Syndicates - worth the investment or not?
Investing in the commercial sector is an unrealisable aim for most small scale investors. Commercial property is inherently more stable than its residential counterpart, but is generally extremely expensive if it is worth buying. Positive factors include the hands off nature of commercial property, longer term contracts and lack of tenant contact.
Of course commercial property isn’t without its downsides. Gearing is normally far lower than for residential, often limited to 60% loan to valuation (LTV), which means having to come up with a lot of money to get off the ground. This very substantial barrier to entry is, understandably enough, what stops most people from entering the commercial arena. Vacancy is also a problem, commercial vacancy is normally far more financially damaging and more difficult to rectify than its residential counterpart. Commercial property is still a very desirable product though.
Enter the Syndicate. In a typical syndicate the investor purchases a share of the property investment and holds it for a specific period of time, normally between 5 and 10 years. It is usual for up to 85% of the value of the property to be financed with what is termed non-recourse debt. This allows the bank security over the property and rents emanating from it but contributors cannot be held liable for more than their investment stake.
By their very nature each individual investment will be relatively unique so it is difficult to be specific about exact returns, appreciation, debt repayment, mortgage arrangement or length of term as these are all project specific. A professionally organised syndicate will release a substantial information memorandum on a particular investment. Most of these vehicles usually work in a projected range of 5 to 10% yield and 7 to 12% annual appreciation.
The biggest problem for syndicates, like the property industry as a whole, is lack of regulation. Consequently the products on offer can vary greatly in quality and fees and charges vary wildly. There are further limitations inherent in the product which must be considered. Lack of flexibility and the difficulty of extracting oneself from a syndicate ahead of the final property sale is a major deterrent. A syndicate seldom returns any income during its lifetime, although some do offer a small return, but it is not generally a suitable product for investors needing ongoing income. Returns are used to pay down the usually substantial debt within the syndicate.
Irish syndicates are active across the world but the most popular areas are the US, UK and Germany. You will find higher risk options investing in Eastern Europe (although these are now very scarce) and even South-East Asia. Entry levels vary from around €50k upwards. There was a tendency for good syndicates to put the lowest entry level at €100k, but that was back in the day when they literally had to simply send an email to their clients to fill anything released. Times have changed and syndicates that are now launched (there aren’t that many these days to be honest) now tend to plump for the lower entry level.
A good quality syndicate would generally be considered a sound investment option, presuming it fits your investment criteria.
