Property shares: Good or bad investment idea?

Only a few months ago property syndication operator PIC seemed to be on an expensive marketing campaign. It took out big advertisements in popular publications like Personal Finance, a weekend supplement published in Independent's Saturday newspapers, alongside general articles about syndications - which suggests PIC's PR machinery was as busy as its advertising planners.

But, behind that media splash, trouble was brewing for many PIC clients, just as it has been for investors in other property syndication schemes. This week, Realestateweb reports that investors in three PIC property syndication companies have had to accept a one-fifth reduction in income.

The three syndications in question are valued at about R800m and are invested in more than 20 underlying investment properties. Investors were earning an average yield of about 10.5% on capital invested, but this has been reduced to 8.5% with effect from the beginning of this month (click here to read that full report by award-winning investigative journalist Julius Cobbett).

As economic conditions have worsened in South Africa, the cracks have emerged in these property schemes. Generally billed as investments that offer a steady income stream, thanks to the underlying properties, these offerings have been plagued by high expenses, poor decision-making and often greedy operators.  Several property syndications have gone under, and hundreds of pensioners have watched their life savings go down the tubes.

Many investors believe it is much safer to buy property company shares rather than plough their cash directly into bricks-and-mortar. Recent examples of property syndication failures and set-backs show that these offerings can't be considered low-risk or liquid.

Property syndications aren't generally on the investment menus of the more reputable financial advisers. This is partly because they aren't subject to the same regulatory controls around other collective investments like unit trusts. The warning bells were rung several years ago by investigative journalist Deon Basson, who died amid a protracted legal battle with property syndication Sharemax.

Shares listed on the Johannesburg stock exchange, on the other hand, are often considered a better bet as are the unit trusts that invest in them. This is because along with a stock exchange presence come certain legal requirements that make public companies appear less risky. Their operators are expected to adhere to a certain level of transparency and disclose important facts that may have an impact on share price. Added to this is that there is a bevy of analysts scrutinising these companies, so there is more independent assessment of the bigger organisations. The unit trust funds, meanwhile, have their own set of stringent regulations designed to protect those who buy units.

Unfortunately, public shares aren't always what they are cracked up to be, either. Take luxury property developer IFA Hotels & Resorts, which is behind the R350m Zimbali Fairmont Hotel development in Kwa-Zulu Natal. Its Africa and Indian Ocean president Wessel Witthuhn has gone to ground, Realestateweb reports, while creditors worry about millions of rands they are owed. Many of these service providers no doubt took some comfort from IFA's presence on the Johannesburg stock exchange at the time they shook hands with Witthuhn and his colleagues.

Direct property investments can have their own share of hassles, not least of all troublesome tenants. And, direct property can be just as illiquid as property company shares in a bear market. But at least when you own the property, you don't have to figure out what's going on behind the curtain set up between you and the operators. You see the problems and can take steps to fix them. You are ultimately responsible for the returns.

If you are opting for a collective scheme because you don't believe you've got the wherewithal to generate your required returns, stick to a fund managed by a professional asset manager. Check the fund manager's performance in the unit trust performance tables too, so you can increase your chances of receiving higher returns.

Above all: Be very wary of opting for a scheme that can operate below the radar.

Jackie Cameron is editor of Realestateweb - SA's fastest-growing property website. Write to jackie@realestateweb.co.za. Follow JackieCameron on Twitter.

Got any tips for investors considering property investments? Would you invest in a property syndication? Share your views below this article.

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responses to this article

It's 10'o'clock, and do you know where your money is? I run a private investment partnership, investing in equities, and I will offer the following rules for avoiding scams. 1) The guy who manages your money shouldnt also be doing the accounting for the money. There should be an external . .more administrator who calculates the return and sends statements directly to investors. As Buffett says "I have never scored less than an A on a self-marked test". 2) The guy who manages your money shouldnt have physical custody of the money or the assets. There should be a custodian, a bank account in the funds name and/or the assets should be kept in the fund's name. 3) The fund should have a reputable auditor, think KPMG, Deloitte, PWC, E&Y, Grant Thornton, PKF, etc. Bloggs & Co just isnt good enough, and it may even be the fund managers brother in law (as was the case in the Madoff affair). Note that the above rules still wont protect you from poor investment decisions and high fees, but at least the odds that someone will run off with your money will be very low. I would regard property as an extremely poor investment right now (sorry, realestateweb), largely because the price in relation to rentals is poor versus other investment alternatives. . .less by Wisdom on November 27 2009, 13:27 Find this comment inappropriate? Report it

Tired of the same old story Jackie please find something else to moan about. Other investment platforms have also had a downturn with the recession, and thus a reduced rate in income. At least the above mentioned companies are not trying pay out unrealistic incomes, but . .more sharing with the investors that they are aware of what is going on and working towards solving the problem. How about truly objective journalism and feature a story about how these companies have added value to their investors portfolios, or how they have had successful investments in the past. Property is a tangible asset that if the structure is right can provide clients with great peace of mind. . .less by Over it on November 27 2009, 18:22 Find this comment inappropriate? Report it

New story please Jackie please find something else to moan about. Other investment platforms have also had a downturn with the recession, and thus a reduced rate in income. At least the above mentioned companies are not trying pay out unrealistic incomes, but . .more sharing with the investors that they are aware of what is going on and working towards solving the problem. How about truly objective journalism and feature a story about how these companies have added value to their investors portfolios, or how they have had successful investments in the past. Property is a tangible asset that if the structure is right can provide clients with great peace of mind. . .less by Over It on November 27 2009, 18:26 Find this comment inappropriate? Report it

What is the explanation for Ingenuity, the listed property fund, not paying out the Du Toit's I did not understand the notice in the paper but get very nervous when companies are unable to meet their commitments. Is this the case and please can we have an explanation of whatever is the case Alec? The rumours meanwhile are flying around and that is . .more no good for anyone. . .less by Worried on November 27 2009, 20:05 Find this comment inappropriate? Report it

PIC As far as I know nobody has lost a cent investing via PIC and that can not be said of many other investment vehicles by Hennie on November 30 2009, 11:22 Find this comment inappropriate? Report it

All unlisted and listed small companies are a risk The Altex is strewn with financial disasters by Koos on November 30 2009, 19:47 Find this comment inappropriate? Report it

Jackie's articles Why the continuous reference to Deon Basson and the fact that he died amid a protracted legal battle with Sharemax. Surely she must have other facts to copy and paste? by Varkie10 on December 01 2009, 12:17 Find this comment inappropriate? Report it

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