Syndicated commercial property investment, is generally regarded as only suitable for those investors who can afford to lock away their money for the long term, have a good knowledge of the property/commercial property market and the amount invested will not represent a major part of their ‘investable funds’.
These types of investment are not regulated and therefore carry no investor protection, should they ‘fail’. We identify below the steps LPS take to minimise the risk of this, but there are limited guarantees and this section aims to identify the risks to you as a potential investor (or adviser).
LPS in conjunction with its advisers, undertakes Due diligence on each property for syndication and carries out the following steps:
- Full financial appraisal of the cost of the property, the proposed rental yield, purchase costs and on-going costs.
- Consider the tenancy covenant and proposed rental income in context of the market rent and purchase price of the property
- Consider the level of any borrowing against the rental income, to minimise the risk of any void period creating a liquidity issue for the syndicate
The principle risks are described below:
- Market Risk – this is the market value of the property itself and will, like any asset, fluctuate over time and with economic conditions
- Tenancy Risk – this is the risk that the tenant may be unable to meet the obligation of the rent. This is usually described as the ‘covenant’ risk.
- Sector Risk – this is the risk that the sector that your tenant operates in, suffer a decline. In addition, risk is increased if a portfolio of properties are all exposed to one sector, which then suffers an economic downturn
- Geographic or location risk – certain areas of the country may be heavily reliant upon one type of industry, or even one employer – if that particular industry or sector suffers, this may cause a general decline in the economic activity in that area, thus increasing the risk of tenant default or void.
- Liquidity – commercial property investments are generally illiquid, because the sale (or realisation) of the investment is likely to be a lengthy process. In a syndicated investment, it also requires a collective and majority decision to sell, although the trust deed does have provision for certain events