Article: Property Investment
Property Syndicates Don’t Shape Up with Frank Newman
It’s often said people don’t learn the lessons of history. That apparent truth seems to apply to investment markets. With the litany of woe that is the historic time line of experience property syndicates one would have thought people would have had enough of them. Not so apparently with a recent media commentary reporting that a promoter is about to start soliciting investment capital from the public.
The reasons for doing so are obvious – there are huge rewards to the promoters of such schemes. Unfortunately there’s not a lot in it for investors. Firstly, let’s just clarify what property syndicates are.
It’s basically proportional ownership in a property or portfolio of properties. Each investor owns a share of the whole property, not a part of it. This makes it relatively easy for small investors to have ownership in landmark property that would otherwise be beyond their means.
The investors have no active role in the management of the property – they leave that up to a professional property manager who receives a fee for doing so (usually about 8% of the gross rentals). It’s not uncommon for that manager to be “related” to the people promoting the syndicate. They do so because by securing a long-term management they lock-in a long-term income stream and enduring no-risk profits. That contract also has a significant capital value which could be realised if sold.
The lure used to hook investors is the high rental yield. The dazzling returns are just too tempting for some who need high income to supplement their income. All too often it is obvious those people are blind to the risks because when they start parroting platitudes like “as safe as houses” or extolling the virtues of “bricks and mortar”.
They don’t seems to realise they have probably paid too much for a property, that is costing too much to manage, while holding units that are virtually impossible to sell.
In my general view property syndicates simply do not stack up when the risks are measured against the returns. These risks are often exacerbated because the promoters use debt to leverage up the returns – not hard to do when the cost of money at around 6% is less than the rental return of about 8-9%. What the returns do not reveal however is the risk attached to that return, and calculating that is well beyond the knowledge of most mum and dad investors who are typically targeted by the promoters of these schemes.
Those who want hands off, sleep easy property investment could do much better investing in any one or more of the seven real estate investment trusts listed on the New Zealand stock exchange.
These are: AMP NZ Office , Argosy Property Trust, DNZ Property Fund, Goodman Property Trust, Kermadec Property, Kiwi Income Property Income, NPT Limited, Property For Industry, and Vital Healthcare Properties.
Kiwi is the largest with over $1 billion in property assets, including the Silvia Park shopping centre and the Vero building in Auckland. As a matter of interest Vital specialise in property for the medical sector and among its $330 million portfolio is the Kensington Hospital here in Whangarei.
Because the units are listed on the exchange they are instantly tradeable, so should the need arise (due to a health emergency for example) the investment may be sold at a transparent and fair value with settlement within a few days.
A number of the funds are also trading at a discount to their asset backing so instead of buying a property at the current value or an inflated value plus the associated costs, the investor can actually buy something at a discount to their market value (but to be fair this discount may endure and therefore provide no benefit to the investor).
An astute investor looking for a passive property investment should look at what else is on offer before falling for the allure of high returns and bricks and mortar security being headlined in the promotional offerings of property syndications.
Frank Newman is the author of numerous books on investment matters and the creator of the NZ Investment Game which may be ordered at http://www.investmentgame.co.nz. He is a director of the accounting firm Smart Business Centre. He may be contacted at .(JavaScript must be enabled to view this email address).
