Second syndicator acts, cuts fund payouts
Dominion Funds suspends payments from one syndicate, cuts three others.
Monday, July 10th 2000, 12:00AM
Dominion director Richard Lynch says the syndicate to get distributions suspended, the Terrace monthly return property fund, owned a Wellington property which was over-rented when it was bought three years ago. The market was expected to improve enough for rents to at least be maintained when the head lease expired in September next year.
Instead, the over-renting had gone from 40 per cent in 1997 to 100 per cent.
Lynch said three syndicates to have their distributions reduced -- Triangle from 9.7% to 5.3%, Major Retail from 9.2% to 5.1% and Powerhouse from 11% to 9.35% -- all faced different issues.
Expected rent rises had not occurred at Triangle, a large space owned by Major Retail remained unleased by the head tenant was still vacant and a rent underwrite runs out in September, and Powerhouse is an example of syndicates sold in the period when a reduction in returns to single figures was imminent. It was sold on the basis of an 11% return, but that will be cut to 9.35%.
For two of these funds, Triangle and Major Retail, the mechanism used for the reduction is the conversion of 45% of the notes to units, on which no distribution has yet been made. The syndicates will use the distribution savings to cut bank debt.
A fifth syndicate, Churchill, got a $750,000 bank loan to make improvements which raised its value by 8%. Its distribution was 8.4%, but will be cut to 6.85% until bank debt is back down.
Dominion's announcement of its troubles follows hot on the heels of one by Waltus Investments, which has proposed merging 29 single-property and mostly single-tenant syndicates into one new syndicate. Waltus suspended payments by some syndicates last year.
The lack of bargaining power at rent review time in a weak property market has been the biggest problem for syndicates with only one property or few tenants, an issue which has been raised frequently by brokers promoting the liquidity and stronger position of listed property entities.
But the action on payments comes at a time of generally lower business confidence, which Lynch said was flowing through to the commercial property market.
"The announcement at the end of June, that business confidence is at levels similar to those following the 1987 sharemarket crash, is closely related to the fact that the number of New Zealanders and companies migrating offshore are at an all-time high. Consequently the demand for commercial property has slowed down.
"In some cities, particularly Auckland and Wellington, there is a surplus of commercial property available, rents have fallen markedly and vacanies are well up. It's a simple case of over-supply and under-demand.
"We have seen some companies which, having remained in New Zealand, are now deferring their own growth and expansion plans until the economy picks up. As these commercial tenants are not renewing leases on some properties, the banks are taking a prudent approach and insisting on debt reduction.
"Dominion Funds have reacted by taking a long-term prudent approach on their investors' behalf, by reducing the debt to equity ratios on some investment properties and in some cases reducing distributions to investors."
But Lynch emphasised the current economic downturn was a cyclical one. "We have seen downturns before and will no doubt see them again. Our response has been one of investment prudence on behalf of our investors. The property market, as our investors well understand, requires a long-term view," Lynch said. Click here to read more
This article is from The Bob Dey Property Report, a property news website which can be reached at www.propbd.co.nz. As it is a subscription site, visitors from Good Returns who want to look at the Bob Dey site are offered the use of a temporary username and password (type in GOOD for the username and RETURNS for the password) until Tuesday, 25 July.
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