ASA in the news: AFR: Why the pros are snapping up commercial property

Why the pros are snapping up commercial property

Syndicates believe the market is bottoming out. Here’s how to assess the best opportunities.

Sam Tamblyn Contributor

Aug 13, 2024 – 5.00am

Property syndicates are coming back to life as investors seek to take advantage of the commercial property downturn by buying discounted assets.

In a property syndicate, private investors pool their capital to invest in real estate, usually a single asset. They offer the opportunity to make a direct investment in an asset, such as an office tower or shopping centre, that would be out of range to an ordinary investor.

The syndicators that buy and manage properties for the investors typically charge fees of about 2 per cent of the purchase price and annual fees of 0.7-0.8 per cent, plus a performance fee of 20 per cent of returns above a hurdle.

Syndicates are usually put together for a set term – for three to seven years. Investors earn monthly or quarterly rent distributions as well as a share of any capital gains once the property is sold.

Returns vary depending on the asset class and quality and the ability of the syndicator. Annual distributions of 5-7 per cent and an overall return of 10-13 per cent a year over the lifetime of the investment are achievable.

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Syndicates can be considered another manifestation of the trend towards private capital in Australian and global investment markets. Some will be mostly for sophisticated investors – the average cheque size is $500,000 – but many will accept smaller investments.

Leveraged returns

There are many syndicators in Australia, including Bayley Stuart, Abell Slattery + Aylward Real Estate Partners, Peak Equities and Forza Capital, which is popular in the ultra-high net worth and family office space.

Many syndicators – or sponsors as they are sometimes called – believe the market is bottoming out and now is a good time to buy commercial properties from institutions.

In June, Bayley Stuart bought 628 Bourke Street, Melbourne from AFIAA for $115 million, a 36 per cent discount to the $181 million the Swiss fund manager paid in 2017. Earlier this year Quintessential paid Brookfield $250 million for an office tower at 250 Queen Street, Brisbane, a 16 per cent discount on the property’s peak valuation of $300 million.

Along with providing access to institutional-grade properties, syndicates offer the potential for leveraged returns because the equity contributed by syndicate members is matched by a debt of a similar amount.

They offer passive income via monthly or quarterly distributions, with the potential to defer some of the tax on the distributions until the sale of the property.

Due diligence

While property syndicates are passive investments, this doesn’t absolve potential investors from doing their due diligence

First, look at the fundamentals of the property just as if they were buying it outright, considering prospects for the asset class; the location; net income; tenancy history and occupancy rates; and cap rate.

Consider the track record of the syndicators – including how long they have been operating and whether they have a history of successful syndications, through good and bad market cycles. Look for their poor results and consider how they have added value to their past investments. Fees are another important consideration.

Finally, there is the project itself. Investors need to understand the business plan and financial projections for the acquisition. Do they stand up? How do they perform in a financial stress test?

It’s wise to be wary of syndications making unrealistic projections. Choose one with more realistic assumptions, a plan to protect against the downside and a history of outperforming.

Consider the risks

Before investors jump into a syndicate, they need to weigh up the risks.
By investing in a single property, they lose the advantage of diversification offered by other property investment vehicles such as real estate investment trusts.

Further, syndicates are illiquid. Your money is locked up for the term of the syndicate – getting out would require you to find another investor willing to buy you out, with a likely haircut.

A reinvigorated property market will bring more syndicators to the fore, so investors will have to choose wisely. But those who select the right syndicator and the right property stand to do well.

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Sam Tamblyn is founder and managing director of Urban Property Australia.