Small investors aim to make a pile

Syndication is back, as a new company starts up and another established firm makes a new offer, all targeting small-time property investors. ANNE GIBSON reports.

Property syndication, the darling of real estate in the late 1990s, is returning to vogue if two big offers last month are any indication.

A new commercial syndicator, Mutual Properties, has been formed by former Barfoot & Thompson Commercial chief Chris Dunn and his mate, Tony Houston.

They plan to syndicate at least $35 million worth of investments to baby boomers with a spare $20,000 to $80,000, promising them a 300 per cent increase in their capital if they leave it in for 10 to 13 years.

The second big deal came from the Albany headquarters of Doug Somers-Edgar's Money Managers' empire, his Dominion Funds showing its hand on the purchase of a Viaduct Basin office block. It wants people with at least $12,000 to put money into the former Caltex House, now refurbished and renamed Microsoft House, estimating a 7.26 per cent return after tax.

Both offers must comply with the Securities Act 1978 and tell people what risks are involved, how they can get their money out, what the charges will be, and who to complain to if things go wrong.

Both are being floated to get "mum and dad" investors to put relatively small sums into commercial real estate, which is going through a rise in fortunes due to the economic boom.

The Property Council's index last month showed a 5.7 per cent return from New Zealand CBD properties in the year to December, around double the 2.4 per cent returns recorded in the six months to September.

Mutual Properties is following a formula whereby a syndicator makes a conditional offer on a building then goes out to a group of investors seeking the necessary cash to settle.

If all goes well, the deal goes ahead. But any hitch in raising the money results in the buyer pulling out, exposing Mutual to less risk than with the traditional form of buying.

Mutual does not yet have any property. It was started only in February, but it has made an offer on the Repco Auto Parts building in Hamilton and is advertising its services through the media as well as using a group of accountants and financial planners to promote the offer. Dunn says Mutual has $100,000 earmarked for promoting offers.

As the former Barfoot & Thompson Commercial chief, Dunn said about $100 million worth of property was brokered in a year there, the average deal being $740,000.

In his new outfit he speculates that the size of any deal will be much less at between $650,000 and $2 million, but he expects to be buying one property every week.

He is particularly targeting salary and wage-earning baby-boomers who want to invest for their retirement.

The unusual aspect of his scheme is that he does not propose to pay any annual return to the investors along the way. They pay the money in and lock it up for between 10 and 13 years with no return.

All the rent from the properties will go into debt servicing so that at the end of the term the property is debt-free.

In the case of the Hamilton building, the expectation is that the property will be owned by the tenant after 12 1/2 years.

Promotional material offers the profile of a client being over 30 years of age, having a household income of $50,000-plus, owning a home and expecting little from the state.

The advertising refers to the growing number of retired people and the need to save. It criticises residential property as a form of investment, saying it is often a comfort zone, but "true net income returns are low and capital gains tenuous. Tenants come and go and some do damage or fail to pay."

Investing in commercial property is often a hurdle for smaller investors. The sector has an entry point of at least $200,000 but syndication gives an opportunity for people with less money to invest, Mutual says.

Syndication involves risk, particularly because of the illiquid nature of property. It might be hard to get the money out if it is needed urgently. Dominion Funds offers a secondary market in its syndications, saying it tries to match buyers and sellers as fast as possible.

But those outside the property industry cite the case of Metropolis and the disaster for investors owed more than $21 million who have been waiting since last May to get their money out.

And as one financial adviser said when looking at the two offers, these sorts of investment hold other risks. For instance, how well the properties are managed will govern the returns they make.

Money Managers promoted three other syndications that failed in the past few years, leaving investors out of pocket. Investors in Metropolis, Ballantyne and Park Terrace syndication offers all lost money.

But the June issue of Money Managers' newsletter ClientTell defended this form of investment and said most went smoothly. It said the firm had been involved in 26 property bond issues totalling $150 million marketed over four years. Eighteen had been repaid in full, totalling $100 million, and interest rates paid ranged from 10 per cent to 18 per cent.

www.mutualproperties.co.nz

www.dominionfunds.co.nz

www.diversified.co.nz