Last week I talked about the direct form of ownership. The flip side to this is indirect ownership where you invest in commercial property through a vehicle such as a listed property trust or syndicate. The latter have been much maligned over the years (some with justification) but I will talk about this later.

The listed property trusts are the ideal vehicle for those investors wanting to participate in the commercial property game and still have a high level of liquidity. As the trusts are publicly listed entities on the New Zealand Stock Exchange, their shares are able to be traded in the normal manner. This is obviously a huge advantage should an investor wish to exit the investment in a hurry.
The downside of this is that the trusts tend to perform in line with the general sharemarket's performance and thus, you can have the anomaly of the trusts property assets performing strongly in a property sense whilst the share price might be taking a hammering in line with general sharemarket conditions. This has in fact been the case in recent times.
However, if an investor is prepared to accept the sharemarket characteristics of those trusts then they do make sound sense.
Another indirect method of investment is through property syndicates. These are not listed entities and most take the guise of a partnership arrangement. Generally, investors purchase an undivided share in a property either through the issue of a proportionate title or a share. The title approach gives an investor a title registrable under The Land Transfer Act whereas a share is merely recorded in the share registry which is normally kept by the manager of the scheme.
Whilst there has been some negative comment on such syndicates, they are in reality no different to any other form of investment in that there will be good ones and bad ones.
In recent times, given the low interest (and therefore deposit) regime and the collapse of the finance company sector as a possible haven for investment, there has been a surge in the number of new syndicators suddenly appearing on the scene and offering double digit returns. How are they able to do this? By leveraging off the borrowings raised against the property. Whilst such financial engineering may seem like simply aggressive and astute use of borrowings, the risk lies in the assumptions that interest rates will not rise and that the tenant will be there for the term of the loan. Neither of these assumptions should be relied upon and I fear that there could be a day of reckoning for investors involved in such schemes.
Our own syndications operate on the basis that the scheme is completely sold down and carries no debt. Obviously, we are not then able to offer the sorts of returns promised by others but we also do not run the risk of putting our investors in the situation where the tenant has gone and they are still liable for a mortgage.
Next week, more about what to expect when you get into the commercial property game.

Until then, have a great week.