Commercial Investment Property Syndicates
Investing for less cost and less risk
Property Investment with 7% to 9.5% Yields. Capital Gain and/or Retirement Income Syndicates Available.
For those of you who have read our Commercial Investment Property Fact-sheet but cannot raise the full deposit required for a commercial building, we have introduced commercial property and commercial property syndicates exclusively for members – this helps members with all levels of capital from £20,000 upwards start to invest in commercial property and obtain the higher yields it offers. It also lets investors diversify their deposit over more than one building hence reducing risk and exposure to just one building. There are several types of syndicate and these are detailed below.
The syndicate will typically consist of 5-15 investors. The syndicate will provide limited liability for the investor and offer potential tax efficiencies by acting as a tax transparent structure (please seek confirmation from your adviser) to ensure tax is paid at the rate of the individual syndicate member. Not all syndicate structures are recommended in current market conditions.
Syndicate Type A – Short Term Capital Gain Strategy (High Risk) - Not recommended for current market conditions
The property will be bought off-plan at negotiated discounts (20% target) direct from the developer. Borrowing of 60% (approximately) will be used. Typically the syndicate will look to buy at around a 9-10% prospective yield – ie the rent obtainable via the letting agents would give a 9.5% return on the off-plan investment. Once the building is complete and tenanted, with a quality tenant and lease in place, another investor would be prepared to buy the building from the syndicate at around a 7.5% net initial yield. The building would immediately be worth around 25% more than when purchased and the building would be sold and the profits distributed to the syndicate members. This whole process is targeted to be complete within one year but will vary according to tenant demand. The member is then free to join another syndicate or take the money and invest elsewhere.
Example Syndicated Trade:
| Price of building inc fees, stamp duty etc | £500,000 (Plus syndicate arrangement costs of 2%, legal conveyancing of 0.5%, mortgage arrangement fee of 0.5% (on the 50% mortgage) and letting fee costs of around 1.5% and utilising a stamp duty avoidance scheme, making an estimated total of 4.25% costs approx or £21,250) |
| Syndicate members invest 50% of the purchase cost plus costs | £271,250 (Let us assume one investor makes up £25,000 of this, or about 10%) |
| Total Borrowings of | £250,000 |
| Yield/ Rental Income | 9.5% or £47,500 rent pa (prospective) |
| Yield Target Once Tenanted | 7.5% |
| At that time the building is worth (rent divided by yield) | £633,333 (47,500 / 0.075). This gives a profit of £112,083 or 41% profit on the basic investment by the member before building selling costs. |
| The building is sold and the profit distributed | The example investor above who invested £25,000 gets a return of £10,000 less interest costs on any short term borrowing (if required), sale fees and tax. |
| In Summary | A great way to trade property with higher risks but high returns - not for widows and orphans but a small speculative element of an overall portfolio. |
The timescale sought by the syndicate for the purchase, build, tenanting and sale is 12 months or less.
Syndicate Type B – Longer Term Retirement Income Planning (Lower Risk) - Recommended for current market conditions
A tenanted commercial building will be purchased with the money invested by the members and a level of gearing/ borrowing to suit the timescale of the particular syndicate. For example, if a syndicate was set up with a 20 year plan to pay off the mortgage, then perhaps 75% borrowing would be sought. For investors seeking a shorter timeframe, we would offer as little as 8 year investments with a suitably higher deposit level. After the mortgage is paid off, the rent would be distributed to investors as income or the building sold, according to the wishes of the syndicate members and as such the syndicate can act as a retirement income or asset building vehicle. Type B syndicates are available with 8, 12, 15 and 20 year target timeframes for the mortgage to be paid off and all of the income distributed to syndicate members.
