If the trust is established to acquire an investment property, for example a commercial warehouse, generally the investors will receive a regular income stream from the rent paid by the tenant.
Trusts are an effective way for everyday investors to gain exposure to investment opportunities with higher price-entry points and the higher returns associated with these investments.
For commercial property investment, property trusts generally best suit assets worth at least $5 million – such purchases require a significant deposit. Many investors don’t have the financial capacity to purchase a commercial property on their own, however, through a syndicate or a property trust, the pooling of investor funds provides the ability to gain exposure to these assets.
Commercial trust vs direct commercial property investment
Large commercial property assets ($3m+) generally provide better returns than lower value assets. The smaller assets are subject to an increased amount of competition because they are more affordable to the average investor and the yields are, as a consequence, generally lower. Furthermore, the management fees are usually a higher percentage of the returns due to the smaller asset value.
By investing through commercial property trusts, higher value assets can be acquired, which generally offer better returns and higher quality tenants, such as multi-national businesses that tend to prefer larger value assets. Trusts are able to achieve better debt rates and cheaper management costs due to having large portfolios and applying the benefits across all assets under management. The increased efficiency of trusts generally mean that the net returns to investors are better than can be achieved by an investor on their own.
Wholesale vs retail funds
Property trusts are generally offered to two types of investors, either wholesale or retail, with the latter being offered less frequently because these demand more onerous compliance requirements. The law draws the distinction between wholesale and retail clients. The intent of the distinction is to protect individuals who don’t meet the wholesale investor definition.
What to look for when researching property syndicates
Property syndicates are highly attractive investment opportunities, however, like any investment, completing adequate due diligence is vital to mitigate the risks and help ensure the company you’re engaging will deliver what they’re promising.
The more information that can be gathered on the syndicate and the company managing it will help to choose a high-performing syndicate that provides large returns over an average investment that fails to deliver a reliable yield.
Some key questions to include as part of your due diligence process are:
- Is the property a good price?
- Are the tenants of sufficient financial standing to pay their lease obligations that underpin the investment?
- Is the property attractive to other users?
- Are the rents in line with the market?
- What’s the investment price versus replacement cost?
- How much debt is proposed to be secured against the property?
WHAT IS THE INVESTMENT PROCESS?
Investing in a syndicate is a different process to buying a property directly, and each syndicate or company may have slightly different processes.
All commercial property trusts will have a Product Disclosure Statement (PDS) outlining the terms and fees of the investment.
Generally investors are purchasing a unit within the trust and the trust manager who buys and manages the property delivers distributions per unit back to investors on a quarterly or monthly basis.
The PDS generally outlines the targeted returns and the targeted property/properties that the trust or fund intends to source. Other factors included will be debt gearing ratios, fees and the term of the trust.