Evolving property syndication market delivering double-digit returns

Australians have invested around $45 billion in property syndicates, as investors increasingly diversify their portfolios and look for new ways to enter the property market.

Evolving property syndication market delivering double-digit returns

For property investors looking to get a foothold on the property ladder without the massive outlay and upfront costs like stamp duty, or those diversifying their portfolio, property syndicates are growing in popularity.

In Australia, the total assets under management in syndicated real estate funds grew from $30 billion in 2016 to $45 billion by 2022, according to the Australian Securities and Investments Commission, representing a compound annual growth rate of 8.5 per cent.

Just like work colleagues hoping to strike wealth in the Lotto draw by pooling their resources once a week, a property syndicate is a direct property investment whereby numerous investors pool their capital to invest into real estate. 

This pooling of the investor’s capital provides the investors with the opportunity to invest in commercial, retail or industrial properties that may otherwise be too expensive for the investors to acquire directly.

Investors can be individuals, self-managed superannuation funds, trusts and companies. 

Syndicated real estate investments typically involve the following:

• Structure: Investors pool their capital to purchase real estate assets, managed by a syndicate lead or property manager.
• Types of assets: Includes commercial properties, residential developments, industrial sites, and mixed-use developments.
• Investment horizon: Typically medium to long-term, depending on the nature of the project.
• Returns: Investors receive returns through rental income, property appreciation, or both.

Rather than being held by an individual, these assets are held in a professionally managed unit trust and are overseen by an expert funds management team. 

Investors purchase units in the trust and in return receive their proportion of the project’s returns once the developed product or asset is sold – and/or, in the case of commercial property, regular distributions from the rental income of the underlying tenants.

Glenn Hitch, Consortium Manager, SMATS Group, said syndication has its advantages and disadvantages, specifically it comes down to the underlying assets, how the risks are managed and how investors are structured and secured.

He identified the pros and cons:

Advantages

• No stamp duty
• No foreign buyer fees
• No capital gains tax
• No legal fees
• No sales commission (unlike the normal disposal of properties)
• Fixed and assured returns
• Low entry capital

Disadvantages

• No actual ownership of property (if asset accumulation is the investment goal)
• No ability to create a long-term passive income earning potential
• Investment is illiquid for a set time, rate and type
• No equity available
• As only preferential loan agreements are available, investors have minimal control

Mr Hitch said syndication exists in both the equity and debt side of developments. 

“Having both equity and debt options provides investors a range of options depending on their risk profile.

“Debt can be structured to provide security over the asset and fixed interest rates offered, whereas equity returns are typically based on performance.

“The key to syndication or direct property investment is to understand the underlying projects’ attributes, funding structure and project management teams’ ability to deliver.”

The Australian syndicated real estate market has experienced several phases:

There was early growth in the early 2000s, with syndicated real estate investing gaining traction as investors sought diversification and access to larger properties.

A recovery followed, with the market enjoying a resurgence after the Global Financial Crisis (GFC), with increased interest from both domestic and foreign investors.

Over the past decade, the popularity of syndicated real estate investments has fluctuated in response to market conditions and regulatory changes.

Industrial and logistics properties have seen a surge in syndicated investments, driven by the growth of e-commerce and the need for warehousing space.

Residential developments, particularly in major cities like Sydney and Melbourne, continue to attract syndicate investors despite recent price corrections.

The pandemic initially caused uncertainty, leading to a temporary slowdown in new syndicate formations, however, the market has since rebounded, particularly in sectors resilient to economic downturns, such as healthcare, childcare and industrial properties.

Anecdotal evidence suggests that while there is continued interest in syndicated real estate, investors have become more cautious, seeking out lower-risk opportunities and preferring established syndicate managers with proven track records.

Syndicators that buy and manage properties for the investors typically charge fees of about 2 per cent of the purchase price and annual fees of 0.7-0.8 per cent, plus a performance fee of 20 per cent of returns above a hurdle.

Double-digit investment returns

Syndicates are generally put together for a set term, usually for three to seven years. Investors earn monthly or quarterly rent distributions as well as a share of any capital gains once the property is sold.

Returns vary depending on the asset class and quality and the ability of the syndicator. Annual distributions of 5-7 per cent and an overall return of 10-13 per cent a year over the lifetime of the investment is achievable.

Interest rates, inflation, and economic growth play significant roles in the performance of syndicated real estate investments. The recent rise in interest rates has led to a cooling in property markets, affecting syndicate returns and prompting some investors to reassess their risk exposure.

ASIC advises investors considering syndicated real estate investments to consider:

• Due diligence: Thoroughly vet syndicate managers and assess the risk profile of the underlying assets.
• Diversification: Consider diversifying across different property types and geographic locations to mitigate risk.
• Regulatory awareness: Stay informed about changes in regulations that may impact syndicated investments.

An ASIC White Paper notes that based on the available data and anecdotal evidence, syndicated real estate investing in Australia has neither significantly gained nor lost popularity in recent years.

“Instead, it has evolved, with shifts in investor preferences, asset class focus, and market dynamics.

“While some segments of the market, such as industrial properties, have seen increased interest, others have faced challenges due to economic uncertainties and regulatory changes,” ASIC stated.