Investing in property stokvels

PEOPLE MIGHT DEFAULT ON MONTHLY CONTRIBUTIONS A properly drafted constitution is imperative. especially when things go wrong.

Property stokvels have created a sense of optimism around the country, bringing hope to those that never saw themselves owning a home or let alone a share in a portfolio of properties. But while the opportunity seems exciting there still is a question of how they operate and their probability of success. Property stokvels haven’t been fully tested due to their long investment horizon and many of them are in their infant stages.

Nonetheless, in an attempt to determine their chances of success, we can judge them on their operational structure.

With deeper analysis we can determine that property stokvels operate in a similar fashion to investment clubs.

Investment clubs in the form of those permitted by the Financial Sector Conduct Authority (FSCA) to pool funds from roughly 20 people for the purpose of investing on the stock market without the requirement of a financial licence.

The rationale is based on the fact that investment clubs collectively make investment decisions as opposed to a hedge fund, for example, where a fund manager invests on behalf of the fund.

Property stokvels follow the same pattern in that decisions are collectively made. Additionally, property stokvels have few members usually between 10 and 20 allowing them to operate beneath the radar of the FSCA. In any case, fewer members are easier to manage because key to the success of a stokvel is management.

One of the biggest challenges property stokvels face is the ability or willingness of members to continuously contribute funds for a long period of time.

Property stokvels initially operate like a piggy bank rather than an investment vehicle because phase one entails saving funds collected for a predetermined period allowing funds to accumulate to an amount adequate to invest.

This saving period can be difficult due to many reasons such as members defaulting on contributions or even pulling out of the stokvel.

That requires rules and laws of participating in the stokvel which come in the form of a constitution. It is wise to draft a binding constitution that every member signs and acknowledges to operate within and agrees to face penalties and other disciplinary measures on account of contravening the constitution.

The constitution is imperative, especially when things go wrong. Disagreements and other untoward issues arise whenever money is involved among a group of people so it is important to have a document that can be used to solve disputes that are uncontestable even in court.

It is also wise to vet members using their payslips to determine continuous contribution ability.

Munya Duvera is the CEO of Duvera Elgroup