Commercial Property Syndicates - a sound investment?
SOURCE: THE SCOTSMAN, JANUARY 2005
Traditionally, commercial property has been a closed-shop as far as private investors are concerned. High entry levels for good quality transactions have meant that even high net worth individuals would have to think twice about jumping into the market.
Private investors have previously stuck to investing through pension funds, where the weighting in property is small compared with shares or bonds, or through buying shares in quoted property companies.
Meanwhile, commercial property has been the best performing asset class over the last 10 years or so, outperforming equities and gilts by a significant margin. Against the backdrop of disappointing stock market performance and pension funds scandals, the world of tangible assets has begun to be seen as particularly welcoming to today’s investor.
In the past few years, it has become possible for individual investors to take direct stakes in commercial developments by becoming involved in one of the growing number of private investor syndicates.
Funds run by property companies are marketed through the independent financial adviser network and are open to anyone for a typical minimum investment of £25,000. Groups of private individuals can also organise syndicates on their own simply by choosing a property and agreeing what to pay for it. In either case, by combining the capital of members the syndicate has the money behind it to look at property far beyond the reach of even well-heeled investors.
Typically syndicates offered by property companies are structured as geared limited partnerships, or offshore companies with a limited life, so that investors know when they will get their money out. As one-off equity raisings, they are not liquid products, but the strength of the investment market has meant that some of the properties owned by the syndicates have been sold on much earlier than expected, resulting in quick gains. The freedom to organise syndicates privately, however, means that strategy can be the choice of the investors and the rule-book can fly out the window if the deal feels right.
Nevertheless, as with any sector receiving a high number of column inches – most recently in reports of the multi-million pound deals of the AAIM (Active Asset Management) fund financed by Sir Alex Ferguson, Frank Lampard Senior and Manchester United striker Alan Smith amongst others – fears about sustainability have been raised but warnings have gone largely unheeded due to an absence of alternative investment opportunities.
Experience would tell us that property ownership has always been beneficial, certainly if growth rather than immediate gain is sought, and an investment in a tangible asset which businesses will always require makes a lot of sense. As one happy investor remarked, ‘We have savings set aside and with the residential market slowing we have been looking around for other options. The syndicate gets us into a successful sector without spending beyond our means!’
Many investors have already taken this view. In fact an investor new to the sector might note the rising prices at which commercial property deals are being done as more people catch on, and as a result, the falling investment returns on the properties when measured against the levels of market rent they will generate. However, continuously poor stock market performance has ensured comparative success.
At the same time, the money pouring into commercial property and easing down returns is also seen as the catalyst for many major new developments forecast for the next few years, bolstering the market with private sector money previously invested elsewhere.
Geographic breadth of investment has also benefited from the boom. A healthy stream of investment money has been channelled to little promoted areas such as Kirkcaldy and Greenock where yields are marginally higher than in traditional commercial centres. Here, perceived risk of investing in 2nd or 3rd tier areas is offset by the secure rents offered by national retailers appearing more and more outside of city centres.
However, commercial property syndicates are as yet unregulated by the Financial Services Authority, which has lead to concerns being voiced. In particular, unscrupulous traders, who having previously exploited the public’s stock market obsession with their share investment schemes, are now promoting bogus property investment schemes, targeting inexperienced private investors.
Even where a syndicate is formed privately, advice will be required to ensure that interests are protected and the possibility of dispute is catered for.
As with any investment, the aim here is to minimise costs and maximise return, but in the cut-and-thrust market of commercial property a meeting with your lawyer is a must.
AUTHOR: ELSPETH CARSON