SPI Capital: Syndication domination

Commercial property syndicates are making a comeback and are gaining momentum amongst investors keen to diversify their investment portfolios, and SPI Capital is at the forefront of the game.

Tuesday, August 18th 2009, 8:56AM 2 Comments

Accepted wisdom is that property should be part of a diversified investment portfolio. Ways of investing in commercial property vary but syndication has gained a strong foothold among smaller investors.

While property syndication is not new, it had to survive the Waltus/Urbus debacle in the 1990s and more recently the asset grab of New Zealand commercial property by Australian institutional buyers fuelled by superannuation money.

The industry grew up during this period and there are now a number of well managed syndication companies throughout New Zealand offering smaller investors the opportunity to become the owners of good quality office, industrial or retail property without an enormous capital outlay.

SPI Capital, established six years ago by three directors, with more than 50 years of combined property industry experience, is a successful manager of 13 syndicates for hundreds of investors, who own property worth more than $130 million across New Zealand. SPI Capital specialises in syndicating $5 - $20 million properties.

The company's latest syndication is Times House at East Tamaki. SPI Capital managing director Murray Alcock says the company is offering 72 proportionate ownership titles at $50,000 each.

Sitting on a 5,805 square metre site at 48 Stonedon Drive, the two-storey 3,761 square metre Times House was built by Euroclass in 2004 and houses a 2,400 square metre press hall that has a strengthened floor for a 160 tonne printing press, paper reels and forklifts and about 1,300 square metres of office space and a café. The building is situated to the south-western corner of the site and there is a large, easy turnaround area for trucks and vans.

Two tenants lease the property. Discount Web, owned by Horton Media - Australasia's biggest independent contract newspaper printer - occupies 69% of the gross lettable area and Times Newspapers, jointly owned by Fairfax New Zealand and three private investors, leases 31% of the building.

Alcock says the $6.1 million property has new leases, net yearly income of $512,126, funding of $2.5 million from the BNZ and is forecast to provide investors with cash returns of 9.25%.

"Interest on the loan has been set at a floating rate but capped at a minimum of 5% and a maximum of 6% for the first 18 months. It will be combined with investors' contributions of $3.6 million to buy the property. Bank debt on settlement will be at 43.25% loan value ratio."

SPI Capital sales manager Aaron Gascoigne says East Tamaki has become a premier business location for many commercial offices and industrial operations.

"Times House sits on the edge of the $1 billion Highbrook Business Park, one of the biggest business parks in Australasia. Tenants at Highbrook include Office Max in new purpose built 20,000 sq m premises and New Zealand Post in a 1.6 hectare facility designed specifically for new state-of-the art mail sorting equipment."

Times House came onto the market at a time when syndicators and private companies are back in the driving seat after a two to three absence from the market when they were unwilling or unable to compete with listed trusts and institutions forcing down yields as they scrambled to buy office, industrial and retail property.

In the first seven months of 2007, foreign buyers spent a record $1.1 billion snapping up New Zealand property as investment returns were higher than those in Australia. By early last year the turnaround had started, when listed trusts began reporting heavy unrealised portfolio revaluation losses of about 10-12%.

The latest property research from global real estate company CB Richard Ellis shows the speed of the turnaround in market fortunes was swift. After five years of property yields firming, that capital value was unwound in just 18 months.

Alcock says this has meant listed trusts and institutions becoming net sellers and it has allowed syndicators, in particular, to buy good-quality properties at more reasonable prices.

"The recession has been helpful for small investors who can buy good property through syndicates with a reasonably small capital outlay," Gascoigne says.

He says interest in Times House has exploded. "A number of high net worth people have registered an interest in taking five to 10 parcels each. Buying into property through syndicates is giving them a reliable, tax effective income while enhancing their investment portfolio. In any asset allocation there needs to be a proportion of direct property investment."

Alcock says established and well managed syndicates are making yearly cash returns to investors of 9%-10%, derived from rental income after all costs are paid.

"Investors also benefit from tax advantages and capital growth over time because they own the property outright. But they need to make an informed judgment call on the quality and location of the property being offered for syndication, the strength of the tenants and the experience of the syndicate manager.

"The manager is the long-term custodian of investor interests and responsible for returns and value. Investors should spend time doing due diligence on the investment and looking at management fees and whether they are closely, or exactly, aligned to the returns of the investors, so both parties drive cash and capital gains together."

While many investors like syndicated property as a passive investment, there are some risks.

Alcock says movement in bank interest rates in the short to medium-term can affect returns and there is always a risk the tenant or tenants will leave.

"If a property is in a good location and is able to be altered for a new tenant's business, it won't stay vacant for long," he says.

Detractors of property syndication often cite the illiquid nature of the investment and lack of a secondary market.

Alcock says property syndicates might be illiquid in some people's eyes but investors prepared to buy in for the long-term don't get wild fluctuations in income.

"After five years of ownership, we offer investors the chance to sell the property and then they are asked biannually after that. We have not sold one property."

On the secondary market, SPI Capital and most other syndicators run an in-house scheme.

"Investors register their titles for sale with the manager. The few titles that do come up for sale are commonly bought by investors already in the syndicate within a short time. Many syndicators also use their wider investor database and financial planners."

A sign of the country's property syndicators drive to continually improve the industry, they have recently formed an informal association to improve investment documentation, self-regulate and work closely with the Securities Commission.

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