There has been a lot of activity in the property syndication market in the last few years. You might have thought about investing in a property syndicate or even looked at establishing one. We give you the lowdown on what it's all about.
A property syndicate is a group of investors coming together to pool their capital to own one or more properties. Syndicates are seen as a way for smaller investors to obtain reasonably stable investments at a better return then their own limited capital could otherwise achieve in the investment property market. They are also a way for larger investors to diversify their property portfolio. There are various forms of syndication ranging from small groups of investors to large syndication entities. This article gives an overview of property syndication in New Zealand.
How it works as an investment
Offers to investors are normally made when a syndicate is being formed to acquire a new property or group of properties. A promoter identifies a suitable property or properties which are on the market or otherwise available for acquisition. The promoter will then organise the ownership structure (company, trust etc.) and finance for the syndicate and also set up the offer for investment. The promoter will then advertise the offer to investors and hope to raise the total capital required for the syndicate to go ahead.
Investment parcels of $50,000 or $100,000 are the most common amounts for regulated public offers. Larger investment parcels are normally required when the offer is being made to wholesaler investors. The promoter will set the total amount required to be raised by investors based off the agreed price to acquire the property, the bank lending amount and all establishment costs. These establishment costs include the promoter's fees (which can be significant), legal and accounting fees, advertising costs and regulatory fees.
The amount of return an investor receives is based on the rental income generated by the property less the syndicates operating costs. These operating costs include lending costs, property ownership costs, syndication management fees, property management fees and any of the property's operating expenses that are unable to be recovered from tenants under their leases. The investment rates currently being advertised by syndicates are between 6%– 9% per annum.
Public offers and wholesale offers
One of the big distinctions between certain types of offers for property syndicates is whether the offer is a public offer to all investors where full disclosure is required, or otherwise an offer limited to wholesale investors (e.g. eligible investors as certified under the Financial Markets Conduct Act 2013).
A regulated public offer for a property syndicate requires a formal disclosure statement under the FMCA which is now called a Product Disclosure Statement or 'PDS'. A PDS provides investors with details of the investment to allow them to make an informed investment decision. The form and content of the PDS is strictly prescribed by the regulations and adherence is enforced by the Financial Markets Authority.
The other major property syndicate type is offer limited only to wholesale investors. These offers are not made to the public generally. Rather they are reserved for those persons or entities that are experienced investors and do not require the same strict disclosure of information required in a PDS. There are several types of wholesale investor categories under the FMCA, including being an investment business, meeting the investment activity criteria, being an eligible investor or if the minimum investment amount is $750,000 or greater. When an offer is made to wholesale investors there is a requirement for investors to certify that they fall within one of the categories. The main advantage of a wholesale offer is that the establishment costs and timeframe are normally significantly reduced because there is no requirement for a PDS.
What to be aware of
Like any investment property syndicates have their pros and cons. Not all property syndicates are created equal and investors need to do their homework, just as with any investment. Many of the risks associated with property syndications are the same as when investing in commercial property generally. We discuss below some of the more important aspects to be aware of.
- It can be difficult to get your money out
One of the most important aspects to be aware when the investing in property syndicates is that there is often limited liquidity for investors. Because there is no active market for your investment unit or share it can be difficult to find a buyer should you want to sell. If you cannot sell your shares or units then you may have to wait until the syndicate agrees to sell the entire property (which could be a number of years). Some larger property syndication companies do help with selling units to other investors from their investor network/ database. Property syndicates are best suited for those investors who have a long investment horizon and will not require their investment capital to be paid out on short notice.
- You may have to invest more
If significant property repairs or improvements are required and this cannot be recovered by insurance or from tenants then an investor may be called on to invest more funds into the syndicate. Investors may also be required to put in more money if the bank requires repayment of some of its loan.
- Your investment returns can change
The investment return rate advertised is not guaranteed over the life of the investment. During the lifetime of the investment the rate of return will be affected by the change in income generated by the property through rents, the change in any operating/ management costs and also the cost of finance. It pays to look closely at the property details and any projected financial information available.
- Single asset and major tenant risk
One of the issues with property syndicates is that they often have single assets and/or major tenant risk. Because the syndicate normally only owns one property then if that property under performs or is otherwise affected by events (such as an earthquake) then there are no other assets to average out any losses or lack of income. Similarly if a property has a single major tenant the performance of the syndicate is closely linked to that tenant. If the tenant leaves or goes under then the syndicates' returns and the value of the property can be significantly affected unless a replacement tenant can be found quickly.
If you have any questions or queries relating to property syndication then please contact our specialists Stephen Brent or Jeroen Vink. Stephen and Jeroen have experience preparing PDS's for property syndicates, with the latest PDS completed for the syndicate company that owns The Hub Hornby shopping mall in relation to their successful raise of more than $14m.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.