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C & D

Property Syndicates – Often an Ugly Investment

11 Jul 2017

It was interesting to read recently, a column written by Sir Robert Jones. Bob Jones is of course a very well-known New Zealand commercial property investor. He was effectively warning property syndicate investors. As he put it, any self-respecting commercial real estate agent, would offer properties to companies such as his and other listed property companies first. Only after they had rejected the property would they try the syndication route to get a deal done.

The usual problems with property syndicates involve the initial set up. They typically pay too much for the property, then add in high marketing costs, plus the ongoing reward of management fees.

The late 1990’s and early 2000’s saw a lot of property syndicates flogged off to retail investors. Waltus, St Laurence, Strategic, Money Managers and others made plenty of money from them. That was something that very few of the investors managed to achieve. Most of the syndicates became close to worthless, as rising interest rates gobbled up the rental income.

There is a wise old saying, “history repeats”.  That’s fine, but there is an even better wise old saying, “learn from the mistakes of the past”.  From years of experience we have noticed that investing in property syndicates offered in New Zealand has seldom been a rewarding experience for retail investors.

When properties become difficult to sell, and when interest rates are low, property syndicates become the answer for the vendor and estate agent.  So instead of finding one well-heeled buyer (harder to find with overvalued property), the answer is to find a number of mum and dad investors with a reasonable amount to invest, who want to earn more than bank interest rates.

With current low interest rates, it is not too difficult to make commercial property syndicates look attractive relative to bank deposit rates.  There will be some distressed sellers of commercial property who are unable to meet tougher banking loan requirements.  It may be possible for a syndicator to buy at favourable prices.  Unfortunately, even good tenants can become bad tenants in a relatively short period of time if market conditions are against them.  Effectively the property owners take on the credit risks associated with their tenant. A so called good long-term lease could become effectively meaningless in a matter of a few months if something goes wrong with the tenant’s business. 

Another major problem with property syndicates is that there is seldom any liquidity with the investment.  So, if you need to sell, it is likely that it will be very difficult to do so, and even if there was a buyer, they would most likely only buy at a large discount.

If the primary reason you are considering buying into a property syndicate is for income purposes there are alternatives that should be considered. To do this consult an authorised financial adviser who is not tied to any product supplier. They may advise investing into equity income funds and/or listed property trusts and other investments they consider appropriate for your needs. The investments they recommend will generally have plenty of liquidity meaning they can be easily sold if your situation or needs change.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Whakatane based Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.