A property syndicate is a direct property investment whereby numerous investors pool their capital to invest into real estate. The pooling of the investor’s capital provides the investors with the opportunity to invest in commercial, retail or industrial properties that may otherwise be too expensive for the investors to invest directly.
Property syndicates have been very popular since the 1980s and 90s as investors looked for diversification in their portfolio.
Investors make an initial contribution to a scheme (also known as a managed investment scheme, a trust or a fund) and in return receive distribution income during the life of the syndicate and a capital return upon the winding up of the syndicate. Syndicates are established with different terms, however if they are non-development, they typically have a set life ranging between five to ten years from the syndicate’s establishment depending on the objectives of the investors.
Each property syndicate will have different objectives. For example, the objectives of a property syndicate could include investing in properties with quality tenants, long-term leases, strong returns and good potential for capital growth. Alternatively a property syndicate might have the objectives of investing in distressed assets with no tenants but the possibility of significant development upside.
What does a property syndicate invest in?
A property syndicate can invest in a single property or a group of properties. Generally speaking there is more risk when investing in a single property syndicate though it can provide a regular cash flow, tax benefits and the potential for capital gains.
A property syndicate tends to be closed-ended (i.e. they involve a restricted number of investors and a set amount of capital to be raised). The property could be commercial, retail, industrial, rural or even residential.
What is the difference between a retail property syndicate and a wholesale property syndicate?
A retail property syndicate enables retail investors to invest. The minimum investment for a retail property syndicate investor tends to be much lower than for a wholesale property syndicate and typically the minimum investment starts from $10,000. A retail property syndicate requires the issuance of a Product Disclosure Statement and requires that a responsible entity is appointed to run the syndicate.
A wholesale property syndicate restricts the investors to wholesale investors. The minimum investment for the investors is typically higher that for a retail property syndicate. As opposed to a Product Disclosure Statement, a wholesale property syndicate requires the issuance of an Offering Memorandum.
What factors should you consider before investing in a property syndicate?
Some factors you should consider before investing in a property syndicate include:
- Property type – Is it a development opportunity or an existing property? If it is a development opportunity there is typically no return for the initial period during the development stage. A development opportunity is exposed to increased risks in an attempt to enhance returns.
- Management – What is the experience and qualifications of the management of the property syndicate?
- Liquidity – Capital could be tied up for the fixed period of the syndicate, which could be as long 5, 7 or 10 years. What are the criteria for redemption, if available, before the end of the term?
- Tenants – What is the quality of the tenant? The quality and stability of the tenant will affect overall returns.
- Interest rates – Will any changes in interest rates affect the syndicate’s investments? Is it intended that the property syndicate hedges its interest rate exposure?
- Government policy – Will any changes affect the property syndicate’s operation?
- Yield – What is the expected yield? Are there any tricks to derive this yield or is it met by the net rent on the property?
- Costs – Factor in other costs such as insurance. Check management costs, marketing fees and exit fees.
Due diligence – Have the property syndicate checked by your own legal, financial and accounting professionals.