$10,000 for a slice of Oyster PIE and a pre-tax return of at least 7%

$10,000 for a slice of Oyster PIE and a pre-tax return of at least 7%

Property syndicator Oyster Group's new investment fund is offering a return that's slightly less than recent property syndicates but a bit more than the major NZX-listed property entities.

The Oyster Direct Property Fund is forecast to provide an initial  pre-tax cash return of 7% pa, with distributions to be paid monthly.

That's a tad less than most recent property syndicates, with Oyster's most recent syndicate - the Cider building in Auckland, offering an initial pre-tax return of 7.5%.

But it's also more than the income returns offered by the major NZX-listed property vehicles, which had gross dividend yields (at Tuesday's close) ranging from 4.9% (Precinct) to 6.3% (Stride).

The fund is unusual in that instead of investing directly in properties that it would own, its initial investments are property owning syndicates that are managed by Oyster.

The fund will take partial stakes in eight Oyster syndicates, which between them own nine commercial buildings, five of which are in Auckland.

The properties range from supermarkets to office and industrial buildings, giving the fund a spread of underlying investment properties by both type and location

The fund will receive its share of the monthly cash distributions that each syndicate pays out to its investors, and after deducting its own fees will make monthly distribution payments to its own investors.

It is being structured as a PIE scheme and the minimum investment is $10,000, which is substantially less than the minimum investment required by most syndicates.

The fund is not taking on any debt to buy into the syndicates, so its distributions should be relatively stable over the medium term and will reflect the returns provided by the underlying syndicates in which it invests.

But there are two other important factors potential investors should consider - how they cash up their units if they want to withdraw from the fund, and how the nature of the fund could change over time.

Investors wanting to cash up could sell their units in the fund privately, although that may prove difficult.

They will also be able to request the fund to buy back their units, which it will do, provided it has sufficient cash available.

The fund will continue indefinitely and it won't have the ability to cash up the syndicates it is investing in.

It will be able  to sell the individual shares it owns in syndicates but it may be difficult to find buyers for these, particularly if market conditions are unfavourable.

So, essentially, it will be holding illiquid assets, which will affect how much cash it has available for investors wanting to redeem units.

Oyster has devised a partial solution to that problem by requiring the Fund to hold cash equivalent to 0.5% of its net asset value, to be used for redemptions.

If the value of applications for redemptions exceeds that cash reserve, redemptions will be paid out on a pro-rata basis until the cash reserve is sufficient to redeem the balance.

Oyster will be able to suspend redemptions to prevent a run on the fund and no redemptions will be allowed in its first year.

Investors will buy into the fund at $1 per unit.

For redemption purposes, units will be valued at the fund's net asset value divided by the number of units issued.

The fund will have initial set up costs of $1,236,467, which is 7.2% of the $17.25 million being raised and this will be written off over five years, which will affect net asset value.

Investors should also consider how the nature of the fund could change over time.

Oyster intends to grow the fund over time by seeking more money from investors.

If  the cash inflows from investors taking up units are sufficient, the fund will likely become a partial investor in new syndicates Oyster puts together and it may also buy its own properties directly.

So eventually it could own a mix of shares in syndicates and a portfolio of its own properties.

Although it won't borrow money to invest into syndicates (each syndicate will almost certainly carry its own debt), it may use bank funding to purchase any properties its buys directly.

So over time the structure and performance of the Fund could change.

Click on the following link for the fund's Product Disclosure Statement:

PDF iconOYSTER_DPF_Replacement_Product_Disclosure_Statement_18_May (1).pdf

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This syndicate is questionable. It's effectively a double dipping exercise by creating a fund that owns nothing other than existing funds that people have already paid for. Great for the managers who double their income but useless otherwise.
Reminds me of the so called +AAA mortgage debacle in the USA during the GFC where sub prime -BBB mortgages were bundled up and became +AAA by sleight of hand. Not for me.

I very rarely agree with you but in this case, definitely. The lack of liquidity surety is a concern let alone the double dipping fees. It's a cheaper way into the syndicates I suppose and might be good for some, but not for me.

agree with alot of what has been said, but every time I look at these syndicates I can't help but think they are too good to be true...
For instance they are all generally 50% lvr, the 50% loan is generally interest only,the rent is usually high enough to cover the interest,the mgmt fees,and the rest goes as monthly distributions to the investors.this part I don't mind. It's the initial or setup fee that gets me!

some other thoughts:
-alot of the funds are existing, but there should be some charge for the new fund setup, in this case its around 7%, so for every $1 you put in you are $0.07 down already. Although they do mention that this will be spread over 5 years, so it might be less. As they plan to grow the fund to 100 Mil, it will initially be 17 Mil. here they will need more investors to get it to that point, so that is not a certainty that the fees would be reduced.
-there is a performance fee but the fund has to be growing by >9%(including distributions) to come into affect, this seems fair enough
-the fund carries 0.5% of the fund so people can exit the fund. You would not want much demand for this else you might have to get in a queue, so this would be a liquidity issue. Also you can't cash out until June 2017, they call them redemptions.
- Oyster have 4000 investors on their database with 800 invested.
- there will be the option to reinvest as they plan to grow the fund going forward from 17 Mil to 100 Mil
- they mentioned somethiing about owning it outright so that would be no loans which would be great from my perspective, but not sure what he meant by that exactly.
- there is 9 properties initially(and its only a part share in as some of these properties are already in their own fund with investors e.g. cider house one is 6 Mil share, its worth 92 Mil). This 6 Mil, I believe, is the 6mil in equity oyster bought into cider house, when it was offered to investers and they are putting it in this fund. They say they know these properties well.
- the average walt across the 9 properties is 10 years
- its a PIE investment for tax purposes which is 28% v 33% for some