Bringing property syndication to the table

In my capacity as president of the Australian Direct Property Investment Association (ADPIA), I am writing to inject some balance and objectivity into the debate about the merit, appeal and relevance of property syndication raised by the Adviser Feedback section in Money Management, October 26.

By way of background, APDIA is the body that represents the interest of investors in and managers of property syndicates and direct property investments generally.

The opinions expressed by the four practitioners in your Adviser Feedback forum recently would suggest that property syndicates receive little support from the advisory network - although one of the respondents indicates that he would if the right one comes along. This lack of support is most emphatically not the case.

When you consider that direct property as an asset class has largely been ignored by advisers for many years, it is a testimony to the popularity of property syndicates that they have grown to a $3.5 billion industry in a relatively short period of time - basically over the last four years.

I point out that the vast majority of these funds have been sourced from financial intermediaries. Research indicates that more than 40 per cent of professional planners either use property syndicates or support the concept.

Syndicates are really only part of the broader property issue. The real issue is a lingering prejudice against direct property generally. This is principally because of the unlisted property trust debacle in the early nineties which was triggered by the inherent (and now obvious) mismatch between the liquid security issued (ie redeemable) and the essential illiquidity of the underlying asset (i.e. direct property).

This negative attitude is being condoned and even encouraged by some research analysts despite the evidence that direct property has been and is still making a solid recovery.

This attitude is strange given that in the United States and Europe, asset consultants are recommending increasing weightings towards direct property and global equities markets are currently highly volatile.

In this country, it should be also remembered that there has always been a significant underlying appetite for property among investors. However, over recent years this appetite has been excessively restricted by analysts and other gatekeepers.

As for property syndicates themselves, would major institutional managers such as Westpac, Macquarie and Deutsche be part of the property syndication arena without having first done extensive research into the structure and logic of the product and into the future of the property markets into which they are venturing.

Some of the issues raised by your four respondents show quite clearly that they have not really understood property syndication and that we, as an industry, have not provided appropriate educational material or communicated the benefits properly.

I would just comment briefly on two of the matters raised by your respondents.

Firstly, despite the underlying assets, the assumption that listed property trusts (LPTs) provide exposure to the property market is not entirely correct. There is a strong correlation between LPTs and the equities market which is not only well documented but certainly proven beyond doubt in the equities correction of 1987.

Conversely, direct property has a negative correlation with the share and bonds markets which makes it very attractive as a diversifier in any prudent, balanced portfolio.

Secondly, the perennial objection to the illiquid nature of direct property and property syndicates is unequivocally understood and accepted. However, in terms of syndicates, there is an exempt market currently in operation and the Australian Property Exchange is expected to be functioning by February of next year to provide an alternative exit strategy.

I appreciate Money Management bringing debate like property syndication to the table. We learn from the feedback provided by successful advisers and we in turn have an opportunity to put the case for our products.

Chris Morton

President

Australian Direct Property Investment Association