What is a Property Syndicate?
A property syndicate a group of investors decide to pool their capital to acquire a single or portfolio of direct real estate assets. The pooling of the capital across multiple investors via a syndicate allows individuals to invest in larger assets that they wouldn’t be able to otherwise.
Commercial property investment syndicate is a common vehicle for individuals to invest in commercial properties directly. Unlike residential properties, typical total value of commercial property spans in tens or hundreds of millions dollars. It is simply not feasible for investors to buy these assets themselves.
Syndicated property allows investors to gain exposure to portion of the investment market, namely commercial real estate which they normally cannot access. It is ideal in matching the capital of the investor with the expertise of the manager.
Individual Property Exposure vs Portfolio of Property Assets
We previously covered unlisted property funds which usually owns a portfolio of property similar to REITs.
A syndicated investment is just like unlisted property funds and is usually formed to acquire individual assets while REITs as being a listed investment vehicle and aims to provide consistent income stream, prudent investment management requires it to be diversified.
The implication is that investors in these unlisted funds are looking to for returns driven by the performance of an individual commercial property while the return from owning a REIT covers the performance of a portfolio of real estate assets.
Diversification decrease risk but that comes at cost of lower returns.
Syndicate Sponsor
A responsible entity or investment manager sponsors or forms a syndicate once an investment has been identified and secured. They are raising the funds for the property acquisition and will be managing the investment on behalf of all the investors in the fund.
Regulated Syndicates
As part of the evaluation of investment into any property syndicate investors should make the manager of the syndicate is regulated by ASIC and there is a product disclosure statement.
Risks investing in property syndicates
Risk is always part of the investment process and investing in property syndicate is not different. We covered risks investing in commercial real estate earlier so the key risks outline below are more specific to investing in commercial property in a syndicated fund.
Limited Liquidity
Traditionally one of the biggest downside of owning an unlisted property trust is the limited avenues for liquidity during the investment term.
The sponsor would’ve formed the syndicate with a specific purpose of investing in a particular asset with a set trust life span. Until the end of the trust life, there is usually limited avenues where the investor in the property syndicate will have an opportunity to sell their interest.
This is because as typical property syndicates are unlisted, either the sponsor need to find a buyer of the seller’s interest before it can trade or there needs to be liquidity in the fund and even then it can be difficult as the syndicate is required to treat all investors fairly.
It is usually hard to get sponsors to be engaged as it is also not in their interest or incentivized to trade units once the syndicate has been formed because the fees they charge is on a percentage of asset in the trust.
Changes in ownership of the syndicate does not increase or decrease their fees. It is just more work for the same income.
Limited Control
Investors participating the property syndicates delegate their decision making rights to the sponsor or manager. This is why it is important to do your due diligence on the manager to make sure they are qualified and has an investment track record.