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Caution urged on property syndication investments

PROPERTY players have warned that the rapid growth in property syndication is attracting fringe players looking to capitalise on the strength of the market.

There are concerns that investors are being hawked risky offers in a heated market. This has raised the potential for parallels to be drawn with the recent finance brokers scandal and the liquidity issues of the property trust market a decade ago.

The issue coincides with a growing focus on the retirement market, as this burgeoning sector seeks stable investments that can achieve strong returns.

However, the industry has played down the immediate risks because of the increasing sophistication of investors and the tougher regulations surrounding modern property investment structures.

Glenmont Properties managing director Simon Toovey said after more than four years in the

industry developing a $177

million portfolio his company

was increasingly seeing offers which caused him concern.

“What makes me nervous is the second-tier syndicators that are buying properties that have already been rejected by people like us.”

The ‘second-tier’ syndicators to which Mr Toovey is referring are securing properties of a lesser quality, often packaging them up with a couple of high profile quality properties.

“There is a temptation for these operators to put a multiple property fund together with more than one property in the prospectus,” Mr Toovey said.

“They have one or two stars, one or two average properties and one or two dogs.”

However, Mr Toovey said it was not all bad and that quality products were recognised.

“If you look at the sector, people are looking for track record,” Mr Toovey said.

“People are disinclined to trust the new kid on the block.”

Property Investment Research managing director Richard Cruick-shank said investors needed to remember that higher returns inevitably mean bigger risks.

“A redundancy factor must be built into a high yield,” Mr Cruickshank said.

“There are a few syndicators that are under-performing.

“I think the outlook for synd-ications is generally fair.

“And it’s not like the unlisted funds, which ran into liquidity problems when the investors wanted their money back.”

In the early 1990s, panicked investors, in part, drove the sus-pension of many unit property trusts as rising interest rates killed off an overheated property market.

An investment in a syndicated property is a long-term investment and with only the small Australian Exempt Market on which to trade units, it can be difficult for investors to get out of a scheme.

The Australian Securities & Investment Commission called for comments on an application for the Australian Property Exchange (APX) to be approved as a stock exchange earlier this year.

If the APX is approved it will provide another avenue for investors to trade their syndicate investment and improve the liquidity profile of this type of investment.

“People go on and on about liquidity, but most of the investors are in their late 40s, 50s and beyond,” Mr Cruickshank said.

Australian Direct Property Investment Association president Greg McMahon said there were several different syndications that offered withdrawal rights.

“Like every investment there are going to be ones that work out well and ones that don’t,” he said.

“It just depends on the risk profile of the individual project.”

With interest rates on the rise and a burgeoning market, investors need to undertake careful research ahead of making any commitment.

“I suppose like any investment you’ve got to look at the particular property,” Bryant Church certified practising accountants partner Geof Church said.

“And if it’s leased out you’ve got to look at the nature of the lease and the strength of the tenant.

“You also need to know how you get out, which is what I call the escape clause.”

For the successful operators in the market the only insurance policy when the poorly managed schemes get into trouble will be their track record in this market.

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