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Trilogy Funds Management's latest property syndicate forecasts an 8% return but investors should check the fine print on Net Asset Backing

Property
Trilogy Funds Management's latest property syndicate forecasts an 8% return but investors should check the fine print on Net Asset Backing

Australian property syndicator Trilogy Funds Management is taking a more active interest in the New Zealand market, appointing Colliers International to market its latest Australian property syndication to New Zealand investors.

The latest offering is an office building at Ipswich west of Brisbane, which is being tipped into a fixed term unit trust, the Tower Central Trust, forecast to provide pre-tax cash distributions at 8% a year, with a minimum investment of A$20,000.

Two of the most important factors investors need to consider when comparing Australian property syndicates to those in New Zealand, are the effects of exchange rate movements and Australia's capital gains tax regime.

If the New Zealand dollar weakens against the Aussie after an investor has put money into an Australian syndicate, that will have the effect of increasing the capital value of the investment and the cash returns the investor receives when these are converted back to New Zealand dollars.

However if the New Zealand dollar strengthens against the Aussie, the reverse is true.

And because Australia has a capital gains tax, it will reduce the capital return investors receive when the building is sold and the syndicate is eventually wound up, assuming there is a capital gain to be taxed.

However Australia's capital gains tax regime does produce a benefit for investors in that it allows Australian syndicates to have fixed terms, providing more certainty for investors about how long their money will be tied up and when they will get their original capital returned, along with any capital gains.

New Zealand property syndicates usually do not have a specified termination date because if they did, they could become liable for capital gains tax, which means their investors usually don't know how long their funds will be tied up for.

But Australian syndicates are liable for capital gains tax anyway, so generally specify a fixed term, giving investors more certainty.

The Tower Central Trust will run for five years, although this could be extended to seven years if Trilogy believes that would be in the best interest of investors, and could also be extended to 10 years by special resolution of investors, but it cannot be extended beyond that.

Capitalising stamp duty

One of the figures potential investors should pay particular attention to in the trust's Product Disclosure Statement is the NTA (Net Tangible Asset backing) per unit (page 36).

This gives an NTA of A$0.95 per A$1 invested.

However that is achieved by capitalising stamp duty and certain other items, which has the effect of inflating the value of the property beyond it's purchase price.

Some investors would probably prefer to see these items reclassified as expenses, and because the property is being purchased at its valuation, using that figure along with cash reserves to determine gross asset value. 

When that is done, it reduces the NTA to just A$0.85, which is probably a more meaningful figure for investors because it takes into account all of the costs involved in setting up the syndicate, which unfortunately come straight out of the investors' equity, affecting the return they will eventually get when the scheme is wound up.

A general guide to the way property syndicates work is available by clicking on this link.

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