Low interest rates and share market volatility are driving investors to consider alternative investments. In recent years we have seen the rapid rise of property syndicates. Such syndicates were very popular over twenty years ago and were offered by companies such as St Laurence and Waltus. At that time, they had a chequered reputation, with some syndicates performing well and some dismally.
A property syndicate is created when a property manager buys a commercial or industrial property and on-sells it to a number of investors. The property manager receives a fee for buying and selling the property and an on-going fee for managing the property. The cash return received by investors is the rental income less costs. It can be a lucrative business for property managers with little risk, as it is the investors who take on the risks of interest rate rises, loss of tenants, maintenance costs and so on.
The key disadvantages of property syndicates are the lack of diversification and lack of liquidity. The investment is in only one building which may perform well over time or not. The loss of a tenant can be a significant risk which destroys cash flow. Finding new tenants can take months. Building locations and fit-outs may fall behind market requirements over time, making it hard to find new tenants, especially when there is a surplus of property available for lease. Most syndicates do not have a specific end date and investors are reliant on property managers to create a secondary market for the sale of their units in order to get their money back. Sales can take a long time, especially if there are problems with the property. An alternative to property syndicates is to invest in listed property trusts or property funds, which are highly diversified and highly liquid.