property syndicate 3

The Ultimate Guide to Property Syndicates

Property syndicates pool investors together in a fund structure to own physical real estate, such as commercial property. Also known as unlisted property funds or direct property funds, they function in a similar way to other types of managed funds and have an appointed fund manager who manages the assets of the fund on behalf of unitholders.

As the name suggests, unlisted property funds are unlisted, which means they do not trade on the ASX.

In Australia property syndicates have been available to investors over multiple decades but are still considered an alternative investment sector rather than a mainstream one. There are many specialist managers in this space with such leading names as Charter Hall, Cromwell, and Centuria

How property syndicates work

Property syndicates allow a group of investors to invest their money into a fund and the fund manager uses that money to buy physical property assets like office buildings or shopping centres.

The fund manager then manages those assets on behalf of investors and undertakes actives such as buying and selling assets, securing tenants and negotiating leases, and paying expenses like building insurance, council rates and stamp duty from the fund. The fund manager charges a management fee for these services it provides on behalf of unitholders in the fund.

Unlisted property funds typically use debt in addition to the equity provided by investors to acquire assets and these loans are also managed by the fund manager.

Most property syndicates, or direct property funds, are unit trusts, where investors own units in the trust. However, in some instances these unlisted property funds are companies, where investors will own a share in a company.

Investors in property syndicates generally receive a regular distribution from the fund based on the number of shares/units they own in the fund and are paid from the earnings of the fund. Those earnings can comprise a combination of rent, interest costs, and management fees.

The value of each investors unit/share in the fund can be influenced by factors such as changes in the value of the underlying properties overt time.

Investors can apply for units or shares in the fund by completing an application form in the product disclosure statement or investment memorandum and transfer their money in the manner required by the fund manager.

Each fund will have a different policy regarding how investors can exit the fund, which is referred to in the product disclosure statement or investment memorandum. However, investors should be aware that generally property syndicates are considered an illiquid investment and therefore exiting from those funds are more complex than funds which own liquid assets such as listed shares.

Types of unlisted property funds

Property syndicates can vary based on their term, investment strategy, and the investors they target:

Fixed Term vs Open-ended funds

Unlisted property funds either operate for a fixed term period (example 7 years) or are enduring/open-ended. Typically, fixed term funds will focus on owning one particular asset or development and only allow investors to exit the fund at the end of the term. While, open-ended funds may acquire/dispose multiple assets over time and offer investors defined entry and exit options.

Investment Strategy

Property funds generally adopt one of the following four strategies:

  1. Core – acquiring and owning properties which are currently tenanted and require ongoing management of the building and leases
  2. Core plus – assets which may require some enhancement, such as a new foyer or managing some upcoming leasing risk
  3. Value Add– existing assets which require a significant amount of work such as vacant buildings
  4. Opportunistic or Development – the development of a new property asset

property syndicates and unlisted property funds

Retail Funds vs Wholesale Funds

Retail funds are available to the general public while wholesale funds are available only to institutions or investors who are classified as sophisticated investors. Retail funds require greater protection for investors and therefore require more onerous licensing requirements for fund managers provide such services.

Features of property syndicates

Property syndicates offer investors the following features:

  • Minimum investment – investors are able to access properties which normally they could not afford to own outright in their own name, such as CBD office buildings, hospitals, or shopping centres
  • Diversification – by pooling multiple investors together the manager may be able to acquire multiple properties to enhance diversification benefits
  • Professionally managed – the fund manager may have specialised skills in managing property assets which the individual investor may not have
  • Less hassle – investors in an unlisted property trust don’t need to deal with th various activities of owning real property, such as paying outgoings and negotiating with tenants which allows them to save time
  • No actual property ownership – hence loss of control and can’t make all the decisions in relation to the asset/investment
  • Illiquid – unlisted property funds are often illiquid which means investors in those funds have limited withdrawal options
  • Can’t leverage against – unlike owning real property in ones name, it is often difficult to use units in a unlisted property trust as security against a loan
  • Less transparency – investors are unlikely to have access to all the underlying financials and details of the asset
  • May not serve your interests first – the manager must act in the best interests of all unitholders which at times might be different to your particular interest

Factors to consider when investing in property syndicates

When reviewing a property fund its worth considering the following asset level and fund level attributes:

Asset level

  • Sector dynamics – what is the prognosis for supply and demand in the surrounding market? There are numerous sectors to choose from such as Self-Storage FacilitiesData CentresService Stations, or Pubs.
  • Characteristics of the asset – what is the age, quality, sector and location of the asset?
  • Tenant covenants – how good are the tenant covenants and what’s the risk of default?
  • Lease expiry profile – what is the vacancy, when are the leases due to expire, are they staggered through the term of the fund or do they extend beyond the term of the fund?
  • Rent structure – is the asset under- or over-rented compared to the rent level in the market, what incentives have been paid to tenants, when and how are rents reviewed during the lease term?
  • Capital expenditure – will the asset require capital expenditure during the term of the syndicate and if so, how will the fund pay for it?

