Property Syndicate

[Apollo]

I have a small office in the southern suburbs of Adelaide that is currently providing a good return but I am mindful that if the tenant leaves I will have trouble finding another one. I like commercial property but the high entry cost and the high risks at the cheaper end have led me to consider other options such as unlisted property trusts. I tried to invest in a trust run by Sentinel but I was excluded (as my income is less than $250k I do not qualify as a 'sophisticated investor'). There are other retail property trusts I could invest in but the return is not as attractive.

I came across this offering - http://www.thepropertyadvisory.com.au/investment/current-investment-opportunity - and I wonder if anyone has had any experience of this group or any thoughts about the pros and cons of this current investment opportunity.

thanks

 

[devank]

"Each Investor must have $219,741 cash to go with conservative borrowings in a non-recourse loan and has an entitlement of $499,852 in initial property value."

What does it really mean?

 

[Apollo]

I think it means that the cash from the syndicate makes up a portion of the purchase costs. The remainder is borrowed from a lender who holds a mortgage over the property. Using these figures, 'conservative borrowings' would be around 56%. Each syndicate member owns 1/9 of the property ie $499,852 is 1/9 of $4,498,667.

 

[The Y-man]

I think it means that the cash from the syndicate makes up a portion of the purchase costs. The remainder is borrowed from a lender who holds a mortgage over the property. Using these figures, 'conservative borrowings' would be around 56%. Each syndicate member owns 1/9 of the property ie $499,852 is 1/9 of $4,498,667.

Ok, hence the return of 9.5% if the loans are at around 6%pa.

What is:
- the exit plan
- any liquidity (early exit allowance)
- are the borrowing rates fixed? A 2% interest rise will see retunrs drop to less than 7%
- the cost of property/syndicate management

The Y-man

 

[Scott No Mates]

Syndicates are usually for a maximum of 7 years where it is sold (no resolution of the syndicate members).

Liquidity, usually not much at all - sale is usually to other syndicate members as the market is extremely small. Sale price is usually the same as the entry price (possibly discounted due to poor performance).

 

[The Y-man]

Syndicates are usually for a maximum of 7 years where it is sold (no resolution of the syndicate members).

Thanks Scott - that's interesting. So the time of sell out, there's only 3 years of the lease remaining which could affect the valuation?

The Y-man

 

[devank]

The remainder is borrowed from a lender who holds a mortgage over the property. Using these figures, 'conservative borrowings' would be around 56%. Each syndicate member owns 1/9 of the property ie $499,852 is 1/9 of $4,498,667.

What is your personal risk here?
Is it the $219,741 (your cash deposit)?
or
Is it the $499,852 (your portion)?
or
Is it the $4,498,667 (total debt)?

 

[Scott No Mates]

Thanks Scott - that's interesting. So the time of sell out, there's only 3 years of the lease remaining which could affect the valuation?The Y-man

It could but there are so many variables at the time of sale. (All things to be considered at the time of purchase eg: WALE, what vacancies will arise during the term of the licence, what % of income will be affected, how will this affect distributions.

The valuation is not based on the short term income but on the projection of sustainable income over the long term using NPV and DCF calculations modelled in programmes like Cougar & Estatemaster.

What is your personal risk here?
Is it the $219,741 (your cash deposit)?
or
Is it the $499,852 (your portion)?
or
Is it the $4,498,667 (total debt)?

Usually syndicates are structured so that the amount "at risk" is your investment portion only - the rest is borrowed through a non-recourse loan. What this will mean, is that when the property is sold, the net proceeds after paying out the loan, is then distributed (both capital and income) and apportioned to each investor. This may mean that you get back more or less than your investment.