The Direct Property Syndicate – a sound alternative in turbulent markets.

14 May, 2009

Linden Toll
Director – Marketing and Distribution, LMW Invest

It has become abundantly clear that under the cloud of the global financial crisis mum and dad investors are looking for simple to understand, transparent and true to label investments. With property revaluations providing opportunities not seen for seventeen years, the simple property syndicate provides such an investment model.

Syndicates are unlisted fixed-term property trusts that aim to provide the risk and return characteristics of direct property investments.

Syndicates aim to provide investors with investment opportunities that will provide a mix of income and capital returns from professionally managed large-scale property assets.

So how do they differ from direct property investments of recent times and are they a new phenomenon? Simply they are not new at all – in fact the syndication industry flourished after the property crash of the early 1990’s. After the crash the syndicate started to become the vehicle of choice with its defined investment period, set distributions, struck interest rates and in some instances established hedging strategies.

The world of property funds management unlisted style began to emerge and develop. Planners however were still unconvinced that property had emerged as a serious investment class worthy of investing in outside the listed market. But through a process of education, planners and in turn their client’s were taught the benefits of illiquid assets in a diversified portfolio. People started to understand that they really did not need a portfolio made up entirely of liquid assets.

In the mid to late 1990’s however a number of Syndicate Managers started to pursue liquidity options. Their reasons at first were altruistic – people have changed circumstances, others pass away and Lionel Murphy made divorce a far easier legal device. Eventually however syndicates were rolled in to much larger open ended funds with liquidity features to maintain FUM and allow continual purchases. Added to this was the proliferation of platforms – touted throughout fund manager land as the ‘Holy Grail’

Get listed and they will come – give me a break! Liquidity features were enhanced to suit the platforms and the rest is history – liquidity in an illiquid space – not really very clever.

And this has recently come home to roost with a high percentage of the open ended unlisted trusts having their redemptions frozen. They are frozen because they are experiencing high volumes of redemptions without the inflows to match which many have used as contra during the upswing.

A lot has been made about redemption freezing in the press recently.

In my view the decision to stop redemptions in the current market circumstances is not only prudent but also conservative, considered and responsible funds management. It is our fiduciary duty to protect unitholder value in a market characterised by bad news and panic selling.

And so to the syndicate – let’s consider the structural differences to a larger multi-asset open-ended fund. Let’s be clear that they both have their benefits and suit different investors, but for the moment the syndicate provides a real opportunity.

Fund Type	Open Ended	Syndicate
Asset Number	Multi	1-2
Investment Term	Perpetual	5-7 years
Liquidity	Some measures of liquidity	Illiquid
Distribution	Variable depending upon assets added	Forecast

So what are the benefits associated with investing in this model of property investment:

• Higher levels of income.
• Regular quarterly distributions.
• A forecast yield – calculated by the cash flow generated from rents collected.
• Some levels of capital growth – in line with rental reviews.
• Some levels of tax deferral.
• Single asset – the investor knows the asset/s at the start and they have the peace of mind that no further assets will be added to potentially dilute yield.
• Realistic purchase prices.
• The understanding that at the end of the investment term the investor can access their funds or alternatively vote to continue with the asset in difficult times such as these.
• Fixed and understandable borrowing facilities.
• Simplicity.
• Transparency.

Let’s not forget that with each type of investment there are associated risks and it’s important that these are considered. Ultimately your choice of manager and their risk mitigation strategies should allow comfort on these. Risks to be considered are the pedigree and backing of the manager, the asset class (commercial, industrial or retail) and the demographics of the location, micro and macro influences, the tenant mix and lease profiles, gearing levels and finally the actual management of the asset during the term of the investment. Don’t forget to ensure that there is enough money in the trust to cover any capital works that might crop up during the investment term.

With the opportunities arising in the property market, well managed conservatively structured syndicates provide investors many benefits in today’s market. Make sure that you do your due diligence and very real returns are available.

ENDS