Syndicate woes for SPI investors
Property syndicates have had a surge in popularity over the last couple of years - but like all investments, they are not without risk. Some syndicates have turned into financial disasters for their investors.
One of these is the Hunua syndicate which owns an industrial property at Papakura in South Auckland.
Hunua was put together and is managed by SPI Capital, previously known as Secure Property Investment, a privately owned syndication company controlled by its directors Murray Alcock and Allister Knight.
Hunua was established as a proportionate ownership scheme in 2006 to purchase a 4.05 hectare industrial park, located just along the road from the Independent Liquor brewery in Papakura.
The property was valued at $11.8 million and the syndicate bought it for $12.375m. On top of that there were quite high establishment costs of $495,000, which took total costs to $12.87m.
Investors were offered 150 interests in the property at $50,000 each, which raised $7.5m and the remainder of the funding was provided by a $6.2m loan from ANZ.
One of the attractions of the property promoted to potential investors was that as well as its existing warehouse and factory buildings, it contained a large amount of vacant land which could be developed into new warehousing space, providing the potential to increase rental income and consequently, the property's capital value. Construction was to be funded by increasing the amount of ANZ loan.
In the offerer's statement, SPI Capital forecast that once the vacant land was fully developed, the cash return to investors would increase from seven per cent a year to 11 per cent, while the property's capital value was forecast to increase by $2.75m.
Of course that plan also brought into the syndicate some development risk.
That was to be mitigated to a degree by SPI's plan that "major construction will only take place in conjunction with the manager obtaining from new tenants signed agreements to lease relating to the new floor areas".
Construction of a new warehouse building commenced shortly after the property was acquired and completed the following year. But at about the same time the global financial crisis had a significant impact on the property market.
Demand for new space all but dried up and SPI has not been able to secure new tenants for further new buildings. Consequently, most of the vacant land has remained undeveloped.
The leasing market for the existing buildings also became much tougher.
The last few years have not been kind to the Hunua investors who have seen the income stream from their investment dry up and a large portion of their wealth destroyed. Ongoing weakness in the demand for development sites meant that last year the syndicate wrote down the value of the vacant portion of its property by just over $4m.
The syndicate's accounts for the year to March 31, 2012, show that bank debt was $7.88m, more than $1.2m higher than when the syndicate was set up. As a result of the combination of higher debt and falling property values, the net asset backing for each of the original $50,000 investor interests has fallen to $18,031.
At the same time there has been no growth in rental income since the syndicate was set up but a substantial increase in costs.
In the year to March, property operating costs increased to $176,216 from $63,858 the previous year, while "other" unspecified expenses increased from $14,257 to $167,955.
Alcock said most of the extra expenses related to improvements made to the roads and driveways on the property and to leasing incentives provided to tenants.
However, the sharp increase in costs meant the syndicate had negative cash flow of -$40,454 in the year to March and investors had not received any income distributions for the last two years.
Alcock said SPI outlined to investors a number of options for the future of the property including an outright sale and winding up the syndicate and a partial sale, with a substantial majority voting for the latter course.
SPI was preparing to sell off the vacant portion of the property but if potential buyers wanted to also buy one of the buildings, that could be considered, he said.
However, if a sale is successful, investors won't receive any of the proceeds as they are earmarked to go straight to ANZ to reduce the mortgage.
Alcock was hopeful that the resulting reduction in debt would allow income distributions to resume.
But the Hunua syndicate's's problems also highlight one of the key difficulties syndicate investors can face when their investment performs poorly.
To quit their investment and cash up, Hunua investors would need to find someone willing to buy their interests. The chances of them getting realistic value are slim, so they are likely to be locked in to this poorly performing investment for some time.
- Sunday Star Times