Financial advisers were right about property – just not property syndications

ast week, a 67-year-old pensioner, Bohuslav Kautsky, shot himself outside the Pretoria offices formerly occupied by imploding property syndication company Sharemax.

Kautsky was one of thousands of pensioners who stand to lose what, at the final reckoning, will probably be billions of rands, all because of the scandalous way in which property syndications were structured and hard-sold by financial advisers, particularly to struggling pensioners.

The advisers, according to numerous determinations by financial advice ombud Noluntu Bam, were driven mainly by the extraordinarily high commissions they stood to earn.

Both the sponsors of the syndication schemes, such as Sharemax, and the advisers, such as Deeb Risk, who advised Kautsky and a number of other pensioners to invest in Sharemax, claimed that property syndications were low-risk investments and would provide superior income flows. Risk, incidentally, was not available for comment this week, because he was on holiday in Thailand.

The claims that property syndications were low risk were made despite research by a number of publications, including Personal Finance, and people in the financial services industry that showed that most syndications were and are extremely high-risk investments. Property syndications are definitely not advisable for pensioners.

LProperty syndications were riddled with problems, from being outright scams to having extremely high costs and being sold on fairy-tale assumptions that property prices would continue to grow at 20 percent a year.

Most of the financial advisers who steered the elderly into these so-called investments still roam free and continue to hold licenses issued by the Financial Services Board. These advisers were correct to regard property investments as one source of pension income, but they should not have advised their clients to put their all into property – and they most definitely should not have steered them into property syndications.

They should have put their clients into listed property via collective investment schemes – but then the commissions were a fraction of what they could earn from property syndications, where the commissions started at six percent and went up to 15 percent of the investment. Against this, the maximum commission on a single-premium retirement product is three percent.

Dries du Toit, the former chief investment officer of Sanlam Investment Management, is a wise and experienced man. When Du Toit talks up property, particularly as a repository for retirement savings ( see “Listed property will give your savings and pension a boost”, above), he does so based on due caution, experience, research and knowledge.

When Du Toit talks about investing in property as a way to save for retirement and to provide an income in retirement, he means properly managed property investments, such as companies listed on the JSE, and direct ownership of bricks-andmortar property.

Du Toit does not even mention property syndications. And, most importantly, he does not overstate the returns, as happened in the property syndications disaster.

Most people do not have the money to buy property shares or invest directly in property. You need at least R300 000 for a direct investment and at least R10 000 per transaction to invest costeffectively in shares.

The way most ordinary mortals can invest in property is via collective investment schemes – both unit trust funds (32 South African funds, one regional fund and six global funds) and exchange traded funds ( three funds). By investing through a collective investment scheme, you are diversifying your exposure to risk, because many of the listed property companies specialise in a particular type of property – commercial, retail, industrial, hospitals or hotels.

The other advantages of listed property shares and collective investment schemes over direct property ownership are: Your money is available when you want it. You can sell at any time.

You do not have the hassle of collecting rent from tenants and maintaining the property.

Mortgage participation bonds (known as part bonds) are also worth considering for an income flow. In simple terms, a facilitator, such as Fedbond, puts borrowers in contact with investors. The investors are issued with mortgage loans by the facilitator, which also collects and pays the interest and capital redemptions to investors.

Part bonds are regulated by the Collective Investment Schemes Control Act, because the money of investors is pooled for onward lending.

If the financial advisers who flogged property syndication schemes had really been interested in your financial security, as the Financial Advisory and Intermediary Services Act requires them to be, they would have considered these other, far superior and safer, property investments.