Property syndication is set to move even more into the investment spotlight with one of the biggest commercial building syndications in New Zealand kicking off.
Packages of $50,000 investments are available in a total of $70 million of capital in the brand new, premium-grade building housing the country's largest newspaper, the New Zealand Herald, part of the NZME media group - a merged radio, digital, e-commerce and print conglomerate also housing No. 1 radio station Newstalk ZB.
In a time of low interest rates and returns, the 7-8 per cent annual returns forecast from syndication deals look attractive - and the syndication of Building A, 4 Graham Street, is understood to be the biggest yet seen in New Zealand for a single building.
'Building A' is the brand-new, 11,000 sq m office building, one of two adjoining buildings constructed by Mansons TCLM off Victoria St, in the heart of the growth Auckland CBD location of Victoria Quarter.
Augusta Funds Management, the biggest syndication specialist in the country with nearly $1.5 billion of commercial and industrial real estate under management, will purchase Building A for $115.818 million. Investors can participate in ownership of a premium Auckland property that otherwise may have been out of their reach - by investing in the limited partnership acquiring the building.
Earlier this year Augusta offered a portfolio of five Auckland commercial and industrial buildings, independently valued at $111.835m, for investment, raising $60m. The Augusta and Bayleys alliance has sold in excess of 30 properties and over the past 13 months has raised approximately $170m in investor capital.
Bayleys' Head of Syndication and Investment Products, Mike Houlker, says the $50,000 minimum investment involved in syndications is significantly smaller outlay than direct property investment, meaning investors can diversify portfolios in various regions and in a range of property types - retail, commercial, industrial - along with different tenant profiles.
"The syndication market has evolved from a relatively small industry 10 years ago to a significant niche within the broader commercial and industrial sector today," he says. "As well as appealing to 'mum and dad' investors or those dipping their toes into the commercial property market for the first time, syndications have become an investment option for family trusts and high net-worth individuals located all over New Zealand.
"Some investors are securing upwards of $1 million worth of interests in individual syndication offerings."
Mark Francis, managing director and founder of Augusta, says: "We understand the importance of cashflow to our investors and receiving the return in their bank account each month, therefore we make our distributions monthly - unlike listed property trusts which generally make theirs quarterly."
The Financial Markets Authority (FMA) advises potential syndication investors that "property syndicates are generally riskier than other types of property investment so we strongly recommend you speak to a financial adviser before deciding to invest". Returns are driven by the rents tenants pay and higher returns can also mean higher risk; the FMA tells investors funds can be locked up for the medium- to long-term, that more funds can be required from investors (although Augusta and Bayleys say this doesn't apply to the 4 Graham Street limited partnership), returns are not guaranteed and can vary.
Francis says Augusta has welcomed the FMA's increased regulatory requirements as they stop "cowboys" coming into the market who may not be able to continue with advertised forecast returns after the first couple of years.
"Importantly, we are also structuring our investment opportunities as limited partnerships which limits investors' liability to their initial investment," he says.
Bayleys' syndicated investment manager, Samara Phillips, says Augusta are not only market leaders but are known to be conservative in their views; they are a subsidiary of the NZX-listed Augusta Capital, which means listed company governance requirements apply (including the requirement for the board to include independent directors). They were also the first property syndication company in the field to be licensed by the FMA.
"They complete an extremely high level of due diligence; for every property they consider offering to their investors, they decide against many others. They are very selective and only offer properties they would buy themselves - and they have bought this one and are partially underwriting it."
Features which Augusta and Bayleys say make the Graham St building an attractive investment include:
• Builders Mansons have provided a 10-year capital expenditure warranty - meaning repairs or maintenance needed on the property (a risk factor in commercial property investment) will be underwritten for 10 years.
• With costs like that fixed, Augusta have forecast a year one pre-tax cash return of 7 per cent for investors, with distributions made monthly. They are also forecasting annual increases of 0.25 per cent, meaning by year 5 investors are forecast to receive an annual 8 per cent return pre-tax. As with all syndicated property investments, the Product Disclosure Statement outlines the risks of the investment and notes that these returns are not guaranteed and the actual distribution rates may vary. The increase in returns over the forecast period does not guarantee further increases. While it may continue to increase, the return following the forecast five-year period may stay the same or be lower.
• The forecast increase is partly made possible by the long leases which have built-in annual 3 per cent increases for tenants (except in respect of the first anniversary of the NZME lease).
• A strong tenancy list: in addition to NZME, Crown solicitors Meredith Connell occupy a floor as does global wine and spirits giant Pernod Ricard, with leases of 10-15 years. Mansons are leasing back the only unoccupied floor for 9 years, meaning the building is effectively 100 per cent leased.
Augusta and Bayleys have also established an unlisted secondary market facility for investors and, over the past five years, have facilitated the transfer of over 250 units on behalf of investors, with many trading at above their original $50,000 face value. Francis says the secondary market is most effective and active when properties have long lease terms and are providing good cash yields, as liquidity in syndicate units is very much related to the performance of the underlying asset.
# The Product Disclosure Statement is available or for more information, contact Mike Houlker, Samara Phillips or Sarah Prebble of Bayleys on 0800 BAYLEYS or visit www.premiumaucklandproperty.co.nz
Disclosure: NZME is a tenant of Building A. No member of the NZME group guarantees any aspect of the investment offered or provides any view on the merits of the investment.