"Big three" property syndication firm ditches current business model, merges with fund manager.
One of South Africa's "big three" property syndication companies will challenge its competitors with a product that it says has lower costs and risks.
On Wednesday Dividend Investments, a syndication company whose clients own property worth about R1bn, announced its merger weather City Capital, a property fund manager with about R200m in assets. The merged entity is called Capital Investments.
Following the merger, which is effective immediately, new investment products will be sold in fund format (as opposed to syndication).
Dividend Investments decision to ditch the syndication model introduces a new threat to the two largest remaining property syndication companies: Sharemax and PIC Syndications.
One of the major criticisms leveled against syndication companies is that they have excessive costs. For example, for every R100 you invest in a Sharemax syndication, at least R25 will go towards various costs and commissions, leaving just R75 for the actual investment.
The main difference between the rival products is that a property fund exposes investors to a basket of properties, whereas syndication investors typically buy a share in a single building. A fund thus offers investors better diversification, which tends to reduce the risk of losing money.
Dividend Investments CEO Etienne Carstens says that syndication companies are more expensive than a fund because every property requires the registration of two companies, each of which must be audited every year. By comparison, a property fund is more efficient.
Carstens stresses that syndication clients of Dividend Investments will be unaffected by the merger, although he says they will be given the option to convert their investment into a fund format.
However, new products sold by Capital Investments will all be in fund format.
City Capital launched its fund in May last year, and has delivered an annual return of 24% since inception.
City Capital MD Jurie Wessels says that Sharemax takes an initial margin of between 25% and 33% on its syndications, whereas investors in his property fund are charged 12,5%.
Wessels admits that this cost might seem high when compared with the low single-digit commissions charged by property unit trust companies. However, he points out that the longer the investment is held, the better value it becomes, because investors save on the annual management fees (usually more than 1%) that they would pay to fund managers.
Those considering an investment in commercial property should bear in mind that there is one low-cost product that is unlikely to be peddled by commission-hungry financial advisers, and that is the newly listed Proptrax exchange-traded fund (JSE:PTXSPY).
Proptrax shareholders own a diverse portfolio of blue chip industrial, office and retail properties. Proptrax trades on the JSE, and can be bought through a stockbroker for a commission of less than 1%. Its annual management fee is capped at 0,75% and is deducted from the rental income you earn, which is paid out every three months. And as Moneyweb has previously noted, there is often little to distinguish Proptrax from actively managed property unit trusts.
