Making a direct hit withn syndication

Syndication has become the darling of the direct property investment sector, with new schemes coming to the market almost every month. John Wilkinson takes a look at what is on offer and why investors are increasingly attracted to the sector.

Syndication has become the darling of the direct property investment sector, with new schemes coming to the market almost every month. John Wilkinson takes a look at what is on offer and why investors are increasingly attracted to the sector.

The syndicated property market is now worth between $2 and $3 billion in total with some significant buildings now owned by numerous inves-tors.

Syndicated property has almost become the late nineties replacement for Listed Property Trusts (LPTs), according to major player MCS Property. Research by MCS shows that the correlation between LPTs and direct property is only 11.7 per cent over a 12 year period starting in September 1985.

MCS managing director Julius Colman argues LPTs are so closely re-lated to the share market that they have ceased to be a true property investment. The company's research also shows the correlation between the All Ords and LPTs is quite strong at 77.2 per cent over the 12 year period.

Colman says when direct property investment is compared to the All Ords, within the same time frame, the correlation is -72 per cent in property's favour.

"Property has an unique quality," he says. "It is the only asset class that moves in a negative correlation to shares and bonds."

It is this argument that is used by syndicators for adding direct property to a portfolio as a means of risk reduction.

Not that direct property is without risks. It is extremely cyclic. Most of those connected with property investment would agree the mar-ket is on the rising side of the current cycle, with perhaps a couple of years to go before a correction.

The 1987 stock market crash saw property run for almost three years before the downturn occurred, that time in a dramatic fashion.

Colman sees syndication as a means of investing in direct property "without the warts". The warts he describes includes management of the asset and liquidity.

Property management is handled by the syndicator. Companies like MCS, which owns 24 shopping centres around the country, are major land-lords for the big retailers like Coles and Woolworths.

"We are talking to these major tenants on an equal relationship, something an individual owner cannot do," Colman says.

Liquidity in direct property, however, has always been a problem. To exit a direct commercial investment usually takes months rather than weeks. Syndicates are no different.

To resolve this negative, MCS, with Austock, has created an exempt property market to enable investors in syndicates to trade their units.

So far, MCS is the only player in the market, but Colman believes this is just the start. He is confident that other large players in syndicated property will join. So certain is he that MCS has regis-tered the name Australian Property Exchange and APX.

"We would love the day when property has its own exchange. It would mean half the world's investment assets (property) could be traded like other asset classes," he says.

MCS will probably never launch another syndication that cannot be listed, Colman adds.

Enthusiasm for a property exchange was not quite so forthcoming from Macquarie Bank. Its head of direct property Richard Cutler admitted it is considering the Austock exempt property market, but it "was far from a decision".

"MCS has set the pace in this area, but we see the exempt market as just an additional exit strategy for syndicates rather than liquid-ity," he says.

"We think it is a positive step, but in the embryonic stage."

Cutler says the market must meet further requirements on how it be-comes structured and on the rules defining exit strategies.

"If there is too much trading, then syndicates become the same as LPTs and that is not in anybody's interest," he says.

To avoid this, investors will have to be educated, Cutler says. It will mean teaching them that syndication is a diversification strat-egy to LPTs and investments in other asset classes such as equities.

Investors may only need to learn about exiting a syndicate as most recent offerings have been quickly taken up.

The boom of the syndication industry would almost seem to be unstop-pable, but property cycles have a habit of taking the edge off the asset class.

Colman, however, believes syndicates can ride through the peaks and troughs of the cycle. The only problem he can see in the foreseeable future is that of acquiring quality property.

"We are seeing a rise in value and a fall in yields and we are not comfortable in buying in that market, especially in retail," he says.

APN Funds Management executive director Howard Brenchley says that while many syndicates favour retail, there are threats to this sec-tor.

"There is always threats of oversupply in retail. While the big su-permarket chains are good long-term tenants, the smaller shops tend to fall over in a recession," he says.

"Syndicates will still favour retail because of the tenant mix and values, but there will be some syndications that fail because the centres no longer work in their particular area."

The syndication sector is branching out into other property areas. Macquarie has successfully completed an office syndication. Cutler says the Sydney syndication was oversubscribed due to two good ten-ants with strong leases in the building.

APN is about to close its retirement property syndication, while Hall Chadwick Securities has launched a retirement home development in Brisbane as a syndicate offering. It hopes to raise $5 million.

Other property sectors such as industrial could be further areas for syndications, Brenchley says.

"Industrial suits syndicates with 10 year leases and yields of about 9 per cent, but the problem is the quality of what is available and its sensitivity to economic downtrends," he says, adding that this is something retail seems to avoid in recessions.

Brenchley believes the syndication industry will endure some future shake-outs "to weed out the dross".

Cutler says Macquarie is still very much committed to the syndication sector and is actively looking for properties to $40 million plus, but is in no hurry to buy unless it finds quality stock.

Colman believes syndicates will continue to provide true property investments in what is the world's largest single asset class.