Augusta is syndicating a large industrial property in Brisbane with forecast cash returns of 7.65%, but it comes with hefty upfront costs

The Brisbane property being syndicated by Augusta

Augusta Funds Management's latest property syndicate should give investors plenty to chew over as they weigh up the implications of investing into the Australian market through a syndicated structure.

Augusta is seeking to raise up to A$17.75 million from investors and another A$14.2 million in bank debt via the Nudgee Road Property Trust, which will acquire a large industrial property not far from Brisbane Airport.

The main attraction of syndicated investments is that they allow mum and dad investors with relatively small amounts of cash to tap into the relatively high returns provided by larger commercial properties which would normally be out of their reach.

The minimum investment in Nudgee is A$50,000 and it's forecast to provide pre-tax cash returns of 7.65% in its first full year, rising to 8.0% in year two, with cash distributions to be paid monthly.

So there's an obvious attraction for people such as retired folk because of the relatively attractive income stream it's expected to provide.

However they need to weigh up the expected returns against the costs and limitations of investing through a syndicated structure, and investing into the Australian market adds an extra layer of complexity to that.

Fees, fees, fees

Property syndicates are costly to set up with substantial up front coats that are paid out of their investors' equity.

Nudgee is no different and its main set up costs include an A$874,000 establishment fee to be paid to Augusta, up to A$408,250 in brokerage fees to be paid to Augusta for overseeing the sell down of units in the trust, mainly via Bayleys Real Estate, promotional expenses of A$204,298 and legal fees of A$165,379.

And because the property being purchased is in Australia, there is stamp duty and associated fees of A$1,697,881 to be paid.

All up, the Nudgee scheme will have total up front costs of A$3,509,608, which works out at A$9886, for every A$50,000 that investors put into the scheme.

That reduces their NTA (Net Tangible Asset backing, essentially the initial value of the investment after costs have been deducted) to A$40,114 for every A$50,000 invested.

So on day one of the scheme's commencement, investors will lose almost 20% of the value of their investment, which has to be recovered over time from any future gains in the property's value.

That may take some time, but schemes such as this are generally long term in nature.

Like most syndicates, Nudgee does not have a termination date or a redemption facility and its units are not listed on a stock exchange.

Investors will generally get their capital back, plus or minus their share of any capital gains or losses, when the property is sold and the trust is wound up.

Capital gains tax

If investors wanted to cash up early, they would need to try and sell their units in the trust privately.

And Australian capital gains tax (most likely at 15%) would apply to the sale of the property.

So there's some uncertainty around how long the scheme will last for, how much of their original investment investors will get back and when that will happen.

Both the monthly distributions investors receive and their capital return at the end of its term, will also be affected by movements in the exchange rate.

If the New Zealand dollar weakens against the Australian dollar, returns will be boosted when converted from Australian to New Zealand dollars, and if the New Zealand dollar strengthens against its Australian counterpart, returns will be adversely affected.

So schemes such as Nudgee can provide attractive returns, but there's a lot for investors to think about before they commit themselves.

See our beginner's guide to property syndicates here, and if you are interested in the commercial property market, check out our Commercial Property Sales page.

And click on the link below for a copy of the Nudgee scheme's Product Disclosure Statement:

PDF iconAugusta_-_Nudgee_Rd_Property_Trust_PDS_July_2017 (1).pdf

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7 Comments

Why would anyone take a punt on a single building , a single tenant , and such HUGE upfront costs ( almost 20% of the value of the share is lost immediately ) for an investment that is so illiquid and not tradeable on any bourse .

You can buy into a smorgasbord of good properties on the NZX or ASX

Totally agree, I think this type of arrangement is a dog

+1

These type of arrangements gather pace while the economy appears to be rosy. Works very nicely for the syndicator.

Not so good in a down turn for the chumps holding the risk.

This deal sounds more like an advertisement to buy Augusta stock lol

I agree with that. I know a couple who invested at least $50,000 in the last syndicate and tried to interest me. I thought it was a great deal-for Augusta. I tried to tell them that if they had just bought Augusta shares,they would get a similar yield and much more liquidity. But,they said,we will get paid monthly,so I shut up and wished them good luck.
I think this is the first timeI have agreed with Boatman on anything!

Aw c'mon mate , I am not that bad surely ?

Meanwhile $50k invested in Argosy, Goodman etc will earn ~6% tax already paid and you can sell up with the cash into your bank in three days.
Yes, you can possibly the vagaries of the sharemarket but 20%+ is a lot to absorb.
Syndication is a losers game --- but not apparently for the organisers.