Property syndicates

It’s often said people don’t learn the lessons of history. With the litany of woe that trails behind the property syndicate sector one would have thought people would have had learn not to invest in them. Not so. Investors seem to have short memories and there are huge rewards to the promoters of such schemes so reincarnations just keep coming.

So what is a property syndicate? It’s basically proportional ownership in a property or small portfolio of properties. Each investor owns a share in the whole. This makes it relatively easy for small investors to have ownership in landmark property that would otherwise be beyond their means.

The investors have no active role in the management of the property – they leave that up to a professional property manager who receives a fee for doing so (usually a pricy 8% of the gross rentals).  It’s not uncommon for that manager to be “related” to the people promoting the syndicate. They do so because by securing a long-term management they lock-in a perpetual income stream while assuming none of the risks.

The lure used to hook investors is a high rental yield. The dazzling returns are just too tempting for some (like retired folk) who need high income to supplement their income.

It becomes all too obvious that those investing in syndicates are blind to the risks when they start parroting platitudes like “as safe as houses” or extolling the virtues of “bricks and mortar”. They don’t seems to realise they have probably paid too much for a property, that is costing too much to manage, while holding units that are virtually impossible to sell.

In my general view property syndicates simply do not stack up when the risks are measured against the returns. These risks are often exacerbated because the promoters use debt to leverage up the returns – not hard to do when the cost of money is less than the rental yield. What the figures do not reveal however is the risk attached to those returns, and calculating that is well beyond the knowledge of most novice investors.

Those who do not want to invest on their own account but want a sleep easy property investment could consider investing in any one or more of the real estate investment trusts listed on the New Zealand stock exchange.  Because the units are listed on the exchange they can be instantly traded so should the need arise (due to a health emergency for example) the investment may be sold at a transparent and fair value with settlement within a few days.

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