Fund level

  • Investment Returns – is the fund yield or IRR attractive enough?
  • Distribution policy – is the fund paying distributions from its cash from operations (excluding borrowings) or capital, borrowings or other support facilities which may not always be commercially sustainable?
  • Gearing – what’s the fund’s gearing level and how does that compare to the bank covenants, and how much buffer is there between the gearing level and the bank’s maximum loan to value ratio? How much, if any, of the debt is fixed versus variable?
  • Fees – what is the fee structure, are they transparent and aligned with investors?
  • Manager track record – what is the performance track record of the manager?
  • Exit strategy – what’s the manager’s likely exit strategy

Performance of unlisted property funds

The following chart highlights the total return performance of commercial property relative to listed property (A-REITs), Australian shares, and Australian bonds. Commercial property provides a good proxy for the performance of unlisted property trusts.

Over the past 10 years commercial property returns have outperformed both Australian shares and A-REITs, delivering an annualised total return of 9.7%.

Total Returns to June 2020

Bonds Australian Shares A-REITs Commercial Property
1 Year 2.4% -7.7% -21.3% 1.6%
3 Years 5.1% 5.2% 2.0% 7.1%
5 Years 4.4% 6.0% 4.4% 9.3%
10 Years 5.5% 7.8% 9.2% 9.7%

Bonds – Bloomberg Australian Composite Bond Index
Shares – S&P/ASX 200 Accumulation Index
A-REITs – S&P/ASX 200 A-REIT Accumulation Index
Unlisted Property – MSCI IPD Index

Looking at returns on an annual basis, commercial property has been less volatile than both Australian shares and A-REITs, as seen in the following chart.

unlisted property fund performance

Listed vs. unlisted property funds

Listed property trusts, or A-REITs as they are called in Australia, offer an alternative way to invest in commercial property.

The key difference between listed and unlisted property trusts lies in the way funds are traded. A-REITs are listed on the Australian Securities Exchange (ASX) and investors buy and sell shares in those trusts similarly to shares, through a stockbroker. As a result of being listed, A-REITs also differ to unlisted property funds when it comes to liquidity, volatility, performance, and the types of trusts available to investors:

Liquidity

One of the main features of listed property over unlisted property is the enhanced liquidity that listing provides. Investors in listed property trusts can buy or sell their shares on most weekdays of the year when the ASX is open.

In contrast, unlisted property trusts or property syndicates are often referred generally only offer limited liquidity events, which typically are at defined time periods, like once a month, or at the end of the term of the syndicate.

Understandably, this reduced liquidity, is reflective of the underlying investments in unlisted property trusts, which are physical assets and more difficult to trade that securities listed on the ASX.

Volatility

While listed property trust investors may be attracted to their increased liquidity, one downside of them is considerably more volatility than unlisted trusts. This higher volatility is reflective of the continuous pricing of listed securities on the ASX and the influence of broader share market corrections and rally’s on A-REITs.

This is in contrast to property syndicates, where it is not uncommon to see the underlying properties revalued only once a year.

Gearing

Gearing levels in the A-REIT sector tend to be much lower than for unlisted property trusts. Typical gearing ratios (debt to assets) are 20-30%, while unlisted trusts generally have gearing at 35%-50%. These differences partly reflect their greater complexity and the presence of development assets within their portfolio.

Types of trusts

Over time, listed property trusts have evolved from just owning physical real estate, to more complex structures which also undertake activities such as property development, funds management, and mortgage lending. These changes have seen the A-REIT sector therefore become more like general equities over time, unlike property syndicates which just own physical real estate.

Performance

Returns from listed property are often considered to be more correlated with shares than unlisted property.

However, a review of the annual total return performance of all three asset classes over the past to years shows a different story. As seen in the following table, both A-REITs and unlisted property trusts (using commercial property returns as a proxy) have a similar correlation to shares. While A-REITs and unlisted property trusts have a much higher correlation to each other.

Total Return Correlations – 10 years ending June 2020

Bonds Australian Shares A-REITs Commercial Property
Bonds 5% 3% 7%
Shares 38% 36%
A-REITs 66%

Bonds – Bloomberg Australian Composite Bond Index
Shares – S&P/ASX 200 Accumulation Index
A-REITs – S&P/ASX 200 A-REIT Accumulation Index
Unlisted Property – MSCI IPD Index

Find out more…

For more information on property funds and to find the latest offerings visit REAL Property Funds.

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