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BNZ backed Timaru-based property syndicator seeks NZ$8 mln, eyes further offers

BNZ backed Timaru-based property syndicator seeks NZ$8 mln, eyes further offers

Investors, perhaps previously attracted to enticing interest rates on offer from finance companies, are being offered a slice of a Whangarei Bunnings Warehouse by a property syndication promoter co-managed by the former chief financial officer of South Canterbury Finance.

The offer comes from the Timaru-based Commercial Investment Properties Limited (CIPL) which is run by Cheryl Macauley and Graeme Brown, ex-CFO at South Canterbury Finance.

“I’m not saying that property syndication is perfect, but it does have a role in some people’s portfolios,” Brown told interest.co.nz.

For a minimum investment of NZ$50,000, investors are being offered projected pre-tax cash returns of 9% in the first full year. A company formed to acquire the Bunnings property which is being bought from the DNZ Property Fund for NZ$13.59 million in a deal due to settle on October 15, 124 Tauroa Street Limited, has registered a prospectus with the Companies Office and is seeking up to 160 investors to stump up as much as NZ$8 million in total.

Proceeds raised in the offer will be used to help buy the property, cover the NZ$465,450 of costs associated with the offer, including a NZ$169,950 promoter’s fee for CIPL, and fund working capital requirements.

Big market

Although CIPL has registered a prospectus, the promoters of property syndicates aren't required to register offer documents meaning it's hard to accurately determine how big the property syndication market is. However, over the last decade some estimates suggest property syndicates have raised up to NZ$2 billion from investors.

The Securities Commission is believed to have started focusing more closely on property syndicates early last year resulting in several being pulled.

The commission warned investors last year that property syndicates could be risky. The commission said such schemes, where ownership of a property is split into equal shares with individuals buying one or more shares each, aren’t required to produce a registered prospectus or investment statement. Instead, they must provide a disclosure document, called an “offeror’s statement”, and an independent registered valuer’s report – before signing up investors.

“These schemes work differently to other kinds of investments, and their risks need to be understood,” the commission said.

Some of the key players in the sector have included Radius Properties whose directors include South Canterbury Finance CEO Sandy Maier, St Laurence, KCL, SPI Capital, Augusta Funds Management whose directors include Mark Francis the managing director of the NZX listed Kermadec Property Fund, Oyster Group, CIPL and IPT Bayleys. See more on syndicated property deals here.

Established in 2002, CIPL has 26 properties under management and has syndicated about NZ$160 million worth of properties. Its offer on the Whangarei Bunnings Warehouse opened on September 8 and is due to close on October 8.

BNZ loan

124 Tauroa Road has secured a NZ$6.1 million five-year loan from the BNZ, which will be used to fund 44.87% of the purchase price. BNZ will charge 5.58% interest per annum and has set out that the loan to value ratio (LVR) must be below 50% of the property's market value at all times.

The terms of the BNZ loan include that 124 Tauroa Road Ltd must maintain a full transactional banking relationship with BNZ and interest cover of at least 1.75 times, measured as total net rentals divided by total interest cost at all times. The entire property is leased to Bunnings, which pays about NZ$1.12 million annually in rent. The lease runs for 12 years from June 2007 with the next review due in June 2011. The lease increases at a fixed percentage of 3% per annum over its term. CIPL, which is owned by Macauley, will manage both 124 Tauroa Street Ltd and the property.

The manager will be paid a fee of 4% of the annual lease income, plus additional fees for the likes of new lease negotiations with a new tenant, sale, project management services. The management contract can be terminated by a resolution passed by at least 90% of the company’s shareholders. A valuation in the prospectus by Colliers International values the property, as of June 28, at NZ$13.750 million.

CIPL says the property is being purchased as a long-term investment so returns should be viewed over at least a 10-year period. On the basis of the tenant meeting its lease commitments, the property not increasing in value and, if sold, only realises its original cost, then the average return to investors on their total investment over 10 years would be 8.7% per annum. This assumes the initial BNZ loan terms, whereby repayments consist only of interest in the first three years with principal repayments kicking in during years four and five with NZ$10,000 paid per month.

