Wave of property syndications raises risks and rewards

Property syndication has once again become lucrative for promoters like NZX-listed Augusta.

Just 15 years ago the market was flooded with troubled loss-making syndicates, which were eventually rolled into listed entities, evolving into companies like Stride (ex-DNZ), with frequent name changes along the way.

Syndications generally offer 1-2% more than listed company shares and more than bank term deposits.

Property syndications commonly offer parcels of units or shares between $20,000 to $50,000 each for an ownership share in a commercial property.

The benefit to the promoter is future management fees, and there are also considerable establishment fees stated in the investment statements.

A predominance of supermarket-related offerings are being marketed by real estate agencies such as Bayleys and Colliers, several of them for NZX-listed Augusta, which is specialising in spinning them off and managing them.

A syndicator offering of return of 8% looks attractive compared with bank term deposits of 4%. Borrowing a portion of funds for the purchase generally lifts the return – for example, a property bought for $12 million gives net revenue of $1 million or a return of 8.33%.

To obtain the promised 9%, the syndicator borrows $4 million at, say, 7% interest, producing interest at $280,000 which is deducted from the net revenue of $1 million and the amount left is $720,000, which is distributed to the owners in the syndicate. Their return on equity is $720,000 divided by $8 million or 9%.

Syndicates currently in the market are generally offering rates between 7.5% and 8.5%.

NZX-listed Augusta’s Peachgrove Rd syndicate in Hamilton East’s nearly built Countdown supermarket syndicate offers 7.5% – in the first year. Bayleys’ Mike Houlker says the 7.5%, when compared to some of the slightly higher offerings, simply reflects the quality and value of the property – similar to buying a property in Remuera versus south Auckland where the higher value relative to return results in a firmer (lower) yield.

The risks are also spelled out in investment statements.

John Polkinghorne, associate director of research at commercial property consultant and design company, RCG, highlights the most obvious risk where a single tenant may choose not to renew a lease, leaving the investors with a purpose-built building that may be difficult to lease compared with an office building with several tenants who may be progressively replaced.

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