Property syndicates a safer bet than the office Lotto
For anyone who’s ever tried their hand in the office Lotto syndicate, you’re only a few steps - and quite a few dollars - from the principle of the property syndicate.
Just like work colleagues hoping to strike wealth by pooling their resources once a week, a property syndicate is a direct property investment whereby numerous investors pool their capital to invest into real estate.
The pooling of the investor’s capital provides the investors with the opportunity to invest in commercial, retail or industrial properties that may otherwise be too expensive for the investors to acquire directly.
Property syndicates have been popular since the 1980s and 90s with investors looking for diversification in their portfolio.
The chances of securing a return are a lot better than Lotto, but due diligence extends beyond picking birthdays and hoping for the best.
Property syndicates lost favour post-GFC and as a result of property companies such as Centro and Octaviar, which operated syndicates, suffering significant financial problems.
Since the global financial crisis and subsequent uncertainty surrounding property values, lower yields and higher interest rates, fewer syndicates were being established.
In terms of commercial property transactions in Australia, sales to property syndicators only account for a small proportion of the overall market.
This can limit participation in property syndicates and quite often well located property offering strong yields can oversubscribe quickly due to the strong demand for this type of investment.
Investors can be individuals, self-managed superannuation funds, trusts and companies.
Australasian Property Investments Limited (APiL) investor relations manager, Cassandra Thompson, said property syndicates provide investors with access to property classes that are generally beyond the financial reach of most individuals.
“Investing in quality commercial property syndicates, such as industrial properties, office buildings and retail centres, provides investors with access to some of Australia’s best corporate tenants and commercial properties that are usually well located with strong underlying investment fundamentals,” Ms Thompson said.
Syndicates are either wholesale or retail, with more wholesale syndicates than retail syndicates generally available to investors.
Wholesale refers to an investor who has a higher level of experience in investing and requires less disclosure from the responsible entity. Retail refers to a wider scope of investors and requires a high level of disclosure from the responsible entity.
Most groups that operate property syndicates will have a minimum investment of about $50,000 and will contain anywhere from 20 to 200 investors.
“These investments will usually be from $10m to $100m in acquisition value and will usually be commercial properties, however, there are some groups who operate in the residential space,” Ms Thompson said.
Returns and risks
Property syndicates are best suited to investors seeking a regular income distribution with the potential for capital growth.
One key attribute that attracts investors to this type of investment is knowing their money is invested in bricks and mortar and directly linked to an identified asset.
“Distributions paid by syndication businesses are usually higher than super’ funds and listed property funds, setting targets above 7.0 per cent annual dividend returns,” Ms Thompson said.
Investors looking to invest in property syndicates should carefully research the syndicate manager and consider the company’s reputation, performance and previous management experience.
Potential sales commissions can potentially be loaded on top of the purchase price of properties.
While its prevalence is unknown, it is a potential risk in the case of newly built properties or developments where there may be kickbacks to whoever is running the syndicate, for the sale of that property through the syndicate buying it.
Just like having a copy of the office Lotto ticket is a wise precaution, transparency is crucial in property syndication.
Regular reporting on rental income, expenses and financial position is a non-negotiable. Professional financial advice and legal counsel before embarking on the investment is also a must.
Pros and cons
It might seem unusual to pool your money with a group of people you’ve never met, but there are a number of advantages to joining forces to invest in property. There are also things to look out for.
SMATS Group, whose property syndication investment model targets wholesale investors interested in fixed yields, security via a grouped second mortgage over the project land, and flexible investment terms, list their pro and cons to property syndication.
- No stamp duty
- No foreign buyer fee
- No capital gains tax
- 10 per cent withholding cap for non-residents for tax purposes
- No legal fees
- No sales commission (unlike the normal disposal of properties)
- Fixed and assured returns
- Low entry capital
- Two-year liquidity
- Property market exposure
- Diversification of investment properties (across projects, states and locations)
- Ideal for wholesale and sophisticated investors with SMSF at 15 per cent taxation
- Secured via loan agreement and security trust deed
- No actual ownership of property (if asset accumulation is the investment goal)
- No ability to create a long term passive income earning potential
- Investment is Illiquid for a set time, rate and type
- No equity available, only preferential loan agreement, so minimal control