Banks are currently offering 6.7% before tax for five year term deposits. See all term deposit rates here.

Cash distributions will be made to investors monthly in arrears.

'Good properties hard to find'

Brown says the fact the lease on the Whangarei property increases at a fixed percentage of 3% per annum over its term is crucial.

“From our perspective (that) was critical when we’re looking for properties to try and find some income growth,” said Brown.

Despite the weak property market, good properties were difficult to identify and secure.

“The vendor in this instance was DNZ and as a result of the rationalization of their portfolio they’re chucked out some pretty good properties. This is one of them,” said Brown.

The Whangarei property syndicate will be the second one CIPL has put together this year. It has two more in its sights, one for what Brown describes as a large scale warehouse and the other a Hoyts cinema in Whangaparaoa. Brown says having a prospectus gives transparency and additional compliance.

"By having them (the Companies Office) involved it’s another set of eyes and another critique which is very important in terms of bringing a solid product through to investors.”

Know how you can exit

Meanwhile, the Securities Commission warning noted someone investing in a property syndicate might be agreeing to share its debts and liabilities, jointly or severally.

“This means that if the syndicate can’t pay its debts or fund repairs, investors may have to make up the shortfall. In fact, each investor may be liable for the whole amount. You may end up owing money to the syndicate.”

“Liability varies from scheme to scheme, so we strongly recommend investors clarify the extent of their liability before investing.”

Since the investment is in real property, the commission said investors’ should pay attention to everything you normally consider when buying any property – the independent valuer’s report, the land information memorandum, and any covenants, conditions, restrictions or easements on the title. Investors also need to think about how to get out of a scheme, the commission said.

“Given the lack of a formal market, it might be difficult to on-sell your interest, particularly if the scheme isn’t performing well. Find out how it will eventually be wound up.”

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9 Comments

Are there still suckers out there prepared to risk their savings on hard- to-sell syndicated property?

I guess so. Even when there are easily liquidatable quoted property unit trust shares with heavily discounted NAVs.

These investors are committing $100k+ to each unit and when they want to sell will have to pay exorbitant commissions to move them (-if they can find a buyer!). Possibly most of them will not have to worry but leave the problem to their estate realisation. I can sell $100k worth of shares for a few hundred dolars and have the cash in my account three days hence. No I cannot get monthly cheques but quarterly payments will just have to do.

Good on the Securities Commission for showing up the barbs but they should also insist that the promoters put that information in front of a prospective buyer.

Property syndication? Run. As fast as you can. Run away.

These are the types of things to look out for:

"The management contract can be terminated by a resolution passed by at least 90% of the company’s shareholders."

See if the syndicators over there are anything like they are in Tauranga, they ensure that they always hold al least 10% of the shares. The management contracts are the real money earners in these deals - and by holding at least 10% they can ensure that they have total control over the management services and it's impossible for investors to control the costs of management.

 "...seeking up to 160 investors(idiots) to stump up as much as NZ$8 million in total."

160 stupid Kiwis...please line up here...have our money ready thankyou...feel better do we?

Two more like minds already!

The NZ$465,450 of costs associated with the offer includes the promoter's fee.

Bunnings is a high quality tenant . Would you guys prefer to stump up $ 300 000 for a rental , and then the"  tenants from hell "  move in ? The Bunnings lease has 9 years to run , and the yield is 9 % . 160 lucky folk will get a share of that action , sweet ! ............. where's me Gummy-Bag wallet ..................

No, no, no

Open both eyes for better investments than personal residential rental risks. Should you wish to stay with property even the quoted property trusts may look better, not that you would bother looking over the parapet I suspect.

Keep wallet in pocket.

Got enough properties here in the Phils to keep me busy . My blog was a counter to those above who heaped scorn upon the Bunnings investment . It stacks up a whole lot better than residential property or finance companies , the Kiwi favourites .