Property syndicator Oyster Group is forecasting a 6% pre-tax cash return (with cash distributions paid monthly) from its latest offering, the syndication of Pastoral House on The Terrace in Wellington’s Central Business District.
That’s better than the gross dividend yields on NZX-listed vehicles such as Kiwi Property (5.661%) and Precinct Properties (3.468%), and more than twice as much as you are likely to get from a term deposit with one of the major banks.
So it’s not difficult to see why commercial property syndicates are currently proving so popular with people chasing investments that provide a regular income stream.
The building is just up the road from parliament and fronts onto both The Terrace and Lambton Quay.
Its main tenant is the Ministry of Business Innovation and Employment which occupies almost the whole building apart from a handful of retail tenancies, two of which are occupied by banks.
The building is currently being refurbished by its vendor Precinct Properties, and MBIE has agreed to a new 15 year lease upon completion of the refurbishment, which is imminent.
The lease will provide for annual rent increases of 1.5% with the rent reviewed to market every six years, with the six yearly adjustments limited to no more than 10% of the current amount.
So the rental income underpinning the cash distributions looks solid.
The other major factor that could affect the syndicate’s cash distributions is interest rate movements.
The syndicate will purchase the property for $77 million, with $37,850,000 of that coming from an interest-only mortgage from Kiwibank and the rest from investors.
Interest on the mortgage will be the scheme’s biggest expense and a rise or fall in the interest rate will affect cash flows and ultimately the distributions to investors.
But syndicates are generally long term investments and how interest rates track over the next five to 10 years and the effect they could have on the syndicate’s performance is anyone’s guess.
There are also three major differences between syndicates such as the Pastoral House scheme and other types of investments such as listed property vehicles and term deposits.
Unlike term deposits the Pastoral House scheme does not have a fixed term.
Investors will get their cash distributions monthly, but they won’t get their capital – the original amount they invest with the minimum investment being $50,000 – until the scheme is wound up and the property is sold.
The scheme would be wound up and the proceeds distributed to investors when at least 75% of the investor interests vote to do so, and there could be up to 887 of them, so there is no telling when that could be.
However property syndicates have been around for a long time and most are wound up within five to 10 years.
The second point to remember is that the scheme does not have a redemption facility, which means investors can’t just demand to be paid out.
If they wanted to cash up early they would have to sell their interest in the scheme privately, which would be a bit like selling shares in an unlisted company.
In such a situation Oyster, or its marketing agents, may be able to assist by trying to match a buyer with a prospective seller, but much would depend on market conditions at the time.
And thirdly, property syndicates are expensive beasts to set up, and the set up costs come directly from the investors’ capital contribution.
As well as the $77 million cost of the building it is acquiring, the Pastoral House syndicate will have $4,011,580 of establishment costs, which will be paid for from the capital provided by its investors.
That will give the investors in the scheme an initial NTA (net tangible asset backing) of 90.95%, which means that on the first day that the scheme commences, the value of each investor’s $50,000 capital contribution will be reduced to $45,475.
But hopefully, by the time the scheme is wound up, the property will have increased in value by enough to more than make up for those upfront costs, and investors will not only get their money back but also a potentially handsome capital gain.
The possibility that the property may not perform as expected is one of the normal risks of investing in commercial property and applies whether investors purchase property outright themselves, or invest through a scheme such as a syndicate.
Here is link to the Pastoral House scheme’s Product Disclosure Statement and other supporting documents.
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21 Comments
Not a very liquid form of investment, and one does question how the syndicator can justify a $4 million establishment fee. I'd do it for less than half.
I'd be very surprised if Kiwibank have agreed to an interest only loan for the entire period of the lease, which will no doubt change the level of distributions . What one can guarantee at or near the end of the 15 year term, there will be major refurbishment costs; likely to be paid for by the syndicate owners.
Good luck to those investors; as the Oyster group will have already got the exposure out through their establishment and ongoing management fee the syndicate buyers have to accept.
The establishment costs are itemised in the Product Disclosure Statement. The mortgage has a three year term, after which it would need to be refinanced.
definitely plenty of downside to this offering,illiquid,all eggs in one basket,front-end loading no guarantees but then it is about the same estimated return as an annuity but with the possibility of the return of your capital down the track.i would like to hear a review from anyone who is a longstanding investor with oyster.
You have raised some good points but the "all eggs in one basket" scenario would only apply if this was the only investment someone put all of their money into. The advantage of things like syndicates and shares in most listed companies is that they allow investors to take a small stake in a much larger asset that they could not afford to buy outright themselves. You can still diversify by spreading your money around several different investment options.
I'm growing to like Oyster.
I wouldn't personally invest in this particular syndicate given no redemption ability, noting that is no different to most other commercial property funds. But I am invested in their Oyster Direct Property fund: it generates income across three buildings in Auckland & Wellington it owns outright, plus it has proportionate ownership of another 12 commercial buildings it syndicates (quality tenants and leases); I suspect (hope because this is a great building/lease scenario) that fund will take a proportionate share in this building.
