Return of the syndicates

An Ernst & Young study estimated investors poured $1.35 billion into syndicates between 1990 and the end of 1999, but shortly after that the funds flow dwindled and all but dried up until recently. This was because many existing syndicates had to suspend income payments as they struck problems re-tenanting after leases expired.

Dominion Funds Management was one of the largest property syndicators through the 1990s.

Dominion chief executive Paul Duffy, who took the job in February last year, says he’ s taking a pro-active approach to managing his company’s portfolio and has been both an active buyer and seller.

St Laurence was another significant property syndicator through the 1990s and chief executive Kevin Podmore says his company is likely to become more active, but on a much reduced scale.

Among Dominion’s recent purchases was the ASB Bank centre in Albany for which Dominion paid $19.6 million. Rather than being used to form a new syndicate, equity in the centre was parceled out to six existing syndicates that had low enough debt levels to finance the purchase through borrowings, Duffy says.

"Dominion’s focus is on providing sustainable monthly distributions to our investors," and the ASB centre provided a 16 year lease with guaranteed compounding rental increases every three years of 2% a year, he says.

Dominion has also created new syndicates recently. Property Fund 31, for example, took 20% of the ASB centre and bought Optimation House in Wellington city, whose principal tenant is law firm Chapman Tripp, and the Beca Carter head office in Auckland. All up, that fund has a capital value of about $30 million.

Another new syndicate bought a Newmarket office building tenanted by consulting engineers Sinclair Knight Mertz and a Wakefield St, Auckland, office building leased to the Auckland University of Technology for 12 years.

Dominion has also sold five buildings for a total $10.8 million under Duffy’ s leadership, including the building on Wellington’ s The Terrace which houses investment manager Morrison & Co.

Duffy, who ran Fletcher Challenge’s property for 10 years and was involved in the 1993 float of shopping centre company St Lukes, says the key to successful syndication is to have quality assets with quality tenants.

One of the benchmarks he has put in place is to make Dominion’s minimum investment $5 million. Below that level, buildings won’t attract the quality tenants he wants, he says.

Since the recent problems with syndicates, both investors and their advisors have become more knowledgeable about this type of investment, Duffy says.

Podmore agrees, saying the type of structure St Laurence is using these days is tending to attract investors used to investing directly in property and more aware of the inherent risks and rewards.

While in the past, his company focused on buildings in the $20 million to $30 million range and used company type structures, now it’s looking at buildings in the $5 million to $7 million range and plans to use the proportionate ownership type structure it trialled last year.

That trial, in which St Laurence raised less than $3 million from investors for a The Warehouse discount department store on Mt Wellington highway in Auckland which it bought for just under $5 million, was oversubscribed.

Now St Laurence is looking at doing the same thing with another The Warehouse store. Over the next 12 months it is likely to do perhaps four syndications with a total value between $25 million and $30 million. It its heyday, the company was syndicating in excess of $60 million a year, Podmore says.

Lawyers and accountants are also involved in putting together such smaller sized syndicates and real estate agency Bayleys is also inolved, he says.

While the Waltus syndicates, which had the biggest market share, were the ones with the highest profile problems, various funds reducing or suspending income payments, Podmore says about 5% of the St Laurence funds had some sort of reduction in payout.

The St Laurence funds tend to be less mature than the Waltus ones and so haven’t met the same vacancy problems, he says.

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