A boutique niche for Mr In-Between

The old cinema at 87 Main Highway, Ellerslie, Auckland
The old cinema at 87 Main Highway, Ellerslie, Auckland

KCL Property has launched a boutique property syndicate aimed at people with at least $250,000 to invest.

In some ways, the property being syndicated, a former cinema in the Auckland suburb of Ellerslie, is Mr In-Between. With a purchase price of $5.1 million, it is smaller than most recently launched property syndicates, which tend to be around to $10m or more, but it is bigger than most of the commercial properties, usually priced under $2m, that are popular with individual investors.

The minimum investment of $250,000, is far higher than the least amount required for a piece of the action in most syndicates, which can be as low as $20,000 but is often in the $50,000 to $100,000 range. And with only $3m being raised, the syndicate will have a maximum of 12 investors, compared with many which have more than 100.

The main advantage of this boutique arrangement is in the yield.

The building is a retail premises, with two shops on the ground floor and a large gymnasium taking up the two upper floors.

Retail properties on a smaller scale in Auckland's central suburbs are being enthusiastically snapped up by private investors.

Such is their enthusiasm for these properties that they are commonly being purchased at prices which provide rental yields of 5-6 per cent and, in some cases, less.

That means anyone looking for a decent yield to provide them with a respectable cash distribution would probably need to look at one of the much larger syndicates, such as the big supermarkets or hardware outlets leased to blue-chip retail chains, which have been popular with syndicators lately.

But, with growing numbers of investors taking money out of term deposits and putting it into property syndicates, the increasing demand for such blue-chip properties has forced their prices up and their rental yields down.

KCL director Phil Hinton said yields on prime syndication properties (built to a high standard in attractive locations with strong tenants and robust leases in place) had probably fallen by 0.5 to 0.75 per cent over the last year or so.

So a prime property that would appeal to risk-averse syndicate investors might achieve a yield of 7.5 per cent, "or even less," he said.

Hence Mr In-Between.

It is forecast to achieve its investors a gross, cash return of 8.5 per cent but investors, of course, must weigh up the risks involved.

These are usefully outlined in the property's valuation report, prepared by Patrick Ryan of CBRE.

The building is a former cinema which was built in 1925 and used for various purposes over the years. It was substantially refurbished, which included seismic strengthening, in 2010-11.

That means it "presents to a newly refurbished standard with limited CAPEX required in the medium to long term," the valuer's report said, adding that the seismic strengthening "provides comfort and peace of mind for both tenants and investors".

It is also well located, close to several major office park developments as well as the southern motorway.

And it has multiple income streams, from the gym and the two ground-floor shops and from renting space at just over $50,000 a year for a large billboard on one wall which is visible from the motorway.

However, while there are several tenancies, the gymnasium provides 87.4 per cent of the property's net income.

According to the valuation report, demand for space in the vicinity is "strong for ground-floor retail tenancies, however limited for the upper levels."

The report said it could take up to 12 months to fully lease the upper floors should the building lose the existing gym as its tenant.

So that is likely to be the main risk prospective investors will be weighing up, along with all the usual ones such as likely increases in mortgage interest rates, the potential lack of liquidity involved in syndication investment and the general risks associated with the property market.

Hinton said that, although most recent syndications were for larger properties, putting smaller properties into syndicated ownership had been fairly common in the past.

Many investors were looking for opportunities to invest in the smaller properties and KCL had received good interest in the Ellerslie property, so the company was likely to undertake further syndications of similar-sized properties in the future, he said.

Many investors also preferred to invest in something with a smaller number of co-owners rather than the large pool of investors typical in most syndicates.

The Ellerslie syndicate was being structured as a proportionate ownership scheme and its governance rules would be the same as for larger syndicates, with 75 per cent of investor interests required to approve any major transactions involving the property, Hinton said.