Augusta's latest property syndicate offers attractive returns but investors should carefully consider the high upfront costs

The projected pre-tax cash return of 8.14% on Augusta Funds Management's latest property syndicate will likely prove attractive to many investors but they'll need to think carefully about the implications of investing in Australian property.

Augusta (part of NZX-listed Augusta Capital) is syndicating an industrial property at Willawong in the south of Brisbane, which will be structured as an Australian limited liability partnership (LLP) with a minimum investment of A$50,000.

The LLP will be taxed at the Australian company tax rate of 30%, which will reduce the projected after tax returns paid to its investors to around 7%.

Those returns will also be taxable in this country but New Zealand investors will be able to utilise the Australian tax credits, which means if their tax rate is 30% or less they probably won't need to pay any further tax.

But if their tax rate is 33%, they may need to pay the extra 3%, which would likely reduce their after-tax return to 6.87%, according to the scheme's prospectus.

With after tax returns of 6.87% to 7% and cash distributions that are to be paid monthly, the scheme will have an obvious appeal to investors such as retired folk seeking a regular income stream.

While those returns may seem generous in comparison to current term deposit rates and the dividend yields provided by shares in many NZX-listed companies, investors will also need to take into account the effect that stamp duty, capital gains tax and exchange rate movements could have on the syndicate's long term performance.

If the New Zealand dollar strengthens against the Aussie, it will lessen the cash returns investors receive and the capital value of the property, when these are converted from Australian to New Zealand dollars.

But if the New Zealand dollar weakens against the Aussie, that will increase the cash returns and the capital value of the property to investors in this country (the offer is not open to Australian investors).

So the syndicate will look more attractive to investors who think the New Zealand dollar will decline against the Australian dollar over time, and less attractive to those who think it will go up.

And those naughty Australians love springing nasty surprises like stamp duty and capital gains tax on unwary kiwi investors.

The property is a newly completed warehouse and office building leased to the Australian subsidiary of Dutch company Akzo Nobel, which is best known as the manufacturer of Dulux paints.

It is being purchased at its valuation of A$10.66 million, which will be funded with A$6.75 million of investors' money and an A$5,367,720  bank mortgage (which will be interest only).

As well as paying for the property, the funds raised must also cover stamp duty of A$593,475 and the syndicate's establishment costs of A$864,245.

Establishment costs include fees for the legal, accounting and marketing work that are necessary to set the syndicate up but the biggest establishment costs are the offeror's fee of A$414,000 (to be paid to Augusta), followed by brokerage of A$155,250 (to be paid to Bayleys Real Estate who are the sole selling agents for the offer).

Stamp duty and establishments costs combined come to A$1,457,720, which is equivalent to 13.7% of the property's purchase price and 21.6% of the money investors are to put into the syndicate.

That reduces the investors'  initial net tangible asset backing (NTA) to just 78.4 cents for every $1 they put into it, which is low compared to recent syndications on this side of the Tasman.

That figure is particularly relevant because syndicate investors usually to have wait until the property is sold and the syndicate wound up before their capital is returned.

If the property was resold for the same price it is to be purchased for, investors who put in the minimum A$50,000 would only get back A$39,200 and that is before allowing for disposal costs such as the real estate agent's commission (estimated at 2% plus GST of the sale price), Augusta's termination fee of 1% of the sale price and sundry expenses such as legal and accounting fees.

And if the property is sold for more than its purchase price, the difference will be subject to capital gains tax, which also reduces the amount of capital that is ultimately returned to investors.

Like most New Zealand syndicates, this one does not have a termination date and will only be wound up by special resolution of investors, so they should be prepared to leave their money in for the long haul.

The offer closes on November 5. Here is a link to its prospectus.

For an overview of how property syndicates work, click on this link.

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