Property syndication opportunities abound in smaller capitals

The smaller capitals of Perth, Adelaide and Brisbane have been identified by a property syndication expert as property syndication locations with greater potential than more mature markets.

Many investors are exploring alternatives to traditional property investment, including property syndicates.

Property syndication is a direct property investment where the smaller property investor with limited available capital has an opportunity to invest in commercial, retail or industrial properties.

Managed by property syndicate professionals who should have a prospectus lodged with the Australian Securities and Investment Commission, this type of investment enables people to invest their capital and leave the experts to manage the day-to-day activities relating to the associated property.

Investors are entitled to a percentage of the income that is acquired from the property in which they have invested.

The Australian Investors Association (AIA) said property syndicates have been very popular since the 1980s and 90s for investors looking to diversify their portfolio.

“Since then, they lost favour partly as a result of property companies, such as Centro and Octaviar that operated syndicates, suffering significant financial problems,” the AIA says.

But according to Cal Doggett, Managing Director with Properties & Pathways, the entire Australian commercial property landscape is strong and experiencing significant growth.

“I certainly feel there are still sustainable returns to be enjoyed from investing with a syndicator who can leverage not only debt but their expertise,” he said.

“Unlisted syndicates typically perform best when they’re acquiring property undervalued and divesting them above value.”

“On the other side of the equation are listed syndicates (REITs), which typically provide a more moderate investor return which allows them to buy at value and take less risk.”

“So, while we can see many of the larger syndicated institutions buying property in Sydney and Melbourne, it’s our feeling that these markets are super-hot.”

“This means buyers are overpricing future earnings or potential upside, hence prices are incredibly high and capitalisation rates are at all-time lows.”

“This dynamic is swiftly making its way across borders, into the less mature markets of Brisbane, Adelaide and Perth, and these states still present a great opportunity for value-buying.”

Considerations before investing

Potential investors need to consider the cost of debt when it comes to investing in property syndicates, Mr Doggett said.

“The cost of debt is a massive consideration for syndicates wanting to provide a healthy return for investors because leverage typically produces an improved investor return,” he said.

“So as interest rates rise, the delta between the rental return and the cost of debt gets squeezed, this makes it harder to produce the same return for investors.”

“The word of caution is to look beyond the headline investor return and see whether the syndicator is managing their risk and their assumptions, which underpin this return,”

“A syndicator can easily manage risk by prudently hedging interest rates, providing healthy assumptions around rental escalations, employing a lower leverage strategy and, most importantly, buying core property.”

“These factors will ultimately determine whether the investor return is sustainable given the almost inevitable increase in interest rates.”

Advantages and disadvantages

Glenn Hitch, Syndication Manager of SMATS Consortium, said syndication has its advantages and disadvantages, specifically it comes down to the underlying assets, how the risks are managed and how investors are structured and secured.

He identified the pros and cons:

Advantages

• No stamp duty
• No foreign buyer fees
• No capital gains tax
• No legal fees
• No sales commission (unlike the normal disposal of properties)
• Fixed and assured returns
• Low entry capital

Disadvantages

• 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
• As only preferential loan agreements are available, investors have minimal control

Mr Doggett identified a couple of key advantages of property syndicates over other types of investments.

“There is the ability for an unsophisticated investor to get leverage and exposure to a complex but sturdy asset class with only a limited amount of capital.”

“Investors also get exposure to a stable market, compared to other volatile markets, and all the while underpinned by many of the world’s biggest companies, for example the share price of Wesfarmers might go up and down from day to day but they pay the same rent regardless.”

Mr Doggett said that, as with any investment, there were also downsides.

“Some syndicators have a very heavy fee structure that is not aligned with investor return - alignment and transparency are pivotal, so check the fine print before investing,” he said.

“Then there’s the illiquidity of the investment - while the share market allows buying and selling with the press of a button, the sale of units in an unlisted unit trust can take time and can also be hard to value definitively.”