By Ian Fife

As interest rates fall, property investors keep chasing diminishing yields from residential flats or listed real estate funds.  Their predicament creates perfect conditions for property syndications. These are investment schemes that pool a group of investors' money to buy a large property they could not afford individually, and on which they hope to get the same returns as large institutional investors. 

Syndications make sense because property is a large investment, needing more money to secure than most individuals have. Last century, many of our cities' smaller structures were built when the local doctor, lawyer, accountant and estate agent got together and erected a building. There would be offices above to house their professional practices, and shops below, and the rest would be let. The 1970s and 1980s brought demands for more and quicker returns.

Companies like Seeff and Metboard formed syndicates to raise investor cash and bought a series of syndicated commercial properties.  These were popular. There were not many other property options at the time. The few listed property funds were mostly made up of second-rate properties, dominated by large institutions. Unit prices were often unrelated to performance.  The weakness of investing in large properties is that they are not easy to offload, and it's even harder to sell an unlisted share in one. 

Mike Flax, who ran the Seeff syndications, says that in good times there were some over-the-counter sales engineered by the syndicate promoters but "when the bad times came, the sales dried up".  A few years ago Flax converted the Seeff syndicates into Spearhead, the listed property loan stock company. Analysts (and the FM) were sceptical, but Flax has enthralled his syndicatees by turning it into one of the star performers of the JSE real estate sector.  Corpcapital property chief Marc Wainer says the listed property sector provides more than enough opportunity for investors. At R20bn market capitalisation and 27 funds with income yields from 9,5% to 16%, there is enough variety and liquidity to satisfy all tastes.  "The market cap of these funds is higher than their property values," he says.

"They can issue paper to buy properties, so direct property yields are falling. This means private syndicates must buy secondary, higher-risk properties to get a decent yield." 

And the syndicate promoters escape the rigours of the JSE, so they can be less transparent and make untested or dubious claims for their properties in a way the listed funds cannot.  Yet there are some needs the JSE can't meet.

For instance, syndicates can be structured to give highly taxed individuals more capital gains than income. Pretoria developer and promoter Gatekeeper's latest syndication is a R19,6m property in Durban's Westville, with a subsidiary of listed IT company CS Holdings taking 81% of the space on a nine-year lease. Twelve investors will each invest R325 000 cash and sign R325 000 limited sureties for the 80% debt of R15,7m.  The debt interest rate is "stepped" so that it increases as the rent does, and there is no net income for the investors. But Gatekeeper's George Rautenbach says that assuming a 5% inflation-linked increase in property value over the nine years, the gearing effect will give investors a 25,64% annual capital return. If he is right, their R325 000 investment in 2003 will grow to R2,535m in nine years. Rautenbach points out that he and his partners are also invested in the syndicate. 

Cape-based CBS has been promoting syndicates for nearly a decade, but none is open at present. Last year it syndicated 35 Wale Street in the central business district, a more typical revenue and capital growth investment which it claims will give a total annual return of 37%. But it is perhaps telling that CBS is combining its syndicates into an unlisted fund - perhaps to follow Flax to the JSE. 

Of course, just like the listed funds, there is many a slip between the cup of performance projections and lip of actual results.

Even with its many rules, the JSE has still not managed to prise open every nook and cranny of listed funds. Promoters of private syndicates are particularly opaque: they do not reveal any profits they make in the turn from development to investment, or the commissions they earn from sellers. 

It pays to investigate the promoter of your investment carefully. Find truly independent people who have invested with the promoter for some years. Really effective promoters will have investors who follow them from property to property, because they have delivered results, year after year.