Commercial property syndications are coming thick and fast this year, with a two property syndicate being put together by Maat Consulting the latest new offer to hit the market.
Maat is using an unlisted company structure for the offer - Osterbama Property Investments Ltd - in which investors can acquire parcels of 50,000 shares priced at $1 per share, making the minimum investment $50,000.
It is forecast to provide cash returns of 8.6% a year and is being structured as a PIE scheme, which means investors will have their distributions taxed at 28% or less.
The 8.6% forecast cash return is relatively high compared to residential property investments (in Auckland), term deposits and listed property vehicles, and that coupled with the fact that distributions will be paid monthly makes it likely to appeal to investors such as retired folk, seeking a long term income stream.
The Osterbama scheme is slightly unusual in that it will hold two properties, while most other recent syndications have been of a single asset.
The two properties being acquired are a large format retail store on an 18,608 square metre site in Blenheim, which is operated as a Mitre 10 Mega outlet and leased to Mitre 10 New Zealand Ltd, and a 6615 square metre office building in central Manukau which is occupied by Inland Revenue and leased to The Crown, with additional income from a Vodafone communications facility on the property.
Having two properties in the syndicate provides the advantage of diversification for investors, by both location and property type.
While investors generally welcome the security that a government tenant provides, they should note that the Crown lease on the Manukau building is gross (unlike most commercial leases which are net) and that it gives the tenant a once-in-every-three-years right to surrender its lease on levels six and seven (a break clause) of the building
That could result in the need to find a new tenant for two of the building's floors at some stage.
Buying into property syndicates allows investors to access the generally higher returns that are available on higher priced properties that they may not be able to afford to buy themselves.
Syndicates usually face the same risks as direct property investment, such as the loss of a tenant, a general downturn in the market or rising mortgage interest rates, all of which could affect the scheme's cash distributions and the buildings' capital values.
However syndicates also have some features specific to them which investors should consider.
The main one is that they do not usually have a fixed termination date, so investors do not know how long it will be before the syndicate is wound up and their capital is paid out.
Osterbama will be wound up when 75% of shares are voted in favour of such a resolution, and although share parcels in the company could be sold privately if someone wanted to exit early, there is no established market for the shares, so investors should be prepared to stay involved for the medium to long term.
Property syndicates are also reasonably expensive to set up and their establishment costs eat away at their net asset backing.
Osterbama will have an initial net asset backing of 94.5 cents per dollar invested.
Osterbama's key features:
Osterbama Property Investments Ltd. Commercial property syndicate structured as a PIE (Portfolio Investment Entity) scheme.
Properties to be purchased: 174-186 Alabama Rd, Blenheim, and 5 Osterley Way Manukau.
Purchase price: $32,750,000.
Valuations (JLL): $32.8 million.
To be funded by: Investors taking up 365 parcels of 50,000 shares in the company at $1 per share ($18.25 million) and a first mortgage over the properties from ASB for $15,556,250.
Establishment costs: $1,056,250.
Loan to valuation ratio: 47.4%.
Net asset backing: 94.5 cents per dollar invested.
Forecast pre-tax return to investors: 8.6% pa.
Distributions to be paid monthly.
The offer is being promoted directly by Maat and through Bayleys.
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