Syndicates Open Investment Choice in Property
Surging commercial property values in Australia have evoked strong interest from investors over the past few years. But as prices have continued to rise, many prime assets in big cities have been pushed beyond the reach of single investors.
This has resulted in unlisted commercial property syndicates becoming an increasingly popular mode of investment.
In 2017, unlisted property syndicates were the biggest buyers of commercial property, accounting for more than a quarter of the $33 billion worth of commercial property deals in Australia.
The unlisted property trust industry had its beginnings in the early 1970’s, but it has acquired particular significance in recent years, says Tom Borsky, managing director and founder of Melbourne-based property syndicator Peak Equities Pty Ltd.
“The industry has evolved in sophistication and scale to the extent that it now has a dominant presence in the commercial property market,” he says.
Under the syndicate model, a group of investors can pool their funds to acquire larger assets such as retail centres, industrial facilities or office buildings that they couldn’t buy on their own.
Syndicates are commonly structured as Unit Trusts, with individual investors being allotted units in proportion to their investment in the total capital of the Trust.
The responsibility for identifying and negotiating the purchase of suitable properties rests with the syndicate or fund manager, who undertakes an exhaustive due diligence of assets before committing to a purchase.
The fund manager also arranges for any bank financing and negotiates the terms of the purchase contract and any relevant leases.
The investment model provides a number of inherent benefits, such as allowing members to participate in ownership of premium ‘A Grade’ commercial assets, even with individual investments ranging between $200,000 and $1 million.
It provides high income yields with monthly distributions – typically 8 per cent annually or better, as well as opportunity for capital growth.
It also allows investors to diversify their risk through investment in multiple assets, while at the same time avoid being concerned with vacancies, repairs, rental collections or lease negotiations, which are all the responsibility of the fund manager.
Mr Borsky, who has provided specialist advice to some of Australia’s leading property funds managers for more than 40 years, rates the unlisted syndicate model higher than the publicly-listed Real Estate Investment Trusts.
“The unlisted syndicate market offers more realistic asset values and greater stability of both income and capital,” he says.
“REITs are far more volatile with the value of equity more closely reflective of the overall share market than the fair value of the underlying real estate assets.”
He set up Peak Equities around six years ago, along with his business analyst son David Borsky.
The company currently administers commercial properties valued at more than $220 million, with its portfolio spanning properties across Victoria, NSW, and Queensland. Investment in individual properties ranges between $10 million and $50 million.
Peak holds a Wholesale AFS Licence, and caters mainly to high net worth individuals. It accepts applications from individuals, companies, trusts and superannuation funds.
Its investors, who are typically mature-age professionals, business owners or retirees receive monthly cash distributions ranging from 8.0 to 10.4 per cent per annum.
The syndicator follows some key investment criteria while selecting assets.
They should be located in an area with population growth rate above the national average; it should be a high quality construction; there must be secure income yield for investors; and there must be genuine prospects for capital growth.
The focus on these criteria should help the company navigate the current slowdown in the property market.
“Our outlook for commercial property (other than retail) remains positive,” Mr Borsky says.
“By selecting cities or regions where there is no oversupply, we believe that demographics will underpin medium to long-term income security.”
Peak Equities has seen its investor base grow by more than 40 per cent year-on-year since 2014 and Mr Borsky credits this to the quality of communication with investors as well as the thoroughness and quality of the firm’s due diligence investigations prior to committing to any asset purchase.
The majority of its new investors are referred by existing investors, and Peak enjoys a re-investment rate of more than 90 per cent.
Peak has charted out ambitious plans for growth in the near and medium term.
The company is currently finalising a capital-raising of $42.5 million for its Diversified Property Trust No 1, which will hold assets to the value of around $80 million.
It is also in the process of developing a ‘Peak Property Development Fund’ for investors keen on higher-returns and shorter turnaround times.
“Our expectations are that we will continue to grow steadily towards a level where we hold between $400 million and $500 million assets under management,” Mr Borsky says.
For more information about commercial property syndication with Peak Equities, contact (03) 9863 8380.