Erskine + Owen’s Syndication Journey
1. Our own property investment journey started in residential property
Naturally, residential property was our focus when we started the business, buying residential property. Residential property is not really a yield play – it’s about long-term equity growth. And therefore, we were laser focussed on achieving maximum capital growth. Our recommendations to clients of where and what to buy have proven to be incredibly successful. We have helped clients make many millions. Which is really our ‘why’. We are in business to help clients build equity and passive income that will allow them to achieve the lifestyles they aspire to.
In 2015, we embarked on syndication having already built other arms to the business – investment advisory, buyer agency, mortgage brokering and property management. We started Erskine + Owen in 2007 and we (directors Lisa Phillips and Alan Henderson) had both been investing in property since the mid 1990’s. Property was not new to us, especially not property acquisition. We’d been living and breathing property for just on two decades when we decided to embark on the syndication journey.
2. Syndication was birthed out of a need.
Our clients were wanting to access commercial property. The challenge was the equity required to acquire quality commercial property. Should we all sell up our residential portfolios – or join together with others for a slice of a bigger pie? We had personally experienced joint ventures (JV’s) for residential property that had worked really well. We wanted to replicate that approach with commercial property. At the same time we had clients for whom we had achieved the targeted level of residential investment property, who were asking —‘what next?’
The importance of capital growth went with us into syndication. We want every property we buy to have superior capital growth over the long term. Syndication is more focused on cash yield compared to residential property. However, we think it is important to protect and grow the underlying equity. Some investors may only be interested in yield, but focusing on yield and ignoring other factors can lead to bad investment decisions. The quality of the underlying asset is what determines the long-term yield performance.
3. We think the key elements to consider when investing in commercial property are:
- Location. Places like Auckland are a no brainer. But as Auckland becomes unaffordable, where next? In 2007 we recommended clients buy residential property in Otahuhu. Many clients looked at us warily, and some chose not to… we could get them only as far as Avondale (when we pronounced it with a French accent!!). However, our research said that the likely future lack of land supply would dramatically push up prices in Auckland and push first home buyers out further, especially to areas with community and good transport options. Otahuhu fitted the bill. We took our own advice and bought in Otahuhu. Like us, all our clients who bought there did extremely well.
So where next for commercial? We still start by following the economic story. Are there sound reasons the region or city will flourish, and can we see evidence? A region going backwards will drag property prices down and lower total yield over the long term.
- Industry. We focus on growing industries, or at least industries that are solid and won’t be overly impacted by technology disruptors. Film for instamatic cameras is not a growth industry. Early childhood education is growing, demand for clean, green food is growing. Its also important to consider the industries impact on society and the environment.
- Tenant. You can choose the right industry but the wrong tenant. Tenant financial stability is critical, which is best confirmed through careful financial and commercial due diligence.
- Commercial Property Type. What kinds of property are essential to the target industries? Apple growers absolutely need warehousing, and apple picking contractors absolutely need housing for apple pickers. Industrial property in the right industry, with the right tenant, in our opinion is an example of a good strategy in this environment.
- Lease Term. The shorter the lease, the sooner the rent is at risk from a vacancy. Therefore the longer the lease the better. Ideally, we would not buy a property with a lease less than 6 years. However, we have bought properties on a shorter lease where we think there are mitigating circumstances. For example, the Waterloo property in Christchurch was bought with 4.5 years to run. However, this was mitigated by a 8% yield, the ability to build up cash reserves, and a tenant that would be facing a very expensive relocation cost if they were to move. In other syndications we have mitigated the risk of shorter tenancies by combining a number of properties with different lease profiles.
- Yield. To a degree yield is simply a product of the above strategy. That said, we naturally want to target the most competitive yield possible. Afterall – we always aim to invest ourselves in each syndication.
- Rent Review Mechanisms – We target certainty and frequency. CPI plus a margin annually is attractive.
4. The rest is history
Our board of advisors kept the leash short for the first few years resulting in what now feels like very small deals. One of the most important learnings has been, that it is a very serious business. We are the custodians of other peoples’ money and it is critical our processes and people are excellent. One of our advisors insisted we read the book Billion Dollar Bonfire by Chris Lee. It tells the story of the rise and fall of Allan Hubbard and South Canterbury Finance. Hubbard’s wall papering over of losses, and thus dishonesty, along with unnecessary loss of millions of dollars through fire sale of investments. Why? Largely because liquidators encountered one almighty administration and accounting mess.
We had an excellent track record on the client property acquisition front – almost a decade of acquiring investment properties for clients and leading the due diligence. What we needed to build out was our ‘compliance capability’ to be able to handle bigger volume. Having encountered plenty of compliance in our previous corporate and governance roles, this was not new to us. It was a matter of identifying the right people, establishing robust processes and controls. We are proud of the fantastic and competent team we now have across both asset management and finance. There’s always room to improve how we do things, but as directors, we can sleep at night in the comfort that our clients’ money is very well managed and protected.