Commercial Property Syndicates NZ
A property syndicate divides a single commercial building into units and sells them to investors. You own a proportionate share of one building, receive your share of the rent, and the manager runs it.
The advertised cash yield is usually attractive against a term deposit, and that comparison is the centre of most marketing. It is also not comparing like with like, in one respect above all others: there is no way out.
The three things to remember
It is one building, so there is no diversification. It is usually geared, which magnifies both directions. And there is no exit until the building is sold, which may be many years.
The yield comparison, examined
A term deposit returns your capital on a known date. A syndicate does not return capital until the building is sold, which happens when the manager and investors decide, in a market that may not suit.
| Term deposit | Property syndicate | |
|---|---|---|
| Capital returned | On a known maturity date | When the building sells, date unknown |
| Income | Fixed and certain | Depends on tenants paying |
| Capital at risk | Protected to $100,000 at licensed takers | Fully at risk |
| Ability to exit early | Break the deposit, at a cost | Often none at any price |
| Diversification | Not applicable | None, it is one building |
So a syndicate yielding several percentage points above a term deposit is not offering free money. It is paying you for illiquidity, concentration and capital risk, which is a reasonable trade if you understand you are making it.
A syndicate's cash distribution can exceed its taxable income, and part of what arrives may be a return of your own capital rather than a return on it. That makes the headline yield look better than the economics support. Read the product disclosure statement on how distributions are funded, and compare the distribution against the property's actual net income rather than against the advertised percentage.
Gearing, which cuts both ways harder than people expect
Most syndicates borrow against the building. That lifts the return on your equity when values rise and destroys it when they fall, and the arithmetic is unforgiving.
Take a $10,000,000.00 building with $4,000,000.00 of debt, so $6,000,000.00 of investor equity.
The same leverage works upwards, and syndicate marketing tends to illustrate that direction. Both are true. The one that matters is whichever occurs, and only one of them can force a refinancing on unfavourable terms or a sale at the wrong moment.
The lease is the whole investment
With a single building, and frequently a single tenant, the lease is not a detail. It is the asset. A syndicate is essentially a claim on one lease with a building attached as security.
Selling before the building sells
Some syndicates have an informal secondary market where units change hands privately or through the manager. Where one exists, units frequently trade at a discount to both the original offer price and the underlying asset value, because the buyer is acquiring the same illiquidity you are trying to escape and prices it accordingly.
That discount is the true measure of the liquidity you gave up. Anyone who might need the money within the likely holding period should treat the investment as unsuitable rather than plan on selling at a discount, because the discount is deepest exactly when you most need to sell.
Managers know what secondary transactions have occurred and at what price. Asking for that history before investing gives you a real number for the illiquidity cost rather than a general warning about it. If no transactions have occurred, that is also informative, and if the manager will not say, that is informative too.
Fees
Syndicates carry establishment fees, ongoing management fees, and frequently performance or sale fees on disposal. Some are paid from the offer proceeds, which means a portion of what you invest never buys property at all. The product disclosure statement sets them out and the total is worth adding up, because the yield quoted is generally after some fees and before others.
Where syndicates genuinely suit someone
For an investor who wants commercial property exposure, has capital they will not need for a long period, and understands they are buying one building rather than a portfolio, a well-structured syndicate is a legitimate holding. Income is regular, the underlying asset is real, and the manager does work the investor would not want to do.
The problems arise where it is bought as a substitute for a term deposit by someone comparing only the two yields. Those are different products with different risks, and the difference is invisible until the money is needed.
What this guide does not cover
Individual offers vary substantially in gearing, lease profile, fee structure and quality, and the product disclosure statement for the specific offer governs rather than any general description. Tax treatment, including the deductibility of interest and depreciation on commercial buildings, requires advice from an accountant. This is general information rather than financial advice.
Related guides and tools
- Commercial leases guide, for the lease terms that produce the income.
- Listed property funds guide, for the liquid alternative in the same asset class.
- Term deposits guide, for the yield comparison usually made in the marketing.
- If your investment platform fails guide, for how managed schemes are structured and supervised.
Test Your Knowledge
Ten questions on syndicates, gearing and liquidity.
Sources: the Financial Markets Conduct Act 2013, under which proportionate ownership schemes are managed investment schemes requiring a licensed manager, a supervisor and a product disclosure statement. Individual offers vary substantially in gearing, lease profile and fee structure, so the product disclosure statement for the specific offer governs. This is general information rather than financial advice.