in big commercial buildings via property investment syndicates.

Bryce Barnett, executive director and head of funds management at Augusta Capital, which offers syndication opportunities, said interest was extremely strong.

'I've been involved for 20 years and this would be the strongest cycle I've ever seen.'

He said low interest rates were prompting investors to look for another way to get a better return on their money.

'And they've seen property always seems to ride the cycles over the medium to long-term.'

He said $100 million had been placed in syndicates through Augusta in the last six months. It has a portfolio worth about $1.5 billion, across 172 buildings.

Investors liked the idea of being able to buy into a larger property with a better quality of tenant than they could afford if they tried to buy a property on their own, he said.

'Irrespective of the economic cycle the tenant will have the ability to pay rent and create a return. If the investor tried to accumulate the funds in the bank to buy a building on their own, some would never get there,' he said.

Barnett said there were more younger investors coming forward. 'They're saying 'now we've got a home let's start thinking and investing wisely'.'

He said many realised that the barrier to entry in the commercial property market was very high, having just managed to get across the barrier to entry of the residential market.

It was possible that some would opt for a slice of a property syndicate if they could not afford their own home, he said, but it was probably not in line with New Zealanders' psyches. 'People are of the mindset that they want to own their own homes.'

How do they work?

A property syndicate pools money from individual investors to buy a property. The rental income is then shared, minus a management fee and other costs associated with the building.

Most syndicates are structured as proportional ownership schemes. Investors buy one or more units to get in on the deal.

Usually the cost for one unit is $50,000 but sometimes $20,000 is sufficient.

Some have a set time that the property will be owned for but most deals are open-ended.

What is the downside?

Property commentator Olly Newland said property syndicates worked well for some buyers.

'They give steady income and a good return and can be good buying indeed but they offer no control,' he said.

'Most people like to be in control of the property they own. But a percentage of people, especially those who want to give grandma something to live on, they just want a return and are not worried about anything else.'

Although property syndicates usually offer good returns, they can be riskier than other forms of property investment.

The returns are not guaranteed. Tenants can move out, their businesses can go under and interest rates can rise.

There have been some high-profile cases where syndicates have gone wrong. Syndicates started by Secure Property Investments in the 2000s have reportedly lost $25m. In two New Plymouth buildings, investors lost more than $5m, or all of their investment.

The Financial Markets Authority (FMA) said investors should ask whether they are comfortable having their money locked in for the medium- to long-term before they took part in a syndication.

They should also consider whether they had enough spare money to cover additional costs that might arise, such as repairs and maintenance. Sometimes these had to be paid quite quickly, the FMA warned.

Newland said it could be hard for investors to get their money out if they needed it in a hurry. 'If you own a property you can just sell it but if you're in a syndicate and you want to sell, you have to sell to like investors.'

Some managers will help an investor sell their stake to someone else, although there can be fees associated with this.

Barnett said liquidity was becoming less of a concern as the market matured.

'There is a very strong secondary market, particularly for a property that is well tenanted with good tenants. We own quite a few supermarkets and if an investor wanted to sell [their share of one], providing their expectation was realistic it would be sold within 24 hours.'

He said as lease agreements neared an end it would be more difficult to sell but once the deal was done, the investment would become more liquid again.

Some syndicate managers are licensed as managed investment schemes by the FMA, which means they need to meet certain minimum standards, including having a licensed manager and additional regulatory oversight.

ASK

The FMA recommends would-be syndicate investors ask:

Could the property be hard to lease when the current lease ends?

What is the condition of the building?

What is the level of insurance cover?

What risks have been identified that are specific to the property?

Who will manage the property?

Who are the tenants?

How long as the leases, are any expiring soon?

Are there upcoming opportunities to review the rent?

Who decides the management fees? Can they rise?

Are any bank loans being paid on an interest-only basis?

What's the loan-to-value ratio of the borrowing?

Are any of the people or firms doing work for the syndicate related to each other in any way? For example, is the maintenance company related to the company setting up the syndicate? If so, how will their charges be calculated?