Property syndicates are often advertised as providing regular income, with attractive returns quoted. However, syndicate structures can be complex, there are risks to be aware of, returns are only estimates, and you may struggle to get your money out.
About property syndicates
A property syndicate typically raises money from multiple individual investors to buy property. Returns are shared among the investors. Syndicates can invest in commercial, industrial, residential or agricultural property, and in existing buildings or development projects.
Property syndicates are offered under different legal structures:
Managed investment schemes, where the manager is licensed by the FMA, and units in the scheme are offered to retail investors.
Companies (or ‘equity’), where the form of the investment is company shares.
It is important you understand what structure a syndicate is using, as this will determine the type of disclosure documents you will receive to help you make investment decisions, the amount of oversight we have over the syndicate, and the protections you have as an investor. Syndicates often have a minimum investment size, which is typically around $50,000
Some property syndicates are only available to wholesale investors. For these offers, many Financial Markets Conduct Act disclosure and governance requirements do not apply. As a wholesale investor, you may not have protections available to retail investors such as access to a free dispute resolution scheme. We strongly recommend talking to a financial adviser if you are considering investing in a wholesale syndicate offer.
Note, some syndicated offers invest in farming projects or forestry rather than property. These projects may have different risks to the ones described on this page.
Property syndicates are typically advertised with a forecast percentage return. Some syndicates pay this as a distribution or dividend on a regular basis. However, investment returns are not certain and can vary.
Returns may be different to the advertised rate
Investment returns for commercial property syndicates are based on the property’s rental income, minus the costs of operating the syndicate. Changes in the value of the property also affect returns. If the value of the property increases, the value of your units or shares should also increase. However, these gains will not be crystallised unless you sell your investment (which may be difficult - see below).
Forecasts for returns are based on various assumptions, which can be impacted by a wide variety of factors or risks:
tenants move out of the property and there is a delay finding new ones
tenants can’t afford to pay their rent and outgoings
the property manager or others involved in the syndicate increase their fees
interest rates change and this affects the syndicate's mortgage payments
the property needs repairs or maintenance
increases in insurance premiums
possible capital gains or losses if the property is sold
a loss in property value increases the gearing of the property, meaning it cannot pay distributions as it needs to reduce borrowings
Some syndicates develop property, either to hold or sell. Property development can be a high-risk activity with numerous examples of investors losing money – if you do not understand the risks and how they fit with your investment profile then you should seek financial advice.
Understanding the risks
Property syndicates are often created over a single property or a very small number of properties. This means your risk is concentrated in a single or small number of assets, and a single asset class. If something goes wrong with the property, or the property market, you may not receive the return you were expecting.
It can be hard to get your money back if you need it
Property syndicates typically don’t have a fixed term, as you are investing by buying a unit in a managed investment scheme or a share in a company. This can make it difficult to get your money out, as there is usually no active market for on-selling your unit or share.
Syndicate managers don’t have to return your money if you need it, but they might help you sell your unit(s) to another investor. If you do this, you may have to pay fees. You may also have to sell them for less than you paid, especially if returns have dropped since you first invested. Otherwise, you’ll need to wait until the property is sold, any loans repaid and the syndicate (managed investment scheme or company) is wound up.
Syndicate managers may borrow money
Like most forms of property investment, property syndicates usually borrow money to help fund the properties they acquire. Any such borrowing will rank ahead of your investment, which increases the risk of your investment. Borrowing money also means the property syndicate will have loan conditions it needs to adhere to. Our property syndicate checklist has some tips on what to check when you’re considering the impact of bank loans.
You may have to invest more money
As a part-owner of the property, you may share responsibility for its costs and debts. This means you may need to invest more money, for example, if the building needs essential maintenance.
The syndicate’s governing documents will set out whether, and how, this applies and the mechanisms for making a decision about additional contributions. In some cases, if you can’t make the extra contributions, you may lose your initial investment and still be legally required to contribute.
A key cost in a property syndicate is the cost of a property manager to take care of the property.
Fees can be high and may increase over time
Investors in property syndicates pay fees to cover specialist services such as property management, legal and financial services. This can result in high fees that could increase over time.
Another often significant cost is the interest cost on syndicate borrowings – a cost that can go up and down depending on interest rates and if/for how long a syndicate has hedged against interest rate movements.
What to do before you invest
When you’re looking to invest in a property syndicate, you will receive documents explaining how the syndicate operates, what the fees are, and what the risks are. Key documents include:
The product disclosure statement should explain how the syndicate operates, syndicate fees and risks.
The governing document should include the terms and conditions you will have to follow if you invest in the syndicate.
The valuation report contains information about the property the syndicate owns or plans to purchase and provides a valuation of the property. Use our property syndicate investing checklist to help you understand what to look out for in these documents.
We strongly recommend you seek financial advice
A financial adviser can help you understand whether a property syndicate is right for you, and give you advice about how much to invest.
Managing your investment
Depending on the type of property syndicate, it may have to provide either audited financial statements or an annual report, or both.
Before investing, check what kind of information you’ll be getting and how frequently.