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New Zealand Commercial Property …Popular Ways to Invest (Part 2)

12 March, 2012

Last month I discussed the pros and cons of investing directly (DIY) in New Zealand commercial property, as well as listed and unlisted property funds.

Another increasingly popular way to invest is through a ‘proportionate title’ property syndicate.   This is perhaps the most direct way to invest in commercial, next to DIY. Proportionate title syndicates are covered by the Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002.  This means that, instead of a prospectus and investment statement, the promoter of the scheme issues an ‘Offeror Statement’. This statement contains the key information about the investment. A proportionate title arises when there is more than one owner of a property and each person owns a share/s. Where there are multiple owners of the property, each owner is entitled to their own certificate of title for their share/s. Such titles are registered through the Land Registry Office and can be sold or bequeathed as with any other Certificate of Title.

Proportional property syndicates allow investors to invest directly in commercial property with a relatively modest level of capital – sometimes as little as $25,000 per title. Because the property is fully managed, an investor doesn’t have to be an expert in evaluating, owning and managing buildings. This means that the investment is relatively ‘passive’. Investors can also spread risk by investing across a number of syndicates.

Where property is owned in proportional ownership, each owner owns a specified share of the whole property. For example, an owner of 10%, would own 10% of the whole land and buildings. Profits and losses, including depreciation, are apportioned accordingly, for tax purposes.

It is possible for proportionate ownership scheme investors as a group to borrow part of the money needed to complete purchase of a commercial property. As such, particularly in the current low interest rate environment, most schemes will fund the purchase with a combination of borrowings and investor equity, in order to gear up the return to investors. Bank borrowings are often structured on a ‘non-recourse’ basis which means that, in the event of default, the bank can only recover the amount lent to the Nominee from the security given, being the property, and not from any of the subscribers/investors.

Property Managers generally operate a secondary market to facilitate sales for an investor who wishes to exit. However, there are no guarantees of a quick sale because, as with owning your own building, this will depend upon the state of the market and the building performance / leases at the time. As such, proportionate titles should be generally considered as a long-term investment of at least 5 years.

Each investor in the scheme has to sign a detailed agreement with the Promoters of the investment opportunity binding themselves to common rules that will affect every investor. Such rules may commonly prevent an individual owner mortgaging their proportionate title as collateral security for other investments or business.  They will also usually be accompanied by a detailed management agreement with a professional property manager.  They control how a proportionate title share is sold. For example they require a selling investor to first offer their share to the other investors before sale to members of the public. They may prevent individual owners from dealing with the tenant and require that to be done by the professional property manager. They will also provide how decisions of the owners are to be made and when and how meetings are to be held.

In some special cases, investors with at least $500,000 can also invest in more ‘intimate’ syndicates with a handful of investors. These typically include a development, or value-add component and, while they may be perceived as speculative, the potential returns can be significant. Let me know if you are interested in this type of investment as they are often made available directly to a pre-qualified database instead of being publicly advertised.

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