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The good bad and ugly about property syndications

Wednesday, 7 September 2016

Augusta
Augusta's biggest and most recent syndicated capital raising was for the NZME building in Auckland.

Promoters and managers have enjoyed a surge in fees from property syndications over the past couple of years.

They offer investors, who take a share in ownership of a single managed property, relatively high returns between 7 per cent to 10 per cent before tax, which compares with bank deposits of about 3.5 per cent.

An alternative to syndications are the 11 NZX-listed property companies with more modest annual dividend returns of about 4.5 per cent, but they have tax imputation credits attached. They also own several properties, limiting exposure to one underperforming building. 

The popularity of syndications was underscored a couple of weeks ago when NZX-listed Augusta reported oversubscriptions to its largest ever $70 million capital raising for the $115m purchase (partly debt funded) of the new NZME​ building in central Auckland. 

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The building has a lease term of 12 years to tenants NZME, Pernod Ricard and Meredith Connell, and a vacant floor is underwritten by Augusta, representing a challenge and opportunity to lift rental earnings.

Augusta has promoted seven syndications marketed by partner Bayleys over the past 12 months, gleaning $7m from initial fees, according to the annual report.

But history has a way of turning. 

Syndications were also popular in the 1990s, promoted by companies like Waltus. When they began to underperform for various reasons in the early 2000s they were consolidated together to even out losses and form NZX-listed property company ING which later became Argosy.

In the mid-2000s another syndicator SPI Capital promoted 11 syndicates offering high returns.

Most have subsequently been placed in liquidation with combined losses of $35m, and founding directors Murray Alcock and Allister Knight were penalised last year by the Financial Markets Authority over various breaches. 

One of SPI's troubled investments set up in 2006 to invest in two commercial buildings was recently placed in liquidation - Q Fund offering 15 per cent annual returns. The liquidation followed an unsuccessful effort to revive Q Fund by Christchurch-based Taurus Group in late 2015.

Liquidator Brenton Hunt is investigating related party loans and whether the scheme may have breached the Securities Act because 'there is no evidence' the minimum amount sought from investors of $3.5m was ever reached. 

He estimated losses of about $1.4m following the sale of the two buildings the fund invested in.

Meanwhile, many financial advisers have reservations about potential conflict of interest when syndications are marketed by real estate agents who may also be involved on behalf of the vendor of the property. Legal, marketing, accounting and valuation fees also lift costs to investors. 

The Financial Markets Authority has a check list for potential syndication investors, highlighting two main ones - inability to cash up quickly, and unforeseen repairs and maintenance requiring more money than originally invested. 

Because syndications often do not have a finite term, a wind up requires about two thirds of investors to agree to a sale, and it is difficult to predict the value of the investment in 10 years time, depending on strength of tenant, condition of the building, and interest rate on borrowings.

Augusta, which has $160m in syndications, offers a broking service in partnership with Bayleys for a 2 per cent transaction fee - e.g $1000 for transferring a $50,000 proportionate share.

Over the past year about 95 per cent of the 195 requests at a value of $11.5m have been settled within a month and some within hours.

Bayleys syndication specialist Mike Houlker said liquidity in syndicate units depends on performance of the property. 

In some cases the syndicate may be structured with an option requiring the vendor of the property to repurchase units - as occurred with syndication of the Quantum building in Wellington, leased to students and young professionals.

Pascoe Barton financial advisers Susan Pascoe Barton and Steven Barton are cautious about syndication, highlighting fees which they estimate may add up to 10 per cent to investor costs.

The Bartons recommend listed property companies or property managed funds in a diversified portfolio if investors are seeking income from property, because they have relatively attractive dividend yields, are actively managed, and generally they sell at a discount to asset backing rather than a premium like many property syndicate offers.  

Investors weighing up tax, syndication debt, interest rates, liquidity, risk, and management fees may conclude there is little difference between listed property company shares and syndicated properties - provided all goes well.

The main syndications in the market were set up by the following promoters: