Can’t afford commercial property alone? Why a syndicate might be your way in

Syndicates let investors pool their money to buy commercial property. But experts advise understanding the risks before you sign up.

Commercial property might look expensive, but you don’t have to go it alone. By banding together with other investors, or even a few mates, you can pool your funds, split the costs and share in the rental income and any capital growth.

That’s the basic idea behind a commercial property syndicate, though REA Group research shows 67% of residential investors are unaware it’s an option.

Finding the right people to enter into a syndicate with can be half the battle. Picture: Getty

Interest in commercial is growing, with investors lured by higher rental yields, longer and more predictable leases, and tenants who cover more of the property costs. But 38% said high purchase prices held them back, according to our research.

Real Commercial Senior Economist Anne Flaherty says syndicates are a popular way to share both the cost and the risk.

“If a few people are on the same page about what they want to buy, individually they don’t have the resources to make that purchase, but as a group they do, or they’re very aligned on their goals, then it can be a good thing to do,” she said.

“But it’s something that needs to be considered extremely carefully.”

Real Commercial senior economist Anne Flaherty says the learning curve for commercial property can be steep. Picture: Supplied

How commercial property syndicates work

A commercial property syndicate is where family, friends or even strangers join together to fractionally buy a property, then share the returns in proportion to what they put in.

Once operating expenses, statutory outgoings and debt servicing are paid, profits are either distributed by ownership share, or reinvested to buy the next property — terms defined at the outset.

Investors can choose to take active or passive roles.

How much money do you need?

Sharing the cost with other investors means the money required doesn’t have to be huge — especially with REA Group research showing almost half of the assets on our site are below $1.2m.

Jean-Pierre Gortan, Managing Director of Simplicity Loans and Advisory, says you can start with “modest five-figure contributions”.

But you need to factor in more than the purchase price, he adds.

“Do you need to make changes or upgrades to the property? Do you plan on flipping or holding long term? Syndicates frequently target opportunistic plays rather than purely static yields.”

Simplicity managing director, Jean-Pierre Gortan, says there’s a lot to consider with syndicates. Picture: Supplied

Run by pros or set up with friends?

Mr Gortan says syndicates can be professionally run by institutional fund managers, usually through a managed investment scheme or unlisted property trust, or set up informally among friends as a direct joint venture.

The professional version works like buying into a REIT – real estate investment trust. You pay acquisition, management and performance fees, but an experienced manager, bound by fiduciary duties and licensing requirements, handles tenants, financing, capex and the eventual sale without needing investor sign-off.

The social version runs under a private co-owners’ agreement and is much leaner on costs. The trade-off is control, with capital calls, lease renewals and exit timing all needing full agreement — though this can strain relationships.

Ms Flaherty says even a syndicate among friends needs to be set up professionally.

“It’s always important to have legal involvement to make sure it’s all set up properly, people are protected and there’s an understanding of what’s going to happen should the syndicate want to break up, which probably happens quite a lot.”

Advantages of commercial property syndicates

The biggest benefits are being able to afford a wider range of properties, such as multi-tenanted industrial parks, medical centres or neighbourhood retail outlets, while spreading the risk.

“The cost of the asset is sometimes high, but also the deposit you need to buy. And because commercial is slightly riskier than residential, people might want to share that risk,” Ms Flaherty said.

A syndicate also lets you split your capital across several assets rather than one standalone property, says Mr Gortan, diversifying across locations, asset classes and tenants and insulating you from vacancy shocks.

And the costs are shared too, he adds.

Syndicates can be a great way to mitigate risk and access more expensive properties, but you have less control. Picture: Getty

Risks of commercial property syndicates

Ms Flaherty says syndicates come with the same downsides as doing anything with other people.

“You have to agree on the property and the location, which can be complicated because people often have different opinions.”

Mr Gortan adds the main risks of syndicate are fees, less control over decisions and difficulty exiting the arrangement.

“Because you don’t own the whole asset, you can’t unilaterally force a sale or refinance. If your personal liquidity needs change but the group or syndicate manager decides to hold, your capital remains locked up.”

Getting out typically means finding a willing buyer or negotiating an internal transfer. Most agreements include a Right of First Refusal, so an exiting partner must first offer their stake to existing members, he says.

“If co-investors lack the capital or appetite to buy out the departing partner, that investor may have to accept a significant discount to net asset value to attract a secondary buyer, or remain locked in until the underlying property is sold.”

What to check before joining

Before joining a syndicate, research the people involved, including the lead promoter and co-investors, because they are the biggest risk, Mr Gortan says.

“The worst thing that you could do is invest with cowboys and then it will cause a massive issue for you.”

Knowing your tenant is just as important as knowing the property. Picture: Getty

Then check the tenants’ leases and financial strength, the debt structure (loan-to-value ratio, maturity, fixed or floating rates) and the legal agreement, which should spell out decision-making, capital calls, reporting and dispute resolution, he says.

Mr Gortan advises agreeing on all the rules before any money goes in.

“When something goes wrong, it’s very difficult to negotiate and people become unreasonable. So be very clear about the rules and how you can get in and get out when you need to, because people’s situations change.”