Oyster Group has taken the bull by the horns and put a likely termination date on its latest property syndicate, giving investors a better idea of how long it will run for and when they are likely to get their capital back.
One of the major drawbacks of property syndicates is that unlike term deposits, they do not usually have a termination date and in theory could continue indefinitely.
Because they are unlisted investments without a redemption facility, investors who want to cash up before a syndicate is wound up would have to try and sell their interests in them privately.
Most syndicate managers try to assist that process by operating a grey market where they will match up sellers (those investors who want to cash up before a scheme is wound up) with others willing to buy-in to the scheme.
Although most syndicators report that their grey market approach generally works well for investors, they are not able to provide any guarantees that they will always to be able to match a seller with a buyer.
The main reason syndicates do not have a specified termination date is that if they did, they could be deemed to be buying a property with the intention of reselling it, which could make them liable for capital gains tax when it is sold.
Oyster's latest syndicate will purchase a large distribution centre near Auckland airport, which is co-incidentally being purchased from another property syndicate, comprised of mostly South Island investors which was set up by Queenstown law firm Mitchell Mackersy.
Oyster has included a clause in its offer documents which means the property will be sold after five years, unless the investors vote against a sale.
Although that leaves open the possibility that the property might not be sold and the syndicate will continue beyond five years, the bar for such a vote has been set quite high, making it more likely that the property will be sold than not.
If the sale does go ahead after five years, then investors will likely be taxed on any capital gains, but Oyster is obviously picking that many investors would be prepared to forego some capital gain in return for more certainty about the term of their investment.
One of the main advantages of commercial property syndicates is that they provide smaller investors with access to the larger, better quality commercial properties that would otherwise be the preserve of major institutional investors, and these can can provide relatively high returns compared to residential property and term deposits, making them popular with retired investors wanting a steady income stream.
This latest offer from Oyster is forecast to provide cash returns equivalent to 8.1% a year and given that expected rises in interest rates continue to recede over the horizon and house prices are appreciating faster than rents (in Auckland anyway), making residential property investment less attractive, it's probably a good time to test market appetite for a syndicate that trades off more certainty around its term with paying tax on capital gains down the track.
Another factor investors need to consider is that syndicates tend to have comparatively high set up costs relative to the size of the investment, which reduces their initial net tangible asset backing (NTA) and this latest offering from Oyster will have an NTA of 92.3 cents per dollar invested.
See below for the key facts of this latest syndicated offering:
The Property: 71 Westney Rd, Mangere.
- A large distribution centre to be structured as a proportionate ownership scheme.
- The tenant is Cardinal Logistics, a privately owned storage and distribution company.
- Cardinal's lease runs for 15 years with three rights of renewal of five years each.
- The rent automatically increases by 1.4% a year and every third year to the greater of the market rent or 1.4%. Intending investors should pay careful attention to JLL's valuation report on the property, which states that it is rented at above market rates.
- Purchase price of the property $21,294,500.
- Lease inducement (incentive) payment $3,805,500.
- Total acquisition cost $25,100,000.
- Issue expenses (including $129,781 working capital) $1,200,000.
- Total of all costs $26,300,000.
The investment to be funded by:
- 276 investor interests of $50,000 each = $13,800,000.
- ANZ loan $12,500,000.
- Total to be raised = $26,300,000.
Property valuation $25,100,000.
Loan to valuation ratio $49.8% (to be capped at 50% once the scheme is sold down).
Initial NTA 92.3 cents per dollar invested.
Forecast cash distributions (pre-tax) equivalent to 8.1% a year of the amount invested.
Oyster Group is marketing the property directly and through Colliers International.
Oyster Group is underwriting the offer for a fee of $150,000 which is included in the scheme's set up costs.
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