Example Syndicated Investment:
| Price of building inc fees, stamp duty etc | £500,000 (Plus syndicate arrangement costs of 2%, legal conveyancing of 0.5%, mortgage arrangement fee of 0.5% (on the 70% mortgage) and stamp duty of 4%, making an estimated total of 6.85% costs approx or £34,250) |
| Syndicate members invest 30% deposit plus costs | £184,250 (30% + costs + stamp duty - Let us assume one investor makes up £18,425 of this, or 10%) |
| Total Borrowings of | £350,000 |
| Mortgage Type | Repayment Mortgage, 20 Years |
| Annual Repayments | £32,398 at a commercial rate of 6.75% |
| Gross Profit per annum | £5,602 after mortgage costs left from the £38,000 rent on a 7.6% yield |
| Once the mortgage is paid off | A gross rent of £38,000 plus rent reviews over the 20 years will be available for the syndicate members. If rents and property prices rise in line with inflation, and inflation is assumed to be 2%, then the example investor who invested £19,125 now has an income in today’s money of around £3,800 pa and a 10% share of the building value worth £50,000. If property and rents rise by 2% above inflation for the 20 years then the rental income would be £5,600 pa in today’s money and the building equity would be £74,297 in today’s money. That represents a yield of 29% pa on the original investment and a compound growth on the initial invested sum of 7% pa for 20 years. |
| In Summary | A good solid retirement planning component with a long term income generation. It is reasonable to expect to receive an income of around £3,800 pa once the mortgage is paid off (roughly index linked) for each £18,425 invested today. |
Syndicate Type C – Buy Off-Plan and Hold at High Yield (Medium Risk) - Not recommended for current market conditions
The property will be bought off-plan at negotiated discounts (20% target) direct from the developer. Borrowing of 70% approximately will be used. Typically the syndicate will look to buy at around a 9-10% prospective yield – ie the rent obtainable via the letting agents would give a 9.5% return on the off-plan investment. At that point, with a quality tenant and lease in place, although the building would immediately be worth around 25% more than when purchased, the property would be held on the 9.5% yield and the mortgage paid down over a much shorter period than a type B syndicate. The mortgage could typically be paid off over a 12 year period and after the mortgage is paid off, the rent would be distributed to investors as income or the building sold, according to the wishes of the syndicate members and as such the syndicate can act as a retirement income or asset-building vehicle.
Example Syndicated Investment:
| Price of building inc fees, stamp duty etc | £500,000 (Plus syndicate arrangement costs of 2%, legal conveyancing of 0.5%, mortgage arrangement fee of 0.5% (on the 70% mortgage) and letting fee costs of around 1.5% and utilising a stamp duty avoidance scheme, making an estimated total of 4.25% costs approx or £21,250) |
| Syndicate members invest 30% deposit plus costs | £171,250 (30% + costs - Let us assume one investor makes up £17,250 of this, or 10%) |
| Total Borrowings of | £350,000 |
| Mortgage Type | Repayment Mortgage, 12 Years |
| Annual Repayments | £42,624 at a commercial rate of 6.75% |
| Gross Profit per annum | £4,876 after mortgage costs left from the £47,500 rent on a 9.5% yield |
| Once the mortgage is paid off | A gross rent of £47,500 plus rent reviews over the 12 years will be available for the syndicate members. If rents and property prices rise in line with inflation, and inflation is assumed to be 2%, then the example investor who invested £19,125 now has an income in today’s money of around £4,750 pa and a 10% share of the building value worth around £50,000 in today's money. If property and rents rise by 2% above inflation for the 12 years then the rental income would be £6,087 pa in today’s money and the building equity would be £63,412 in today’s money. That represents a yield of 35% pa on the original investment and a compound growth on the initial invested sum of 11.45% pa for 12 years. |
| In Summary | A solid retirement planning component where shorter timescales are needed and a higher risk of finding the tenant is acceptable to the investor combined with the need for medium term income generation. It is reasonable to expect to receive an income of around £4,750 pa once the mortgage is paid off in about 12 years (roughly index linked) for each £17,250 invested today. Voids mean that it should not be the sole retirement income plan. |
Syndicate Type D– Quick Income Syndicates - Not recommended for current market conditions
The property will be bought off-plan at negotiated discounts (20% target) direct from the developer. Borrowing of 50% approximately on an interest-only basis will be used. Typically the syndicate will look to buy at around a 9-10% prospective yield – ie the rent obtainable via the letting agents would give a 9.5% return on the off-plan investment. Once the building is complete and tenanted (taking ideally 6-12 months), then although the building would immediately be worth around 25% more than when purchased, the property would be held on the 9.5% yield and the excess income above the mortgage interest would be paid out quarterly to syndicate members.