Prudently, I don't have more than 20% of my savings in any single investment/company/fund, which goes for this investment, but given I won't touch shares in the current stimulunatic environment, the 5.18% yield I'm getting in Oyster Direct (I could take as a monthly cash distribution, but I'm in the funds distribution reinvestment scheme), plus, to date, 3.2% pa capital growth, is the best return in my savings portfolio. It's beating my cash & term deposits (I went looking for yield because term deposits were barely earning real returns); it's still beating bonds & treasuries.
The reason for investing in the Oyster Direct Property Fund was originally, as well as yield, because they had the monthly reinvestment plan, and I wanted to lock in and grow long term until retirement, plus it is unusual in that it does allow a redemption option on the first day of every month. Back in the day that redemption option got some UK based property funds into trouble when there was a run on redemptions, but Oysters wisely have the rejoinder of redemption each month so long as they have the funds. Which is perfectly fair: I want them to protect the fund first and foremost, but it's nice in ordinary times, which is most times, to have the ability to redeem some of my capital over time - when I am retired that will be very beneficial.
Note also I originally wanted to get into this sector by investing in Harbour's NZX REIT - noting Harbour is a great fund manager (I use them for fixed interest) - but all the NZX property funds carry currently a 25% or more share-bubble premium which is destroying their yield and will disappear overnight when the necessary sharemarket correction finally comes: an unlisted fund doesn't have that disadvantage. Indeed, in the coming share armageddon :) unlisted is a nice place to be, standing in valuations based on yield, not the distortions of ludicrously lose central bank monetary policy which will one day soon disappear rapidly.
Anyway. I'm very happy with Oyster to date. Kudos to them (oh, always important: their admin is efficient and timely; I find their officers great to deal with and have always had same day answers to any emailed queries. And I always ask a lot of questions).
PS: I see someone dissing the set up fee - if you're getting 100% taxable 2.6% interest on a term deposit, compared to yield and capital gain of over 8%, I'm happy with the set up fee. Given I'm long on this investment, that capital gain component is the only un-taxed investment return across my savings portfolio: and that cheers me up.
Mark..You haven't been able to go wrong with property in the 6/7 years, and yields have followed the cost of funds downward.
The illiquid nature of syndicates; which have a very limited secondary market, means you become trapped when vacancy appears and refinancing becomes difficult. There is a long history of syndicates taking a beating.
When the tide goes out, is when these syndicates get in difficulty. You only hear the good stories.
Ditto, but on steroids with shares for last decade ... you in those?
I said I would have no more that 20% here.
In this stimulunatic environment, I have to get better than term deposits to beat inflation, and I consider this low risk to anywhere else right now, including bonds and treasuries which are all risk (and traded for risk not bought for fixed income anymore).
Oyster Direct (where I am invested) is across 15 large properties.
Of course there is risk, but at least Direct spreads that risk across buildings and across New Zealand. If they all go down, well what of the economy is left?
I consider the biggest risk with commercial property is increases in interest rates: well other much larger parts of my savings will benefit from that (while being crushed right now).
We make our investments based on individual circumstances: this one is right for me (and as stated, has a redemption option which will be safer, still, than trying to get out of share funds as they soon disintegrate, particularly the passive ones). Oyster Direct is filling a real hole in my savings and giving me acceptable returns for the risk, as I see it. Commercial property will always be an important sector, and I'm better off unlisted in a big fund like this (not a single building for me), than in the NZX over-priced REITs.
PS: if you believe in this particular syndicate MBIE is going to welsh on it's 15 year lease, paid by the taxpayer, then I trust you have no 10 year government treasuries? ;)
Re Mark - I had a look at the fund. The terraced steps ups in fund prices after each revaluation worried me as I was concerned about how independent the valuers were. The recent Hisco valuation fiasco showed how some valuers can be bought.
From memory the Fundsource (independent) report at bottom of this link covers valuation:
Normally only the one valuation a year, this year two as they purchased a building part way through. I suspect the step up each month is also tracking funds movement.
Watching valuers trying to value dairy farms at the moment I know how fickle valuations are, but I know the valuations of the NZX REITs include the deluded - at the moment - sharemarket premium on all things, and that is a fiction which will disappear. I'd rather be in an unlisted vehicle where the valuations are on yield and normal terms, as that won't be affected when the sharemarket corrects, and will be 'slow moving' with economic forces.
If you get to the stage of not investing because you question independence of valuers, professionals etc, in big funds like this where there is internal and external audit, then let's face it, outside term deposits you've nothing left to invest in (and even then bank term deposits are almost wholly a mortgage fund reliant on house/farm valuations).
I read enough of the detail of the Oyster fund to be very comfortable with it. I'm very careful with my savings. As stated for the period I've been in, I'm very happy with it, it's a small bright spot in my otherwise paltry returns, but hopefully safe, savings portfolio (in which I wanted some commercial property exposure because it is a good long term sector to be invested in). In this insane stimulunatic environment we've entered, the most distorted markets I've seen in over 30 years, it's only about preservation of capital for me, returns are secondary, my only target to beat or keep up with inflation and that is what Oyster Direct Property is helping me to do.
