While private equity may offer a slew of investment strategies to Australian investors, recent speed wobbles within the sector, accentuated by regulator concerns over their liquidity, transparency, valuation practices, potential conflicts of interest, and governance concerns, warrant a timely direct comparison with syndicated property.
While real estate syndications are a type of private equity, it’s important for you to understand how they differ from other private equity counterparts.
Given that private equity in Australia – which has virtually tripled in size since 2010 to over A$66 billion - is often accused of understating underlying risks to investors, Azzet went in search of some guidelines as to how private equity operates and how it differs from property syndicates.
Private equity structure
For starters, a private equity (PE) fund is a pool of capital used to invest in private companies that fit within a predetermined investment strategy.
While there is no standard Private Equity fund structure, the internationally preferred structure is the limited partnership.
Here in Australia, a private equity firm (the General Partner or GP) pools capital from investors (the Limited Partners or LPs) into a fund to acquire and actively grow unlisted companies, improving operations and finances to increase value.
The GP invests the fund's capital, often using significant debt financing and then exits the investment through a trade sale, secondary buyout, or Initial Public Offering (IPO) to generate returns for the LPs.
The most appropriate fund structure for a private equity fund will depend upon a number of factors, including:
- The size of the fund
- The investment strategy
- The sector, industry and stage of development of target portfolio entities
- The tax resident status and level of sophistication of the target investor group
The choice of the fund structure is important because it can have major implications for investors and fund managers alike, including:
- Taxation treatment of investor distributions and the carried interest of the fund manager
- Australian Financial Services Licensing obligations
- Levels and complexity of regulatory compliance
- The extent of restrictions on the fund’s investment strategy and size
Together, these implications can impact revenue outcomes, internal rates of return and the composition of a fund’s ultimate investment portfolio.
The 10 largest private and growth equity funds with offices in Australia
- The Carlyle Group | $201 billion
- KKR | $153 billion
- Goldman Sachs Merchant Banking Division | $150 billion
- Oaktree Capital | $122 billion
- TPG Capital | $107 billion
- Bain Capital | $104 billion
- IFM Investors | $101 billion
- Bain Credit | $30 billion
- The Riverside Company | $7 billion
- Affinity Equity Partners | $5 billion
Property syndicate structure
While real estate syndications – which, based on ASIC data, grew from $30 billion in 2016 to $45 billion by 2022 - are a type of private equity, they differ from other options under the private equity umbrella in terms of structure, risk, tax treatment, and investor experience.
The popularity of syndicated real estate investments has fluctuated in response to market conditions and regulatory changes over the past decade.
However, the recent growth of e-commerce and the need for warehousing space resulted in a surge in syndicated industrial property and logistics investment.
Residential developments, particularly in major cities like Sydney and Melbourne, also continue to attract syndicate investors.
Offered by someone with a financial services licence, and requiring a product disclosure statement, a property syndicate is a scheme under which investors have legal title to real property as tenants in common.
Requiring a minimum deposit typically anywhere between $2000 and $100,000, investors receive a $1 unit for every $1 invested, which is calculated as net tangible asset (NTA).
Given that this structure allows for collective ownership, participants in a syndicate may not typically have their names shown on the property title.
Overseen by the ASIC, Property syndicates are first and foremost income streams that pay quarterly distributions to investors.
But given that investors are locked in for up to seven years, the only day the value of the NTA is important is the day the syndicate is wound up, when assets are sold and proceeds returned to investors.
Syndicators that buy and manage properties for the investors typically charge fees of about 2% of the purchase price and annual fees of 0.7-0.8%, plus a performance fee of 20% of returns above a hurdle.
Hopefully, there’ll be enough value to return to investors all of the money they initially invested, plus some growth.
Tickets to the dance
The lure of annual distributions of 5 to 7% and an overall return of 10%-plus annually over their lifetime has seen Australians invest around $45 billion in property syndicates.
The beauty of syndicated property investments is that it gives small investors access to a plethora of investment opportunities - commercial, retail or industrial properties - without the massive outlay and upfront costs like stamp duty, legal fees or capital gains tax.
Once you’ve made your initial capital investment, you can sit back and wait for your investment to start paying dividends.
In principle, the larger the property, the greater the potential returns, with large commercial properties, like suburban shopping centres, attracting and locking in long term, big name tenants.
These big names attract customers, which in turn attracts other tenants who are often willing to pay premium rents.
How to find available property syndicates
Research property syndication companies specialising in commercial or retail properties and check their websites for current investment opportunities.
While there isn't a single "best" property syndicate in Australia, Sentinel Property Group and Charter Hall are frequently mentioned as reputable players with extensive portfolios in commercial real estate.
Other notable companies in the property sector include Goodman Australia, known for its industrial properties, and Dexus, a leader in property portfolio management.
Things to consider
Interest rates, inflation, and economic growth play significant roles in the performance of syndicated real estate investments, with historically high interest rates having led to a cooling in property markets, affecting syndicate returns and prompting some investors to reassess their risk exposure.
In addition to seeking professional financial advice, some things you need to think about before taking the syndicated property investment plunge include:
Property type: Existing property or new development? With an existing property, you just buy and take over. For a new retail development, where the syndicate buys the land, builds the shopping centre and then leases it out, you can typically expect no return for this initial development period.
Management: What are the qualifications and management experience of the syndicate? You should be looking for a demonstrated track record of successful property syndicate management.
Capital: Is this a liquid investment? If so, your capital could be tied up for five, seven or even ten years. Similarly, is there any way for you to get your money out, if needed, before the end of the investment term?
Interest rates: Will interest rate changes impact the syndicate’s investments?
Yield: What’s the projected yield?
Tenants: The quality and stability of tenants will greatly influence overall returns.
Government policy: Would a change in government, or government policy, affect the syndicate?
Costs: Don’t forget to check the prospectus for associated costs such as insurance, management fees, marketing and exit fees.
Due diligence: It should go without saying that your solicitor or financial teams should be checking any prospectus before you sign.
Key players
These companies primarily focus on the syndication of commercial properties and are often a preferred choice for ultra-high net worth individuals and family offices.
- Bayley Stuart
- Abell Slattery + Aylward Real Estate Partners
- Peak Equities
- Forza Capital
- Sentinel Property Group
- Properties & Pathways
