Managed property schemes are often referred to as property syndicates. However, there are a few things that differentiate managed investment schemes from simple syndicates.
Learn how syndicated property investments work and what makes them different from the typical managed investment property funds.
Unlisted property scheme versus property syndicate
Fund management companies usually refer to their unlisted property investment products as property syndicates so many retail investors may automatically think of professionally managed funds.
By definition, however, property syndicates take on a more basic form because it does not always involve professional management. It can also include residential properties as opposed to most unlisted property schemes, which commonly exclude it.
Unlisted property schemes
Unlisted property schemes are medium and long-term indirect real estate investment products that are neither listed in the Australian Securities Exchange (ASX) nor regulated by the Australian Securities and Investments Commission (ASIC). However, ASIC has guidelines that unlisted funds must follow in the creation of its product disclosure statements (PDS).
These managed schemes offer investors the opportunity to earn distribution income from local and overseas retail, commercial and industrial properties for a fixed term. Distribution continues until maturity when the fund is wound up.
Unlisted property investments may also be held in perpetuity, but have an exit strategy for investors who want to pull their money out of the fund.
ASIC requires fund managers to acquire an Australian Financial Services (AFS) license for managed property investments, no matter how few its fund members are.
Property syndicates may be direct or indirect property investments and they don’t require professional management. The most basic property syndicates are made up of a group of mum and dad investors who agreed to combine their capital to purchase and manage an investment property.
The underlying property in syndicates is usually a single residential property. Investors may also select any other type of property for investments, including units of unlisted property schemes and shares in real estate investment trusts (REITs) or Australian REITs (A-REITs) or a combination of both.
In its most basic form, property syndicates are single property direct investments purchased by a small trust composed of up to a maximum of 15 members.
How property syndicates work
Property syndicate is a form of investment wherein a small group of investors collectively purchase and co-own a property as a long-term passive investment.
As co-owners, each member is entitled to income from rental fees and profits and are liable for its expenses. They are also responsible for management decisions proportional to their stake in the investment.
It may sound like a typical investment held within a trust, but ASIC explicitly states that property syndicates are not trusts because they have different arrangements, taxation and benefits.
Consider the following elements that make up a basic syndicated property investment:
- Asset selection, ownership and management
- Income and expense
- Early withdrawal
- Syndicated property arrangement
Syndicated property investments offer flexibility in terms of how it can be structured. Syndicates may take the form of joint ventures, unit trusts, small property syndicates or fund managed schemes.
The type of property investment the syndicate plans to engage in would determine how it should be structured.
For instance, a group of retail investors may engage the services of a fund manager to create and manage a syndicate that caters to their investment goals while taking full control over all aspects of the investment.
Small-scale syndicates may be held in perpetuity if held within a corporate trust. It may also be a fixed long-term investment.
Members of a property syndicate would ideally know each other and are like-minded individuals who share the same (or similar) investment goals.
A typical small-scale syndicated property investment is composed of retail investors who may or may not have the financial capacity to purchase an investment property. By creating a property syndicate, these members will be able to purchase a property and share income and risks.
Any retail investor may inject their funds into a syndicate provided they were given a PDS and that all members consent to the terms set in the syndicate agreement.
Each member of the syndicate must own at least five per cent of the total value of the syndicate, regardless of their role in managing the investment. If a syndicate decides to employ the services of a fund manager, the manager must also be a member and own at least five per cent of the total value of the syndicate.
Asset selection, ownership and management
Property selection may commence before or after the syndicate is set up—as long as all the investors are aware of the type of property they are investing in and all the risks involved.
The members or fund manager should have an idea of the type of property to invest in (residential apartment, retail or commercial property, etc.) before establishing the syndicate. They may select and purchase the property with the approval of all members or create an investment structure with a specific type of property in mind for selection. Purchase must be finalised within six months of establishment.
If the property was purchased prior to establishment, the syndicate must provide its exact location—including the complete address—for potential investors to assess. If the property will be purchased after the funds are pooled, the syndicate must provide the areas or locations where they intend to purchase a property.
This is important because regulations require that syndicates provide its investors' ample information about the investment property.
Once a property is purchased with the collected capital and the syndicate is established, each member becomes a co-owner of the investment property or a trustee and beneficiary if the investment operates within a trust.
Income and expense
As co-owners and beneficiaries of the investment property, members should receive a distribution of income and tax concessions from the property. Maintenance and management expenses should also be shared.
It is important to ensure that all members are aware of gearing, borrowing, transactions and distribution practices prior to joining the syndicate so they know what to expect come distribution time.
Syndicated property investments are passive long-term investments by definition, which means members are aware that they’re in it for the long haul. However, personal or economic circumstances may push a member to seek early withdrawal.
Syndicates should have a course of action and exit strategies that are indicated in the trust deed, syndicate agreement and other legal documents that members must agree to.
Syndicated property agreement
The syndicated property agreement is a legally binding contract that all members of a syndicate must agree to and sign.
This document contains all the necessary information with regard to the investment and roles and responsibilities of each investor.
Is an AFS license required?
Some sources say that an AFS license is required for the establishment of a syndicated property investment, while others say these are exempt because of the small-scale operations. Which is it, really?
Answer: The AFS license requirement is determined by the syndicate’s structure and how the investor or fund manager will gather investors.
No advice, no AFSL
If the syndicate is simply composed of small group retail investors who will establish, select, purchase and manage the investment property without enticing other potential investors to invest, an AFS license is not necessary.
The fund manager would also not be required to acquire an AFSL as long as all services rendered have nothing to do with financial advising.
AFSL is necessary
If the fund manager or any member of the syndicate will promote the investment or advise potential investors to join the fund, the active member should have an AFS license or is acting in behalf of someone within the fund who does.
Suggestions or recommendations may be considered as a form of financial advice, so each member should still be careful and read the Corporations Act to determine what is considered as a form of ‘financial advice’.
If in doubt, get in touch with a qualified financial advisor.
This information has been sourced from ASIC, ASIC’s Moneysmart and Australian Investors Association.