Property syndicates almost eliminated from recovering market

Property syndicates, once a constant of the Irish commercial property market, have not just fallen out of favour with the investing public but their use has been virtually eliminated, according to new figures.

Data compiled by estate agent Savills show that private syndicates accounted for 16 per cent of total investment in the Irish commercial property market in 2012, but, by 2016, this figure had slumped to just 1 per cent as money flooded into real estate investment trusts.

The syndicate model first emerged in Ireland in the late 1990s, for the first time allowing smaller investors to invest in commercial properties that would have previously been the preserve of larger institutional players.

As the property market soared, so too did the use of syndicates, with everyone from stockbroking firms to accountancy practices and private wealth operations structuring deals for clients. The gains to be made from syndicates were significant: in 2005, Quinlan Private made an estimated profit of €60 million in just eight months when it sold the Savoy Hotel in London. The losses experienced were also significant, however.

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Peak of the market

Research from property company CBRE shows that at the peak of the market in 2006, some 26 per cent of the €3.5 billion or so invested in the Irish commercial property market that year was attributable to syndicates, while a further 20 per cent was invested by private individuals. Syndicates were also active abroad, accounting for a quarter of all international investment by Irish investors that year.

Fast-forward to 2012, however, and the proportion of syndicates had slumped to 16 per cent, and of individuals to 14 per cent. Since then, the decline has hastened.

In 2012, private syndicates invested some €90.5 million in the commercial property market, 16 per cent of the €574 million invested that year. While the actual amount invested in 2013 rose to €113.6 million, as a proportion of overall investment, syndicate investment slumped to 6 per cent, while last year, just €43 million, accounting for 1 per cent of total investment, came from private syndicates. These figures exclude transactions of less than €1 million, so some low-level syndication deals may be happening outside of these figures, but the overall trend is clear: Irish investors are foregoing property syndicates.

Emergence of Reits

According to Savills, one reason for the “virtual elimination” of private syndicates is the emergence of real estate investment trusts (Reits). First introduced back in 2013, Reits have gradually taken money that might have previously been invested through a syndicate. In their first year of operation, Reits accounted for 32 per cent of investment, albeit in a somewhat muted market, and have since rocketed ahead, accounting for three out of every four euro invested in Irish commercial property in 2016.

Of course, another clear factor must be investors’ experience of syndicates from boom to bust, and their obvious reluctance to tread the same path again. Many of the investment vehicles were highly geared, which meant that the risks to the downside were greater than many understood, and when the property market collapsed syndicate members were called upon by banks to plug the large gaps in agreed loan-to-value ratios.

Syndicates were also often personally guaranteed by their members, which meant that these cash calls sometimes led members to bankruptcy, as they did not have the cash to meet the banks’ requirements.