Mark Francis: Property syndicates let investors choose

Opinion

A column by Brian Gaynor in last week's Weekend Herald made a number of criticisms of property syndication. Mark Francis, managing director of Augusta Funds Management, responds

Brian Gaynor suggests property syndicates are not dissimilar to the disastrous securitised property products developed by Wall St that are the foundation of the current economic crisis. This is an absurd comparison.

Investors in syndicated property are fundamentally buying commercial and industrial property, not the debt behind residential property (as was the case with the sub-prime crisis).

The properties in question are generally high quality, with long leases to strong tenants. Most are funded up to a maximum of 50 per cent prime bank debt and at least 50 per cent investors' equity. The property at the centre of Gaynor's article, 510 Mt Wellington Highway, will be funded by approximately 42 per cent prime bank debt and 58 per cent investors' equity.

Gaynor accuses syndicates of being illiquid. Property syndications are often criticised as being illiquid because they are not listed on the New Zealand Stock Exchange. Augusta Funds Management actively facilitates a secondary trading market for the units in our schemes.

While we can give no guarantee that a liquid market will always exist for our property syndications, had Gaynor contacted us prior to writing his article he would have learnt that to date we have a 100 per cent success rate with on-sales of units in our syndicates. These sales have been at, or above, the issue price.

Gaynor says property syndications offer unrealistic returns. We generally try to offer a 10 per cent per annum return on investor's equity, which we consider is in no way "unrealistic". In fact, 10 per cent is about the industry average for equity returns on well-leased commercial property.

Augusta Funds Management has successfully established eight commercial property syndications in New Zealand since 2003, all of which have provided and continue to provide cash returns ranging between 9 - 11 per cent per annum.

Gaynor went on to state that investors could find better returns in listed property trusts, where the sector was currently offering an average return of 14 per cent for 2010, yet no comment was made as to how realistic or sustainable that was.

He points out property syndications have no set termination date.

This is done for two reasons and should in no way be viewed as negative.

Firstly, if a property syndicate has a set termination date that scheme could potentially be viewed by the IRD as a speculative property investment as opposed to a long term property investment.

Secondly, there is no set termination date in order to allow the scheme the flexibility to achieve the best long term outcome for investors. Gaynor claims the the Offeror's Statements for property syndicates are not easily obtainable.

Under the Securities Act we as offerors are not legally permitted to receive or accept a dollar of investors' money, unless they have been provided with the Offeror's Statement, Independent Valuation Report, and had the Ownership & Management Deed made available to them.

We also make these documents available on our website at www.augusta.co.nz. as do our selling agents Bayleys Real Estate Limited. The application form that Gaynor refers to has to be torn from the Offeror's Statement.

To imply that this information is somehow withheld is completely incorrect.

Gaynor says property syndications compare unfavourably with listed property trusts. The managers of listed property trusts have the mandate to invest your money in various properties at their discretion, sometimes issuing new shares to fund acquisitions, and thereby diluting the interests of existing shareholders who are not in a position to take up new shares.

This is one of the reasons that property syndications exist, because unlike listed property trusts, they give investors the opportunity to choose the one property that they would like to invest in.

They can also claim their own depreciation on their share of the property to improve their return even further, and this is one of the areas that we assist investors with as part of our management fee.

The key message here is that passive property investment is a long-term game. If you have the right time horizon as an investor then either syndicated property or listed property can work, as can a combination of both.

Neither structure can alter the inherent long-term nature of the underlying investment. At the end of the day, either way you are investing in real estate.