10 Feb 2023
Words
Christine Retschlag Informer 105
Syndication Nation
When it comes to buying into syndicates, most Australians automatically think of racehorses, or even a weekly Lotto ticket. But syndication is a model also popular in the commercial property industry.
At its core, syndication is a simple concept: several partners coming together to collectively purchase a business. And while there are many benefits of syndication, there are also some challenges of which to be aware.
TDK Management, which is headed by Troy Edwards, Damien Windle and Kelvin Cotter, own and operate multiple permanent residential Management Rights.
Edwards says their model is similar to other syndicates with the exception that they provide a supervising mentor who can serve as a link between working and silent partners.
Syndication enables the working manager to live in a manager’s unit, receiving a good salary as well as a percentage of the Management Rights’ net profit paid monthly.
“For a little extra responsibility and workload, the working manager can receive a higher return. Investing with a syndicate allows the purchase of a much larger Management Rights, with higher net incomes, hopefully generating a higher return-on-investment,” he says.
“You don’t have to work alone as the partnership may engage additional part-time staff. The working partner can also rely on TDK for mentoring, and syndicate partners are very often exmanagers with their own experience.
“Being able to secure highly sought after off-the-plan (OTP) MRs for the first time is also a possibility given the wealth of experience of TDK and other partners in successfully launching OTPs in the past”.
A barrier to entry in the syndication of Management Rights largely revolves around the cost of buying – you generally need around $100,000 of equity to substantiate a share of the investment.
In regards to selling, most partnerships require a long-term commitment, with working managers needing to commit for a minimum of three years, according to Edwards.
“Success is all about the 3 Ps – people, process and product.
Engage good working managers, ensure the partnership has good processes, and purchase an OTP Management Rights or a successful going concern business from a reliable broker,” he says.
“With product you are looking for an income of $400,000 and above and preferably a high letting pool, with a good balance of income between Body Corporate salary and letting income. We are always looking for new working managers.”
PCS Finance founder Steve Burton, whose company also specialises in Management Rights, prefers to use terminology other than “syndication”.
“We act as a conduit for partners to come together to purchase and finance a business. We streamline the process,” he says.
“They are business investments, and each partner needs to be across the running of the business.
“There is nothing new about business partnerships, but as the size and price of Management Rights has increased substantially over the years, purchasers have had to combine resources to buy larger ones.”
Burton says given Management Rights could be $5 million, $10 million or even $30 million, the average manager couldn’t afford to go it alone, citing the average life of a partnership between five to 10 years.
“It’s pretty pointless entering unless you have a few hundred thousand dollars.
“You do it because you can expect better returns than having your money in the bank or buying shares. Unless the return-on-investment is above 15 per cent, a syndicate is unlikely to receive interest from investors.
“New players need to get into the industry first and gain experience by operating their own smaller Management Rights, before investing and running larger syndicated businesses . It is not social security, there are no guarantees.
“Permanent Management Right have been more volatile recently, mainly because owner occupiers have been moving into investment units and lettings pools have decreased in some situations. But holiday complexes are doing really well now that we’re coming out of COVID and domestic tourism is booming. That should continue for a few years to come.”
Mike Phipps Finance director Mike Phipps believes that there can be a general lack of understanding and prudent risk analysis when it comes to purchasing off-the-plan Management Rights.
“However, armed with grounding in the fundamentals, neither opportunity should cause alarm or present unacceptable risk to potential purchasers or investors,” he says.
“I am often surprised when I meet existing partnership investors. When I ask about return on equity, I get a puzzled look and a shrug of the shoulders. I am also surprised to learn that in many cases, partnerships are formed to purchased large Management Rights with the working partner having no prior accommodation management or similar experience.
“For me, the single most critical component of any partnership acquisition is to identify the right managing partner. Get that wrong and the risk profile of the transaction will rise significantly.”
Phipps, who personally invests in a wide range of syndicates, says his experience has yielded him between 20 and 25 per cent return on his investments.
“I think they are one of the lower risk business models out there. But with interest rates going up, we will see these returns start to fall,” he says.
“Our average investor has $300,000 tied up in a building. You don’t want a cast of thousands and be in a syndicate with 25 people. The more partners, the more chance of dissent.
“What we do is a match-making service to determine ‘will these people get on with each other?’” END
