Property syndicates and property trusts – when should you use these?

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Reproduced with permission.

Investing in property, especially commercial property, can be a very costly exercise. Not only do you have to find the money to purchase the property but refurbishments, fit-outs and vacancies can create a huge problem for your cashflow.

However, if you want to invest in commercial property but don’t have the money and/or expertise to go it alone, there are two alternatives; property trusts and property syndicates.

Property trusts
A property trust purchases commercial property and then manages it on behalf of the investors. There are two types of property trusts – listed and unlisted.

A listed property trust, as the name suggests, is listed on the Australian Securities Exchange (ASX). In a listed property trust, you are able to buy and sell your units in the trust, just as easily as you can buy and sell shares.

However, an unlisted property trust is not listed on the ASX. It is more difficult to sell your units in an unlisted property trust as there is no formal market for you to buy and sell the units.

Some trusts focus on a particular sector of commercial property, for example, retail, industrial or office, whereas others are diversified and have a mixture of property. For example, the Westfield Group is one of the best-known listed property trusts. Its focus is primarily on retail property, in particular, shopping centres.

Listed property trusts are in some ways better than owning property yourself (also called direct property investment).

> Quick and easy access to your capital

Unlike direct property investment, which can take weeks and even months to sell your property, you could sell your units in the Westfield trust in a matter of minutes (if you were realistic with your price).

> Low cost of entry

Property trusts provide you with the opportunity to buy a share of a large commercial property portfolio for a relatively small amount of money (for example, $2000). Compare that to direct property where you need hundreds of thousands of dollars to buy property. If we used Westfield Group as an example, you could purchase $2000 worth of units and this would entitle you to a portion of the profit from the Westfield shopping centres and any other activities they might be involved in.

> Low cost of entry and exit fees

The general rule of thumb for buying and selling property is you need to add an extra 6 per cent on top of the purchase price to work out how much the total cost will be for you to buy a property.

When selling property, you need to allocate 3.5 per cent of the selling price to selling costs such as real estate agent’s commission, advertising, banking and government charges. Compare this to 1 per cent buying costs and 1 per cent selling costs if you go through a stockbroker to buy units in a listed property trust. It can be even cheaper if you do it yourself online.

> Easier to diversify and spread your risk

When purchasing property, there is often a large sum of money put towards just one property.

With listed property trusts, you can easily diversify your funds and consequently your risk. For example, you don’t have to put all your money into the Westfield trust. You could put just 25 per cent into Westfield, another 25 per cent of your money towards a property trust that focuses on industrial property, a further 25 per cent in an office property trust, and another 25 per cent into a trust that invests in airports (the percentages and sectors I have used are just examples. There are a myriad of trusts available to invest in and you can allocate your funds to suit your own needs).

> Exposure to a high-yielding sector

As I outlined in a previous article on commercial property, this sort of property presents investors with higher yields than residential property. The opportunity to achieve a relative higher return for your money is very appealing to investors. Be aware that the higher return comes with a higher risk. The risk with property trusts is that their value can drop as quickly as share prices, leaving investors with a lower level of capital.

> Appealing to retirees

Listed property trusts are particularly appealing to retirees as they have to distribute all their profits. Rather than investing, for example, in a listed company such as BHP, which might decide to distribute only half of the profits to investors and use the other half to expand the company, trusts have to distribute all their profits. This is great for retirees who tend to be more concerned with income than capital growth.

Property Syndicates
Property syndicates are quite different to property trusts. A property syndicate is basically a group of people who pool their money and generally develop and lease out property and then sell it.

Let’s use an example to clarify the difference between syndicates and trusts, using a fictitious property syndicate, the ACME Property Syndicate.

The ACME Property Syndicate is 20 investors, who have each put in $100,000 so as to buy some land, build a small shopping centre, lease it out and sell it after five years. At this time, the investors will hopefully get all their money back plus their share of the profits.

From this brief example, some differences are obvious.

In the above example, you needed $100,000 to invest in the syndicate whereas you could buy into a listed property trust for as little as $2000.

In the property syndicate you may have to wait for up to 10 years to make any profit. In listed property trusts, you can buy and sell units within minutes.

In the ACME property syndicate, there are 19 other investors that you have to deal with. With a property trust, the management group takes care of the day to day activities and the administration.

To be listed on the stock exchange, all companies must pass rigid tests. This is not necessarily the case with all property syndicates.

If investing in property trusts or property syndicates seems appealing to you, please get some independent professional advice before you invest your hard earned money.

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