Property syndicates aimed at small-scale investors have grown from almost nothing to a R5bn industry in less than five years.

Falling interest rates, a lack of decent returns in other asset classes, a property boom and sophisticated selling techniques have persuaded thousands of investors (mostly elderly and retired) to buy into private syndicates.

Syndicators sell shares in companies owning shopping centres and offices in parcels for as little as R1 000.

They promise returns between 8,5% and 9,5%. Large-scale investment syndicates have been an accepted part of property for over a century.

Respected organisations such as Rabie Developments and the Louis Group have built large property empires with investors who have followed their developments through the decades.

But government and the property industry worry about potential investment disasters from a new breed of unregulated syndicators.

High commissions to dedicated sales teams and comforting financial advisers drive sales.

Mike Flax listed his struggling 1980s Seeff syndicates as Spearhead and turned it into one of the most successful funds on the JSE.

He can't believe that financial advisers are objectively guiding their clients into these syndicates, when unit trusts that invest in listed property funds give the same return - and their shares can be sold at any time.

Somerset West lawyer S P du Toit, who is the chairman of the newly formed SA Association of Property Syndicates (Saaps), says financial advisers earn up to 6% commission on syndications, double the 3% they get from unit trusts.

Additional commissions can trail the life of the investment at 1%/year.

But Du Toit and Durand Botha, CEO of Pretoria-based syndicator PIC Investment Holdings, say there are good reasons many investors prefer syndicates to listed funds. "Most of our investors are old or retired," says Botha.

"They prefer to have a share in something they can see."

Du Toit adds that they are attracted by syndicates in their own neighbourhood, "where they shop. Listed property funds don't give them that."

Yet Du Toit says there are also good reasons to worry about certain practices.

He, valuer Erwin Rode and some promoters have formed Saaps to regulate syndicators.

Promoters such as PIC, Sharemax, Dividend Investors, Blue Pointer and PFC will buy a neighbourhood shopping centre that produces an initial yield of 14% and sell it to investors at a 9,5% yield. Up to 20% of the money raised goes on commissions and syndication costs.

They hire valuers to satisfy investors that they are making a good buy, but Saaps questions the independence of many of these valuers.

Botha says Sharemax and PIC, headed respectively by intensely competitive brothers Willie and Durand Botha, have raised about R3,8bn.

Sharemax's Northpark Mall in Pretoria is typical.

The company says it bought it for R122m and this is confirmed by a deeds office search through the SA Property Transfer Guide.

At that price, the forward yield is 12%, based on Sharemax's projected income to October 2005. But property dealers confirm that last year yields on such a shopping centre would have been closer to 15% than 12%.

It's difficult to see how a valuer could justify a yield of 9,5% and a price of R155m a few months later. Sharemax says it made a net profit of R8m. But additional profits could be hidden in the purchase price as undeclared commissions and fees.

PIC says the expenses for its R234m Cherry Lane syndication were about R23m, R19m of it commissions.

It says it bought the three shopping centres in Randburg, Pretoria and Roodepoort from Bosman & Visser (Pty) Ltd on August 19 last year.

The SA Property Transfer Guide reveals that the Randburg property was bought on May 3 for R36m but the Pretoria property on August 23 - after the sale to PIC.

There is no record of the Roodepoort sale.

It is newer than the first two properties, but it could have sold for R60m, leaving about R50m after expenses between Bosman and Visser's estimated purchase price of the three centres and the R234m syndication.

Some of that was spent on refurbishment.

Saaps wants promoters to use truly independent valuers.

They support the department of trade & industry's tentative proposal in principle that promoters must disclose what they and previous owners paid for the property.

That disclosure wouldn't help Northpark Mall investors because the SA Property Transfer Guide shows the property selling for the same price in 1999.

The department also want promoters' prospectuses approved by a special committee.

The promoters argue that their profits are reasonable because they must finance the property until the syndication is complete.

They also inject money into syndicates to smooth the income as they rearrange tenants or refurbish the property to get the promised investment yield.

"But the danger is that the promoter will use funds from new syndicates to smooth old syndicates, thus creating unsustainable schemes," says Du Toit.

It can also give investors a false sense of security. Properties can still lose tenants to newer developments close by. When this happens, the investors, not the promoters, take all the risk. But syndications can be done another way.

Three years ago a group of doctors in Knysna formed KIH Group to invest directly in property. "We were tired of being ripped off by the institutions," says founder Douglas Seton. When KIH finds an investment property, the group decides what percentage of it they want and offers the rest to investors at what it cost them, plus a 10% administration fee and a 5% franchise fee.

"We have three income-producing commercial investment funds in Knysna, the Klein Karoo and Kimberley," says Seton.

"And we take positions in smaller trading opportunities that come our way to increase their yields. Investors can participate in most of these."

Seton says transparency works and that the investments are popular. Like the large syndicates, they have their money in alongside the investors.

KIH is one of between 60 and 80 syndicators that have contacted Du Toit to join Saaps. Du Toit says Saaps also wants sales staff to be accredited and to fall under the Financial Advisory & Intermediary Services Act. But Flax says syndications are fundamentally flawed.

Unlike listed funds, the shares are not easily tradable. His syndicatees took a 50% drop in value when he listed Spearhead because they found it so difficult to sell out.

Botha disagrees: "We can sell our investors' shares within eight weeks."

Retorts Flax: "The model is commission-driven. It's not ultimately in the interests of the investor and this will show when the market turns. We listed after some of our investors tried for two years to sell their shares. Now they are worth three times what they were unlisted."