Financially Speaking July 2009

Be kinder than necessary, for everyone you meet is fighting some kind of battle.

Dear Client,

We are still regularly able to read about investment companies and syndications that are being placed under curatorship or liquidation. The curators of Ovation will hopefully finish up soon; August was the speculated month. But my comments here are going to be around Property Syndications. Still often commented on in Personal Finance. There is a big billboard in Pietermaritzburg at present advertising a Property Syndication offering an income of 12.5% with a 100% capital growth guaranteed. If one remembers what Bruce Cameron often writes about; if it sounds too good to be true, it probably is. How are they going to ensure an annual income of 12.5% and growing when interest rates and rental increases are much lower? And what happens if tenants default and close their doors? How are they going to manage the income then? How are they going to guarantee the capital when, in a property syndication, if an investor wants his/her capital out, another buyer has to be found to buy out his/her shareholding? All rhetorical questions really.

I was approached by Sharemax, a property syndication group, a number of years ago to sell their product. What makes these schemes attractive to financial advisors to market to clients is that the syndications offer us 6% commission on a deal; like an estate agent they said. When I said that that would be too much and too expensive for the client, the consultant told me that I could take less, say 3%, and then the client would get a 103% investment allocation. If I took the whole 6%, the client would still get a 100% allocation into the syndication. That raised my next question, something I’ve also seen with insurance company investment marketing: “How can you get a greater than 100% investment allocation?” I asked. “How can I invest R100 and, after your costs, have R103 or R106 invested?” The answer wasn’t convincing. So, again, as Bruce Cameron says, if it seems too good to be true, it probably is.

And now we’re seeing some of these syndications struggling because they over valued and/or overcapitalized these systems through the above methods. They oversold shopping centres in the belief that property always goes up, something we’ve now all learnt not always to be the case. As mentioned in a recent edition of Noseweek, there are many shopping centres battling with occupancy and rental incomes. Sharemax has been under suspicion once or twice from the authorities (FSB) and was also mentioned in Noseweek.

So I am glad that I never sold these things and managed to listen to my suspicions. By comparison, I find Marriott’s income systems transparent and simple and logical. The property rental parts of the income they manage, come from numerous listed property groups where the tenant vacancy problems are diluted and become a minor percentage of the income stream. Furthermore, being property unit trust funds, there is always an amount of cash in the fund to pay out a withdrawing investor. So much better.

Often these issues go hand in hand with greed. Like when financial advisory brokerages and groups register their own unit trust funds when there is already a proliferation of good enough funds out there. The reason for them doing it is often to be able to get the extra rebate fees for themselves.

But that’s all I should probably say about these things.

Until next time

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.