Category Investments

Investment in property choose your product supplier with care

29 May 2006 Andre Brand, Sharemax Investments

Property investments have been in the news lately and are often discussed during conversations on investment possibilities.

One of the investment alternatives in property is syndication. When investors make use of this alternative, the following perspective must be kept in mind.

Valuation of properties

The statement is made that the valuations on which developers of these properties base the syndications, are a grey area. Fully developed properties are usually syndicated. Therefore the product providers who conduct thorough valuations and due diligence investigations know what they are doing.

And so all existing leases are thoroughly evaluated, as well as all expenditure components in order to determine the net rental return. External professional auditors also control these figures.

Actual return from property investment

The statement is also made that commission paid to intermediaries, such as financial advisors, is actually paid by the investor and that the initial investment is diluted by this.

A trustworthy promoter, who complies with legislation, will carry all costs such as auditors fees, legal costs, administrative costs and marketing costs, beforehand. Investors who invest in property syndications from trustworthy product suppliers, earn net income on their total investment amount.

Regulation of property investment product suppliers

The fact that property syndications arent regulated by an official body, and that the consumer has no recourse should things go awry, is mentioned as a problem.

A trustworthy property syndicator will never outsource its intermediary services, such as resale transactions, and will therefore have to be registered at the Financial Services Board (FSB) to be allowed to act as an authorised financial services provider. Such a company will comply with the FAIS act of 2002 through this registration.

Furthermore, the Public Property Syndication Association (PPSA) is a professional body for the industry, from the industry with the purpose of, amongst others, monitoring other property syndicators credibly. My recommendation is that business is done with product suppliers who are registered as members of the PPSA.

Expendability of property investments

A statement places a question over the expendability of this type of investment. The truth is that investors income from the rental return of commercial properties escalates annually along with the lease of the shops in such a centre.

The impetus for an investor to take over such an investment is therefore self-explanatory, because he/she would qualify for an increased interest income sooner. An investment in a new project will only render an increased interest income after a year.

Shops in business centres

The statement is made that should one or more of the businesses in a centre become insolvent, and new tenants cannot be found quickly, it could negatively affect the investors income.

All trustworthy property investment projects are marketed by means of a complete printed prospectus, which has been registered at the Registrar of Companies. All relevant information and projections pertaining to such a project are disclosed in this document. Provision for loss of income due to vacancies is definitely made through the creation of a reserve in the statements of the company. Certain product suppliers also have a guarantee option.

A quality promoter will also market shopping centres that the buying public find attractive, where plenty activity takes place, and where retailers prefer to do business. There will always be vacancies due to the natural progression of tenants, but these vacancies filled as a part of the normal course of managing the centres. It is always a good idea to study a product providers vacancy factor.

Investment of retirement capital

The warning goes out that property syndications are not the optimal investment choice for many peoples retirement capital, but that it should be invested in a property unit trust with a proven performance record.

My advice up till now has constantly been that no one should invest more than 25% of his or her available investment funds in a single asset class. An investment in property is one of the most important asset classes to consider, without disregarding the others.

Whether you wish to invest in unit trusts, properties, listed shares or in any other financial instrument, the most important to consider is the product suppliers credibility and success history.

Dont judge a book by its cover

Dont judge property syndicators and promoters of commercial property investments by the sins of their neighbours. They differ in the same way that all banks, unit trusts and other companies performances vary. Just because certain property syndicators are not registered at the FSB as authorised financial service providers, it doesnt mean that others that are, should be judged negatively.

I say it again, choose any supplier of a financial service that you wish to make use of, with care.

Is property syndication safe enough?

Investment in commercial properties must be done in the medium- to long term. Most investors focus on the monthly income that they generate, with the longer term potential of capital growth.

Qualified suppliers of property investment products also offer their investors options. The investors can choose a guaranteed return and a guaranteed annual income escalation, which is slightly lower than the projected returns. Other investors dont choose this because they want to fully exploit market potential.

Credible promoters of property syndications also guarantee investors initial investment value after five years, specifically because this type of investment in property is a long term investment.

Return and capital growth

The statement is made that investments that render returns that are notably higher than the market norms should be approached carefully. Income from commercial property currently offers higher returns that arent exceptionally high, because the investments inherent force is in the potential capital growth.

Important aspects to note when investing in property

Before you invest in property, consider the following:

Make sure that the investment product being marketed has been registered at the Registrar of Companies by means of a complete, correct prospectus.

Study the investment products relevant prospectus and make sure that it contains sufficient disclosure regarding the property or the development, as well as regarding the role players supporting the promoter, before you make a final decision.

Make sure of the integrity of the promoter companys directors.

Check the promoter companys success history.

Make sure that the promoter company has been properly registered at the FSB as an authorised financial services provider.

Make sure that the promoter companys ethics and sense of responsibility are above reproach, as promoted and recommended by the Public Property Syndication Association (PPSA).

Gain the advice of your independent financial advisor or your broker.

Make sure that the investment in property meets you needs.

Andre Brand,Sharemax Investments

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