Are property syndicates the next big bubble?

24 February 2016

Phillip Arnold, Managing Director, Phillip Arnold Auctions and President of NAVA, discusses the popularity of property syndicates for those wanting a foothold on the investment ladder.

2015 was an incredible year for the property market but in a year in which Government buy to let policy, the shortage of housing and the rising costs of getting on the now mythical property ladder will all have a huge impact on the sector, what’s the next big thing in property?

Landlords, and those wanting to get into the rental investments, will have to think outside the box, overcome hurdles and jump through some scary hoops to make their property dreams come true.

But there is one way of getting on board the property train that has reduced initial investment, spreads the risk and still gives investors a way to grow a portfolio of quality properties they couldn’t achieve on their own. Yes, you’ve guessed it, I’m talking about property syndicates.

Whether an investor wants to put their money into residential investment property or commercial properties such as retail units, restaurants, and offices, there are syndicate opportunities out there for almost any kind of prospective landlord.

Syndicate basics
When considering whether buying in a syndicate structure is right for an investor they need to ask themselves a few basic questions to determine if it’s right for them: How much capital needs to be invested? How much profit could be generated? Over what term will a return be realized?

Assuming an investor decides the answers to these questions are satisfactory, they can look for syndicate opportunities and select one, or more, that suit their investment goals.

Bear in mind the investment is a joint one, with a number of other similarly focused people and the right investment framework and legal contracts will need to be drawn up. Specialist law firms are available and often come recommended by property consultants or the lawyers have worked for other syndicate members previously and are experts in this type of transaction.

Some key advantages
There are many advantages of syndicate investing, but ultimately the advantages are only advantages if they suit an investors objectives for entering in to this type of arrangement. However, there are some clear positives, but the list below is not exhaustive as each investment needs to be assessed on its own merits.

Syndicates enable smaller investors to participate in bigger and better properties and to spread the risk of such investments, as they are only one of several people involved. If an investor has enough capital, they can also spread the risk further by investing in several property syndicates.

When a syndicate is established it’s done with no personal liability, meaning that if the worst came to the worst, an investor will only lose no more than their initial investment

There’s a tremendous amount of talk about buy to let taxation at the moment, and one key advantage syndicates have is that they are tax transparent and have other tax reliefs associated with them. They can also be used as part of a longer term pension fund and can, for example, be included in SIPPs.

Commercial syndicates
I mentioned earlier that commercial syndicates had several advantages over the more common residential property investment. With a commercial property, landlords can generally expect longer leases, which in turn means fewer void times, when the property has no tenants. Lease terms can also have longer severance penalties and are often on a full repair and insurance basis.

This type of syndicate is very much worth considering, particularly when you look at the rise in the value of commercial office space as one example, and the returns that can be achieved. After all as an investor only achieves their share of any profits, they want to maximise those returns at the exit.

How to exit a syndicate
There may be occasions when after a period of time an investor wants their money out of the syndicate early. When this occurs, the scheme manager will alert other members, and the shares are usually bought by other investors in that syndicate. Or the investor themselves could find a buyer for their share. This again is another advantage as funds that would normally be tied up in privately owned property for some considerable time, can be released a lot quicker. Of course these exits will be subject to the terms of the contract that have drawn up by the legal advisors.

The future
With high yields still being seen in the rental sector and demand for property outstripping supply, it’s no surprise that syndicates are growing in popularity. With further taxation of the buy to let sector on its way, grouping together with a number of like-minded property investors, seems a logical way for many to generate longer term income, without the downsides of investing alone.