Six essential questions to ask before investing in a property development syndicate
Property development syndicates are gaining increased popularity amongst investors looking to diversify their investment portfolio and access large-scale development projects without the time and costs involved in developing an entire project themselves. However, investing in a syndicate can be a daunting and potentially risky process when you don’t know what to look for in a high quality investment. Here are six essential questions you should be asking to mitigate risk and identify a syndicate that suits your investment strategy.
Does the development syndicate match your risk profile?
If you’re considering investing in a property development syndicate, the first thing you will need to ask yourself is whether the syndicate aligns with your risk profile and investment property strategy. As opposed to yield-based commercial property syndicates, which tend to be suited to investors seeking a passive income stream, property development syndicates typically focus on generating higher profits within a shorter timeframe through capital growth and value-add strategies. Rather than receiving regular income distributions, investors will generally receive a final distribution upon the completion and sale of the development project, and will therefore need to factor this into their overall finance strategy. These syndicates are typically higher risk, but with the right management and strategy in place, can also offer significant rewards for investors seeking to build wealth quickly.
What size is the syndicate?
Another key factor that can determine the risk of syndicated investments is the size and scale of the syndicate itself. Most development syndicates will need to secure a certain number of pre-sales before construction can go ahead, with the target pre-sales generally being higher with larger developments. This can lead to longer wait times before construction, during which time the project will be exposed to market fluctuations. This is something you will want to bear in mind when researching different property syndicates to ensure the project aligns with your expectations and financial strategy.
How experienced is the syndicate management team?
A key due diligence question you should be asking before investing in any type of syndicate is whether the syndicate management team have experience in similar projects. For instance, what properties have they already got in their portfolio? And have their past projects generated successful outcomes? The syndicate management team will be responsible for everything from initial site research to acquisition and management of the development project, and will therefore play a fundamental role in the success of the syndicate. As an investor, it’s vital to do your own research to ensure the development project is in the best hands possible. As a rule of thumb, it’s always a positive sign if the syndicate promoters have their own capital invested in the development and are personally tied to its success.
What additional fees are involved in the investment?
When it comes to budgeting for a syndicated investment, one of the fundamental things you will need to know as an investor is the fees involved. Whilst almost every syndicate will require capital to cover capital raising fees, marketing fees and management, it’s important to note that not all developers are equal, and some will charge significantly more than others. When researching different projects, this is something you may want to ask the syndicate management team to ensure you are making a worthwhile (and most importantly, profitable) investment.
What is the strategy behind the property development syndicate?
Another fundamental element that will determine the success of any property development syndicate is the strategy behind the project. This is a crucial due diligence question you should be asking the syndicate managers before making your investment decision, as getting the end-product wrong can have a hugely detrimental impact on the overall returns of the development. Who will the development be targeting? Are there strong current and future demand drivers in place in the local market? Does the property type and size appeal to the project’s target demographic? And are there any future supply threats from competitor developments? These questions will help you determine whether the syndicate management team have completed thorough research and developed a strong investment strategy to support the success of the development.
Have thorough due diligence checks been performed?
In addition to researching the strategy behind the development, one of the fundamental questions you should be asking as an investor is whether the syndicate management team have completed thorough due diligence checks to assess the feasibility and profitability of the project. Failure to notice obstacles and warning signs early on, such as limestone underground that will hinder construction works or easements on titles, can be incredibly costly to fix further down the line, significantly reducing the overall profit from the project and leading to lower returns for investors. Even less tangible factors such as community opposition to a development can be accounted for and mitigated with the right due diligence and strategy up front. Before investing in a property development syndicate, make sure the management team have conducted comprehensive feasibility checks and consolidated prices to ensure you’re not met with any nasty surprises on completion of the development.
If you are considering investing in a property development syndicate and would like to learn more about opportunities for investment with Momentum Wealth, please request a consultation or contact Momentum Wealth’s Key Relationship Manager, Brad Dunn, on 0424 138 044.