Here we go again! Personal Finance and other publications have been warning for years about the dangers of property syndication schemes.
Over the past three years, property syndication after property syndication has gone belly-up as property prices evened out or fell as a consequence of the international credit crisis brought on by the indiscriminate property loans to high-risk customers by banks in the United States.
Now Sharemax, one of the largest sponsors of property syndications in South Africa, has run into trouble, with thousands of investors, many of them pensioners, not receiving their income payments for August. The syndication in question, The Villa, is a massive R3.5-billion retail development east of Pretoria, which, once completed, will be one of the largest retail malls in the country.
But Sharemax seems to have run into trouble, because it has been unable to raise sufficient capital to keep up payments to both the builders and the investors.
And Sharemax is also in trouble with the South African Reserve Bank, which has ordered Sharemax to repay deposits taken from investors in contravention of the Banks Act. The Reserve Bank this week appointed two managers to manage the repayment process with the least disruption for investors.
Sharemax, in paying returns from the capital, hopes that the completed property development will result in capital values rising to cancel out the withdrawals from investor capital and will sustain the future cash flows.
In most cases, the problem with property syndications is that the costs, including fees taken upfront by syndication companies and the extraordinary high commissions paid to so-called financial advisers to flog the syndications, result in artificially high valuations being placed on the properties. When the property market turns sour, so do many of the syndications.
The longer the property downturn lasts, the greater the potential for failure.
The risks of a syndication can be further multiplied by some very dubious characters getting involved and selling syndications that are nothing more than scams. This happened with BlueZone, where effectively a mealie field - against which there was a land claim and where no planning permission had been obtained - was mis-sold. Investors stand to lose millions of rands.
Now that payments are not being made to the Sharemax Villa investors, the very investors who ignored the many warnings about the high risks of property syndications have come knocking on the door of Personal Finance - and, no doubt, on the doors of others - asking what we can do to help them get back their money.
A colleague, Deon Basson, died from the stress of taking on Sharemax over many years.
At the time of Basson's death, Sharemax was suing him; and then it paid R400 000 to his estate for publication rights to a book he had written about his fight with Sharemax. Needless to say, the book has not been published.
Personal Finance does not warn lightly against high-risk investments. Considerable time is put into investigating them and trying to understand the risks of their failing or your losing money.
One of the first cases about which we issued clear warnings was Jack Milne's PSC Guaranteed Fund in which investors placed more than R200 million despite our advice. Our warnings proved correct, and Milne went to jail for a year.
You have been warned
Over the years, we have advised you to exercise caution with many other investments. These have included:
- Currency trading.
This is a gamble, and very few people get it right. Currency trading is also a playground for crooks, such as Leaderguard, where millions were lost by investors. Yet currency trading is still advertised widely on television as being an investment where you can make big returns. It is more likely to cost you everything.
- Hedge funds.
These are very opaque investments with extremely high costs that are sold on the basis that they can protect you against the vagaries of the markets. Yet at the very time the markets ran into trouble in 2008, most hedge funds failed to deliver on their promises. In fact, about half the hedge funds internationally closed shop.
- Unlisted shares.
Almost every time a scam or high-risk investment is in the offing, it will involve the sale of unlisted shares. The reason is that there is no effective regulation. The unlisted company can be investing in anything from property to mines (remember Eldorado?), promising huge returns, which, it is often claimed, will be realised once the company lists on a stock exchange.
Not all unlisted companies are scams. The problem is that you need time and expertise to be able to identify the good ones.
Other problem areas
The problem areas are not confined to "fringe" products such as those listed above. Other high-risk investments include:
- Life assurance endowment and retirement annuity policies.
It is not that the life companies will steal your money. The problems lie with the structure of the products, namely costs, commissions and penalties. Both investment vehicles are sold on the basis that a maximum of half the commission will be paid upfront. That, plus the other costs, is why the life company makes you sign a commitment to pay the premiums or keep your money invested for a fixed number of years. If you do not, it will levy a penalty on your accumulated savings.
The problem is that no one knows what the future holds. For example, many people cancelled their life assurance contracts during the recent recession, particularly when they lost their jobs. So when you are down, you get kicked again - in the form of the penalties. The proven high cost of most of these products also too often results in poor returns.
- Structured products.
These opaque - both in structure and in costs - investments partially guarantee a return on an index. However, the chances are that you could do better simply by investing in a balanced unit trust fund or one that invests in the same index.
Many of the underlying problems in the investment industry are about ethics and morality. I will be dealing with that subject over the next four weeks.
Promises of above-average returns mean higher risk
Spare a thought for pensioners: they are normally the target of people who sell high-risk products such as property syndications.
Many pensioners depend, in part or in full, on interest-earning investments. If they want to invest safely, the best they can do is to invest in RSA Retail Bonds, which currently pay a return of nine percent for a fixed investment of five years.
Every time interest rates drop, pensioners become increasingly desperate. This makes the job of people who flog property syndications and other high-risk investments so much easier.
Property syndications normally promise (but too often do not deliver) what seem to be returns that are a few percentage points above the rates offered by RSA Retail Bonds and money market funds. With Sharemax's The Villa, the promised return is 12 percent.
However, what many pensioners do not realise is that every percentage point above the acceptable market rate multiplies the risk.
More often than not, when pensioners fall for the lure of higher returns, whether it is a poor property syndication or a currency scam such as Leaderguard, they lose just about everything.
You should be advised properly
Most sales of high-risk investments, be they a life assurance endowment policy or shares in an unlisted company attached to a property syndication, involve your being advised by an independent financial adviser or the agent of a financial services provider registered in terms of the Financial Advisory and Intermediary Services Act.
If your adviser did not fully acquaint you with all the risks of the investment (and, in terms of the Act, your adviser is obliged to be acquainted with all the risks), you can complain to the Ombud for Financial Services Providers, who can order that you are compensated for any losses - but only if you received the advice after October 2004.