Pros and cons of property syndication

This warehouse and office property at Albany was offered for syndication in a deal by St Laurence last month. Photo / Supplied

The appetite for syndicated property investments is increasing although its rise has not been greeted with delight by some expert and long-time investors.

A Christchurch retail property is the latest to be offered for sale to syndicate investors this week, paying 9 per cent on $100,000 lots.

Colliers International said Moorhouse Central Ltd from Ocean Partners Property would offer the Countdown supermarket to syndicate investors, planning to buy the property for $21.5 million from an Australian investor.

The supermarket and 10 retail tenants including a Burger King, Pharmacy Xtra and a food court are offered in the syndicate.

Countdown had leased the building until 2020 and Sarah Ott, a partner at Ocean Partners said investors were only getting 3 to 4 per cent from banks but could get more than double that via the syndicate.

Property syndicates get an exemption from the Securities Act so a full prospectus is not needed, although an offerer's statement is mandatory and has some of the same characteristics as a prospectus, an aspect Ott stressed.

Ocean is offering 114 units in the deal closing on May 14. Ott said a 40-page statement had been prepared to comply with the Securities Act showing the risks and information about the offer.

At Easter, St Laurence Realty - part of the troubled St Laurence Group - released a new syndication offering 9.8 per cent for a North Harbour property syndicate.

Critics of syndication said financially literate people would run a mile from schemes. Only the promoters were keen, said one cynic.

Bosses of two businesses managing properties worth more than $2 billion raised questions about the syndication model.

Rob Lang of AMP Office Trust has been one of syndication's more outspoken opponents, questioning why investors were even remotely interested in these vehicles which usually had only one tenant and a solo asset when listed property trusts were paying high dividends.

"I thought those syndicates had had their day," Lang said, referring to the difficult history of the Waltus and Urbus property syndicates.

The syndicates now being widely promoted were only paying around 10 per cent, yet listed property trusts were yielding 11, 12 or 13 per cent.

Paul Duffy runs one of the country's largest property funds, managing assets valued at $900 million plus. Formerly Dominion Funds, his DNZ Property Group has now shunned syndication in favour of listing shares in its funds on the unlisted market.

Duffy said the business had deliberately moved away from the syndication model more than five years ago because:

The risk profile for investors was too large because syndicates tend to be a single property often with a single tenant.

The debt level in the funds is typically geared high to achieve the coupon rate return which is often promoted by syndicators, ie 8.5 per cent to 9 per cent.

Investors are looking for a lower risk profile in today's uncertain times and a well-diversified, well-managed portfolio far outweighs the exposure of a single property investment.

Some investors were happy to take on this type of risk profile, Duffy said.

John Dakin, chief executive of Goodman Property Trust's manager, took a more positive view of syndicates, particularly after selling some of his trust's property into these vehicles. "It started last year when we sold the APN building in Manukau to a syndicator.

"We have since sold another asset to a syndicator.

"I think it is driven by a number of factors including low interest rates relative to yields, investor demand for steady income streams, higher yields for investors relative to falling bank deposits and that investors can see and touch their investment.

"We don't have any specific research but effectively the stars are aligned for this model today.

"The re-emergence is a positive for the investment market in terms of introducing another type of buyer and improving liquidity," he said.

However, buying a unit or share in a listed vehicle had big advantages, Dakin said.

"The obvious comparison from an investment point of view with a listed property trust such as Goodman is that buying a unit in GMT provides access to a $1.5 billion portfolio with over 230 customers and a loan-to-value ratio in the mid-30 per cent area. The typical syndicate will have a single tenant and will often have a loan-to-value ratio of 50 per cent so the risk profile differs quite significantly."

Zoltan Moricz, research and consulting director at CB Richard Ellis, said investors keen on syndication were looking more for regular payments than big capital gains.

Syndication had been active lately and demand came particularly from retail investors who were faced with low bank deposit rates.

Moricz said it was important to remember that a group of syndicated property investments last decade performed particularly poorly and investors should be careful.

"They should look for security of income stream so having a longer-term tenant - and being able to re-lease the building if the tenant leaves - is important," he said.

A critic of syndication who did not want to be named said high debt levels within the vehicles should put investors off.

"Syndicates are highly leveraged, sometimes up to 50 per cent. No bank is offering bank facility terms longer than three years.

"So while the syndicate investor thinks they are getting a long-term return, when the facility expires in the short-term the return can change significantly because the margins could go up, the loan-to-value ratio could change," the property investors said.

BIG PLAYERS

Syndicates/proportional ownership schemes:

Oyster Group, Hamilton:
* Ex-Bayleys agents with about 25 syndicates.

St Laurence, Wellington:
* Troubled financier with a few schemes.

Bayleys Real Estate and Colliers International:
* Promoting schemes.

Augusta Group, Auckland:
* Manages listed Kermadec and has syndicates.

Lawyers Glaister Ennor:
* Completed many syndicates.

KCL Property of New Plymouth:
* Manages syndicates worth $200 million.