Property syndications

Property syndication has become quite the talking point in South Africa over the past 12 months. The debate centres mainly on whether prices of property syndication investments are inflated or not. Fixed property has always been an important asset class, but an expensive one. With property syndication, small investors have the opportunity to own indirectly commercial property such as shopping malls. The typical investor in property syndication investments seeks security (ownership, income with potential escalation and capital growth), without his/her capital being drawn down in order to provide that income. Property syndication is thus a collective way to invest in property indirectly. In South Africa, the industry represents more than R3 billion of investments.

Regulatory regime of property syndication in South Africa
With the introduction of the Financial Advisory and Intermediary Services Act, 2002, the (“FAIS Act”) on 29 September 2004, the rendering of financial services (being advice and intermediary services) in respect of certain property syndication structures became regulated by the Financial Services Board (FSB) as shares / units / debentures in a public company are defined as financial products in terms of the FAIS Act.

Property syndication is typically structured either by way of a private company owning the property or a public company owning the property and investors investing in the public company. Where the property / building is bought by a private company, its shares are 100% owned by a public company. The shares / units / debentures in the public company is sold to investors and investments are solicited with a prospectus, registered with the Registrar of Companies. Property syndication is also done by way of private placing with the minimum investment amount being R100 000 and investments are solicited with a catalogue and not with a prospectus.

Although the FSB regulates the rendering of the financial service, the approval of the prospectus of the product falls under the regulation of the Registrar of Companies and not under the FSB. In addition, the Consumer Affairs Committee also recently published for comment in Government Gazette No. 28496 dated 10 February 2006 additional requirements that promoters of property syndication schemes need to meet. It is proposed that promoters need to make certain minimum information available to investors in addition to also signing an affidavit in which the promoter must declare, inter alia, that they have complied with the said requirements. It is proposed that a person who does not comply with these requirements will be committing a criminal offence and shall be liable on conviction to a fine not exceeding R200 000 or to imprisonment for a period not exceeding 5 years or both.

Many of the principles laid down in the FAIS Act were incorporated from the Australian legislation. The Australian industry may therefore serve as an indication of the development that may take place in the South African industry.