Example Syndicated Investment:
| Price of building inc fees, stamp duty etc | £500,000 (Plus syndicate arrangement costs of 2%, legal conveyancing of 0.5%, mortgage arrangement fee of 0.5% (on the 50% mortgage) and letting fee costs of around 1.5% and utilising a stamp duty avoidance scheme, making an estimated total of 4.25% costs approx or £21,250) |
| Syndicate members invest 30% deposit plus costs | £271,250 (30% + costs - Let us assume one investor makes up £27,125 of this, or 10%) |
| Total Borrowings of | £250,000 |
| Mortgage Type | Repayment Mortgage, 20 Years |
| Annual Repayments | £16,875 at a commercial rate of 6.75% on an interest only basis |
| Gross Profit per annum | £30,625 after paying the mortgage from the £47,500 income. |
| Once the mortgage is paid off | A gross rent of £47,500 plus rent reviews will be available for the syndicate members. After mortgage interest costs of £16,875 the net income of the syndicate would be £30,625. A 10% syndicate member would have invested around £27,125 to achieve this. |
| In Summary | A quick income generator with a capital asset thown in that can add additional longer term capital gains into the overall returns. Each £27,125 invested could produce an income of around £3,063 pa whilst a tenant is in place plus the syndicate member would gain from any capital growth in the asset. |
Frequently Asked Questions regarding syndicated investments:
1. What is the minimum investment for a syndicate?
Usually £20,000.
2. What are the costs above those I would pay if I bought the property myself?
Our charge for syndicate organisation and structure is a standard 3.5% of the building value. This is paid as a deduction from the contributions by members initially.
3. How long will my money be invested in property for?
Type A syndicates will be for one purchase and sale cycle of between 6 months and 2 years (but could be longer) and Type B will be for 8-20 years. However, it is possible to come out earlier subject to the syndicate rules or to extend the period subject to syndicate member votes. Syndicates are not liquid investments and if you require your money sooner than the planned exit then you should not invest.
4. Can I use my pension money to invest in these syndicates as well as private money?
Yes this is possible and we have an FSA regulated advisor to assist with advice concerning this and also to migrate pensions funds into a property-friendly SIPP structure if required.
5. I may need to leave the syndicate early – can this be done?
Yes this is possible subject to the rules of the syndicate – the shares must be offered to existing members first and then to outside members to join in your place. In the event that more than one syndicate member wants to buy you out, the shares are apportioned pro-rata to existing rights. Full details will be provided in the legal documents once your syndicate reservation is confirmed.
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Risks Notice:
Operating within a syndicate can reduce the risk of investment if diversifying across several properties and gives access to commercial property at lower investment levels than normally required however, like all property investments, there are some risks:
- Void periods can cause lack of income versus costs being incurred (mortgage, business rates etc)
- Mortgage rates could increase
- Changes in pension regulations (if investing through a pension)
- Less liquidity than if the property was owned by yourself only
- Professional charges could change and reduce the returns
- Property values could go down as well as up
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Off-Plan Property Investment
Commercial Property Investment Commercial Property Syndicates
Individual Portfolio Planning Service
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UK Holiday Home Investment
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SIPP / Hotel Room Investments
Diversifying Your Property Portfolio & Investments
Owner Occupied Pension changes
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