Syndicated property investments have been a big hit with New Zealand investors over the past few years, primarily because of the high yields they have offered. However, troubles recently experienced by the Three Kings Fund promoted by Cascara Group illustrates the risks of this sort of investment.
The fund, which owns a retail property in Auckland, ran into difficulty when three of its tenants, Farmers, Steven Gifts and Street Seen, left and the manager had "difficulties in finding suitable replacement tenants".
Consequently the fund's profit for the year was 40 per cent below forecast and investors received only $220 on each of their $5,000 parcels, which is the equivalent of a 4.4 per cent return.
On the positive side the manager is predicting low interest rates will boost the profit by $101,000 to $286,000 in the current year.
While that sounds like a plus for the unitholders there is a downside.
The manager has told unitholders cash distributions have been suspended for at least 12 months because of issues refinancing a $3.14 million loan.
The loan, from Westpac, is due to be repaid at the end of this month and the bank has given the fund two options - both of which require more funds.
Westpac says it will extend the loan on an interest-only basis, providing at least $1 million of it is repaid. Alternatively it will extend the loan but increase the principal repayments (currently $172,000 a year).
The other problem Three Kings has is that to attract new tenants it is likely to have to met some of their relocation costs.
Cascara is proposing to raise a $1.8 million second mortgage on the property to fund the loan reduction and the prospective relocation costs.
It says that once the second mortgage and relocation costs have been quantified the suspension will be reviewed.
The manager has an objective of distributing 100 per cent of any surplus earnings.
Syndicated property investments have been a big hit with New Zealand investors over the past few years, primarily because of the high yields they have offered. However, troubles recently experienced by the Three Kings Fund promoted by Cascara Group illustrates the risks of this sort of investment.