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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