Syndicators combine to set standards

Syndication gives smaller investors the chance to have a stake in the likes of this Wellington property. Photo / Supplied

Eight of New Zealand's longest-established commercial property syndicators have taken the first steps towards forming an association to protect the interests of investors and set standards for the industry in relation to corporate governance, documentation and disclosure, ethical capital raising and self-regulation.

Murray Alcock, managing director of SPI Capital in Auckland, who is driving the initial stages of the association's formation, says there has been commitment from experienced syndicators who have a good track record of portfolios delivering consistent returns.

The founding members of the association include SPI Capital, Oyster Group, KCL Property, IPT, Glaister Ennor, Commercial Investment Property and Augusta Funds Management.

Property syndicates, or proportional ownership schemes, are proving popular with smaller investors seeking regular and consistent returns. But the amount of money flowing into property syndication has sparked debate on the risks and rewards for investors.

Mark Winter, managing director for Hamilton-based Oyster Group, says some disgruntled fund managers have been willing to give their opinions on property syndication, but syndicators have not had a united voice.

The fledgling association is planning on working with the Securities Commission and Capital Markets Development Taskforce, part of the Ministry of Economic Development, on documentation and transparency, making it easier for investors to understand the risks and rewards of investment in commercial property syndicates.

Formation of the association comes when syndicators are active property buyers after two to three years in the wilderness when they were not able to, or willing to, compete against institutional investors - particularly Australian superannuation and property funds, which were paying big prices for buildings as yields compressed to lows of 5-6 per cent and returns dropped.

However, the global credit crunch and falling property values have forced many institutional investors to sell stock to reduce debt and rebalance their books.

This has left the way open for New Zealand syndicators to pick up quality properties at yields of 8-9 per cent for investors through property syndicates or proportionate ownership schemes.

"The market has swung in favour of buyers and now is an optimum time to purchase commercial property when prices are 15-20 per cent less than 2 years ago," says Winter.

"The result has been to bring property prices back to more normal levels, making public investment viable."

Property syndication in New Zealand is a relatively easy way for smaller investors to get into good-quality commercial property.

At the basic level, a syndicate or proportionate ownership scheme is formed when a group of investors pool their funds to buy a property. This property is managed for a fee, often by the syndicator, who negotiated the purchase of the property and its sale to investors.

Mortgage payments, maintenance fees and other expenses are deducted from rents collected, and the surplus is distributed to investors. The money invested in purchase of the property is repaid to investors when they sell their share or when the property is sold and the syndicate wound up.

Property syndication has become attractive for smaller investors as bank deposit rates drop. Significant tax advantages also have a big effect on investors' returns.

But Alcock says any property investment should be part of a wider investment strategy that suits each individual investor.

"No investor should have all their eggs in one basket.

"Syndication gives smaller investors, generally with upwards of $50,000, the chance to buy in to good quality commercial property that would normally be reserved for corporates or wealthy individuals," he says.

Winter says Oyster Group has seen a surge in the past year of investors wanting a stake in proportionate ownership property.

"Many people regard it as better than listed property trusts that invest in a raft of properties the managers choose. If the trust is not performing it has the option of issuing more shares watering down the investment and giving investors a giant headache."

Winter has found more sophistication among the investing public over the past two years.

"Before the finance companies and general economic collapse only 20 per cent of investors in our syndicates would read the valuation reports. Now more than 80 per cent read them, query what is in them and talk to us. Their decisions are far more informed and it is good for property syndication and investment in general."

Property syndicate investors are also more comfortable with their decisions.

"Their investments haven't dropped anything like the 30-40 per cent on average listed trusts have lost. Syndicated property on average would be down between 10 and 15 per cent," says Winter.

Winter says most syndicators have simple fee structures generally aligned to the interest of investors.

"Syndication is hands-on investment providing steady income distributions, a measure of capital growth and usually a fee structure at rates lower than listed trusts and managed funds charge.

"People like property syndicates because they can see the bricks and mortar - the physical buildings - they have invested in."

Bryce Barnett, managing director of KCL Property in New Plymouth, says he warns investors who want liquid investments they should not buy property. "It is a long-term investment, not a trading activity."

"Our investors spread their risk," Barnett says. "We turn down people who want to invest a big chunk of money in one property and encourage them to spread their risk by investing in properties in different sectors and geographical locations.

"On average syndicators have been achieving not only top market income returns but also significant capital growth."

Barnett says that compared with 15 years ago, today's syndicates and proportionate ownership schemes are sophisticated and give investors more control.

As the property owners, the investors receive the benefit of a monthly or quarterly cash payment, which means they are always aware how a property is performing.

One of the biggest criticisms of property syndicates and proportionate ownership schemes has been the level of disclosure potential investors receive.

Generally raising capital from the public requires a registered prospectus and for proportionate ownership schemes an offerer's statement.

Alcock says that in the past decade documents have become more robust and highlight investors' rights and equitable returns.

"This is an area that always needs continuous improvement and one of the main reasons for the association's formation.

"We are going to work together to provide better information outlining the risks and rewards and what is involved in the syndication of public investment opportunities.

"It is not just a matter of conforming with the law, but offering higher-quality and more transparent information.

"There is a maturing in attitude in how syndicated and proportionate ownership properties are offered and managed."

While the commercial property syndication market has gone up a gear or two in the past year, Barnett is worried that greed will creep back into the sector.

"What I call 'wide boys' are starting to come into the industry and place product that is not up to scratch for investors. People have raised concerns about this aspect of the sector and they are right to do so.

"Greed has ruined aspects of the property market in the past and our new association needs to take a stance on the property that is being put on the syndication market and the risks investors are being asked to take."

Alcock says the formation of an association demonstrates a "coming of age" by the industry.

"Since the Waltus and Urbus debacle about a decade ago the industry has been able to see its weaknesses and take action to fix them." The secondary market has also been a bone of contention for many critics of syndication. Alcock says although investors are encouraged to invest long-term in properties, people's circumstances change and they might have to sell some or all of their interests.

Secondary sales, in the main, have been arranged by the syndicator. SPI Capital has sold several units this year for investors and all have gone within several weeks at a greater value than the original investment.

Alcock says it has been a perceived problem in the past and the association intends taking early steps to address the issue.

"We are moving toward making clear guidelines and disclosure statements available so secondary sale investors are fully informed before making a decision on investment."