Refurbished, good lease, strong tenant, high yield but very illiquid. In summary likely to be a good investment for those who do not need their principal repaid by a certain date.
Thanks for the heads up Greg
I hope nobody takes any of the comments on here as a recommendation to invest 50,000dollars or more in this syndicate.
Of course you have a non-biased, analytical and reasoned argument for saying this, based on years of experience in commercial property, yes?
Given the tenant is government and if you think this syndicate is such a bad investment you must be concluding the NZ government is going to default? Which would be international news. There isn't a safer tenant to have paying your lease for 15 years. In this market 6% yield is a great return.
Indeed as I said above I invest only in the Oyster Direct Property fund for the reasons listed, but I really hope that fund takes a proportionate ownership in this fund, as I'd love to be involved in some way.
Mark,no doubt you have done due diligence on pastoral house as you are dead keen on it.my caution was triggered by an article in stuff dated april 25th 2019 regarding the proposed sale of pastoral house by precinct properties who had it on the market at 45million.I have been invested in property syndicates when I was younger but to invest in one now would be a triumph of hope over experience.
I’ve said I’m not going into this particular syndicate; I only invest in Oyster Direct Property because it’s across 15 properties, I’m more than happy with returns to date, and it has a monthly redemption option. I invest in nothing without a redemption option. That’s to your last point. So this building was bought and sold: hardly news. What in the Stuff article put you off? Despite that it is refurbished and tenanted on good yield. Is a government tenant in a 15 year lease at a good yield such a bad thing?
If this is such a good investment, why not syndicate the whole building, in other words no debt. Is there a shortage of investors with 50k to spare. My question is why add risk for minimal extra return. The real return is waiting for capital gain, when sold in the future.
Goodness me. Especially right now the cost of capital is higher than the cost of debt. It increases returns. The main risk, yes, to this or any investment, will be rising interest rates. If you look at the mess here and globally out of central bank stimulunacy then I’m expecting low interest rates for a very long time. That’s why I’m searching for yield in this small proportion of my savings. This will be the decade of either a collapse of sharemarkets under bubble valuations with decades to recover from this excess, or alternatively decades of low to no returns for all investment classes, shares, fixed income, property, under debt saturation, over-regulation, over-taxation to fund massive deficits in US, and an increasingly zombified global economy. In that environment, and the insane age of negative interest rates in some of world’s biggest economies, 6% is a handsome return. Looked at bank deposit rates lately?
Mark H 1965,
I wish you well, but find your distaste for the stockmarket amusing, but also sad. it mirrors the thinking of most Kiwis-property good, shares bad. It's not based on logic, but a folk memory of what happened over 30 years ago-the '87 Crash.
I have been involved in the stockmarket professionally and personally for some 40 years, both in the UK and since 2004, here. I have seen market crashes come and go and survived them all. My portfolio is very cheap to run, gives me considerable diversification and the ability to trade small or large amounts quickly. it gives me a significant income from dividends which is my primary focus. Yes, there will certainly be another correction/crash and I believe I am well positioned to take advantage of it when it comes with a high level of cash.
You need to have a deep look at valuations right now. In the 40 years of my adult life I have never seen, thanks to command economy central bank stimulunacy, such distortions as exist currently. The world has never, ever seen this debt level. US shares are the most expensive in history (that's in history). And we have contracting zombie economies, and a little pandemic that is crippling the most integrated economy in the world global economy.
There's decades to recover from this correction (at my age, I don't have that time, you might - investing is always pending individual circumstances). There may be paradigm change.
There has never been a more telegraphed crash.
It's all risk. Everything is danger right now.
But, buy all the shares. And yes, cash is a good place to be. That's where I mainly am.
Did they find all the asbestos in the refit? A syndicate like this can be quite lucrative if you can buy and hold happily for several years. I imagine this syndicate is more focussed on picking up a rundown building, refitting and capturing the tenant and onselling the whole thing after 3 or 4 years to bigger single invester most likely who then doesn't need to worry about the herculean undertaking that is a refit.
For that type of return , I would rather stick to a widely diversified NZX or ASX listed property counter .
The LISTED shares are easily traded in a well functioning secondary market ( syndication shares are not)
The risk is spread over multiple properties and locations
The tenancy risk is lower
The seismic risk is lower over many properties
The opportunity for growth is better over a portfolio of properties instead of just one .
Agree, except at this particular time yield on the listed REITs is down to 4% or lower because all those firms have the stimulunatic current sharemarket premium of about 25% to 30%. It's the desperate search for yield that is also killing yield in highly liquid markets.
On the correction coming to all sharemarkets, that premium will evaporate. Bad time to buy into the NZX REITs in my opinion for that reason (great if you've been there previous to about the last 18 months).
Again, that's why I would like you be wary of the close ended syndicates, but Oysters Direct Property fund does have a once a month redemption ability so long as they have funds, so that pretty much solves that issue for me. Although, in a sense I am buying long on commercial property; ie, I want the higher yield through retirement, but - in my individual circumstances - the capital might be simply estate legacy anyway, so liquidity in that sense, just for this asset, isn't so important.
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