Property syndications: tread carefully

This is according to Tsakane Shilubane, Manager: Legal Services for the South African Property Owners Association (SAPOA).

“Property syndication – or a collective property ownership scheme - is often seen as an attractive and more accessible investment particularly with property’s age-old status as popular safe haven for cash,” Shilubane says. “However, much needs to be considered for investors who may well be exposing themselves to needless risks.”

With no prescribed legal structure, property syndication can present as a complex, high risk investment instrument. Typically, syndication may comprise a number of different companies, and through these companies investors access property ownership opportunities by way of a shareholding in the company. Investors’ money is lent to another company, on an unsecured loan basis, and this becomes the capital with which the property is acquired.

This is often where the risk presents itself. Shilubane explains, “The syndication scheme’s structure may be such that it is difficult for the investor to reclaim funds if the company that owns the property goes into liquidation. With no guarantees and little chance of being able to resell one’s share in an ailing company, it’s a grim outlook.”

He notes that a well planned and managed property syndicate can offer good returns for an investor, but Shilubane recommends obtaining confirmation from an expert that potential risks have been properly managed. “There are examples of leading property companies which have their roots in syndication. These companies were driven by prudent investors who made sure that their structure provided the necessary framework for a sustainable investment and business”

Shilubane’s advice is that prospective investors examine a syndicate’s prospectus document with the help of an attorney who specialises in property. “Get another opinion, and if you’re at all unsure, get the information you need to be 100% certain. If you can’t obtain this reassurance, shelve your plans.”

With many available options to invest in property, Shilubane notes that investors can also choose to better manage risks by considering other property investment options that are well regulated and that offer some protection or recourse.

“Accurate, well researched knowledge will empower your investments. Don’t be lured by glossy marketing brochures; but rather look deeper into the structure of the company as this is what will protect and benefit you if all else fails.”

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