E+O commercial property syndicates – frequently asked questions

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1. How will a rise in interest rates impact the syndicate?

Banks predict that interest rates may peak towards the end of next year (2023). We don’t have certainty on that, but we actively manage the risks. We believe that the rent inflation will provide a natural hedge against the rise in interest rates because the rent increases will keep pace with interest rate rises over time. Here are the reasons:

Interest rates rises are driven partly by inflation. The Reserve Bank lifts the OCR to a level that will bring inflation within their target range, which then drives a rise in interest rates. It’s not the only driver because the cost of money for banks does not only come from the OCR.

In our opinion, when interest rates rise to a point where consumer confidence weakens, the economy will slow down a lot more than the Reserve Bank expect, in which case that would push them to lower interest rates. Again, we are not the Reserve Bank governor, but we have been through a few cycles and ultimately there will be a point where interest rates rises will have to plateau.

2. The offer is 100% underwritten. What does that mean?

The General Partner has arranged commitments to underwrite the Offer and to subscribe 100% of the Units to the extent of any shortfall. This secures funding for the property transactions which are the subject of the Offer.

3. Will the syndicate add new properties to the fund?

Take NZ Daycare Properties Fund for example, the General Partner’s objective is to create, over a period, a portfolio of daycare properties that provide investment in this unique commercial property category. We will continue to identify properties which meet our investment criteria and periodically add them to the Limited Partnership’s portfolio. Over time, this will spread the portfolio risk over multiple tenants and locations.

4. How liquid is an investment in the syndicate?

One common concern that investors have with syndication is how easy is it to cash out of their investment. Property is never the most liquid of assets, but there is good liquidity for our property syndicates – to date we have had a good record of helping our investors to sell their units.

For example, we have successfully helped a couple of our clients sell their shares in the Heinz Wattie’s National Distribution Centre Property LP. This was achieved by reselling their units to existing investors and then offering to our 8,000+ database. Furthermore, we have partnered with Syndex, who have developed a secondary trading platform for investors to buy and sell units in syndicates.

5. Is the monthly pay-out consistent? What factors will affect the distributed amount?

Returns are not guaranteed, but we are pleased to say that all our property syndicates have continued to provide investors with the pre-tax cash return paid monthly as projected.

There are a number of risks that could impact the performance and financial returns of the syndicate with one being the rise in interest rates.

When getting to the end of the fixed interest rate period, interest rates may increase the mortgage repayments due from the Limited Partnership to the bank, which might compromise the returns. To deter this from happening, the Limited Partnership will look to increase the rents as allowed.

For more details about other risks that could impact the returns of the syndicate, please refer to the Information Memorandum.

 

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