What are Property Syndicates ? – how do they work?
The following paragraphs describe the main features of a property syndicate.
Property syndicates are usually unit trusts. This means when you invest you are issued a number of units proportional to you’re holding. A trust structure is used as it preserves the ability for you to access capital gains tax discounts.
The unit structure also allows investments to be potentially redeemed, sold, or transferred depending on the individual trust set up. In particular, assuming it is a widely held trust (which the majority of publicly offered unlisted property trust are) then within limits, units can be sold or transferred with no stamp duty payable.This is significantly different from a private syndicate or directly owned property when usually stamp duty is imposed on a transfer.
Issuance of Units
Fixed Term Trusts
A fixed number of units is issued (usually at $1 each). The capital raising is completed when the full cost of the property plus fees and costs less any boring has been raised.
Open Ended Trusts
An open ended trust continues to raise funds indefinitely so long as it can keep purchasing properties. Units will be issued based on a unit price, with the unit price based on the value of the properties. Unit pricing policies and frequency of issue will depend on the manager and the fund.
Property syndicates primarily own physical real estate. This is therefore unlike other types of investment funds like share funds or bond funds, which own financial assets.
The majority of assets owned by property syndicates are commercial property. While the majority of these own office buildings or shopping centres, the recent trend has been for those investments to also include industrial sheds, and alternative assets like childcare centres, data centres, storage facilities, and pubs. Although in recent years there has been the emergence of funds which own residential property.
A key feature of the trust structure is that all borrowing is entered into by the trust and not by the unit holders. This means that the loan is non recourse to the unit holder (ie you can’t be asked to pay more than the cost of your units).
As part of arranging borrowings for the trust the manager may also into into hedging for all or parts of the loan to provide debt security and more certainty of future distributions for the trust.
A key reason for using a property syndicate is gaining the expertise of a manager not just of funds, but also of properties. The best property fund managers have an internal property management division which looks after the buildings in the syndicate it managers. Having dysfunction in house insured & alignment of interests.
An external property manager made look after a number of properties owned by different owners in the same area. What is going to make them prioritise your building in terms of leasing opportunities?
Property management includes racing on-going maintenance of buildings building concierge services, fire safety and other compliance requirements, and most importantly ensuring rent is collected.
Costs and Fees
The syndicate will generally be charged acquisition fees, ongoing management fees, proper and various other fees by the manager depending on the trust structure. The syndicate is also likely to pay stamp duty for the acquisition of properties plus legal and other costs.
The syndicate will receive rental payments from tenants and these will be passed on to investors less any expenses on a regular basis. Depending on the trust, distributions may be paid monthly, quarterly, biannually.
Property syndicates are usually structured as either a fixed term trust or an open-ended fund.
Fixed term trust are essentially illiquid throughout their term unless you all the fun manager can identify someone to purchase your units. At the end of the trust term the property is sold, the trust wind up and investors paid out proportionately to the unit they own.
Open-ended funds will have different liquidity mechanisms but as the underlying property assets are illiquid the ability to exit the fund will have limitations and may not be available in times of market distress. Common ways of providing some liquidity is to hold some of the assets in the front in cash, using cash from incoming investors to pay out outgoing investors, or if the man is high and market conditions allow, selling assets.
Property syndicates can only be offered by ASIC licenced managers, who are called the ‘Responsible Entity’.