Buying a property as a primary residence or an investment property is very capital intensive and for most people the biggest undertaking of their lives. For even more, it is a near impossible dream. South African’s being as creative as we tend to be have found a creative solutions around this, including formulating savings groups or social clubs commonly known as stokvels.
A ‘traditional’ stokvel is basically a group of people usually known to each other or introduced by people known to each other, who save money (generally in fixed deposit account) as a limited group and then at an agreed time share the money saved over a period via equal lump sum ‘payouts’ to members either at the same time or an agreed rotational basis. The idea is that people have a common goal to save towards the same objective and keep each other honest by saving together and not take risk, either trading or investment.
Where the money isn’t immediately paid over to a member as and when it is contributed through the rotational payment system, it is invested in a fixed deposit account and shared equally amongst members at an agreed time. Usually members will be required to use the funds a manner agreed by all parties.
The familiarity of the members keeps them honest i.e if Sonto doesn’t pay Nonhlanhla the contribution due to her, Thembi, Karabo and Anele can go knock on her door and demand payment of the outstanding contribution, causing great embarrassment to Sonto. Believe me, you don’t want to owe stokvel members any money, the whole neighbourhood and your preacher will know.
Stokvels, because they are meant to be ‘simple’ and ‘friendly’ to use for members, despite the fact that they are estimated to generate over R50billion per annum are effectively unregulated. The constitution of the stokvel is the only regulating document, which interestingly many don’t have as they tend to be based more on a system of ‘trust’ and familiarity. A constitution is generally required by banks when a stokvel is opening a bank account in order for the bank to have some sort of formal administration process in place i.e who can operate the bank account.
With approximately R50billion in circulation, it doesn’t take a maths genius to see how ‘lucrative’ this ‘market’ is for banks and those who see other opportunities.
Enter the ‘property stokvel’, the new kid on the block making waves. Why a ‘property stokvel’? Well getting into the property market is very expensive and the ‘property stokvel’ promises to reduce the barriers to entry buy helping people to save and purchasing property together.
Does this work? The short answer is no, the majority of those don’t work and here is why.
A ‘property stokvel’ is made up of a group of people that have pooled together money in order to acquire property income generating property as an investment, land to develop and generate an income or sell or acquire property for members over period of time. The larger the group the better is there is more money in the system to fulfil the property investment mission.
The idea is that ‘property stokvels’ will make property ownership more accessible by off course allowing people to pull together money and invest in or acquire property which they otherwise would not be able to afford. The more the members the more available money to invest. This sounds good until you start digging a bit deep and start noting the following:
- ‘property stokvels’ unlike traditional stokvels are not started by members known to each other or introduced to each other. The founder of the ‘property stokvel’ starts the ‘property stokvel’ and invites members of the general public to join, by making contributions and often paying administration and joining fees, quite contrary to the traditional stokvel;
- the founder runs and administers the stokvel often at their sole discretion whereas the traditional stokvel is more democratic and transparent;
- the constitutions of the ‘property stokvel’ are often unclear in terms of including the mechanics of how members actually benefit i.e how will they own these properties and how will their interest in the ownership of such property be noted – will their names appear on the title deed?;
- the constitution gives free reign to the founding administrator to run the ‘property stokvel’ as they deem fit with what often seems to be a complex annual meeting system that does not really allow for the administrators to be changed by the members
- the administrator is tasked with acquiring income generating property and to administer it at an undisclosed cost. One can see a lot of room for abuse here, high admin fees and of course what experience does the administrator have in making property investment assessments and then administering such property. Bizarrely, these constitutions often state that members are not entitled to receive any benefit;
- in respect of acquiring property on behalf of members, it is the administrator who at their discretion who decides what property is transferred to a member. Never mind that there are tax implications where multiple transfers of property are involved, there are never any values set in terms of the properties that member will receive. So hypothetically one member may receive a commercial property or mansion valued at millions while another receive flat valued a few hundred thousand;
- the administrator also decides, in the instance that property is acquired to be transferred to a member, when such property will be transferred and which member will receive such property. A member could therefore be in the ‘scheme’ for years and not receive a property or have someone who has joined after them receive a property;
- time value of property and money is for ever changing, thank you inflation, a member receiving a property valued at R600000 in 2013 will carry the same value as member receiving the same property in 2017;
- the value of a two bedroom flat in Pietermaritzburg and Sandton or Cape Town are not the same, ensuring that members receive properties of the same value is something that is also silent;
- there is also, what you would think is a logical maths question. If a member contributes say R1000 a month over a year, well you only have R12000 of value each as members no matter how many people are in the scheme. This means if all is square you would need to contribute the value of the property to be acquired for yourself before you can ‘receive’ a property. The only way to circumvent this is by having more members in the scheme with the member joining later shoring up the earlier members so that properties can be acquired fairly quickly or else the scheme does not make sense. What happens to the late joiners when there are no longer any more new members to join? (you can see where I’m going with this, if not, Charles and Madoff would be proud of this particular initiative). Some stokvels seem to promise what would be amount super profits/investment returns in order to maintain the schemes – we all know what that means; and
- then there is of course the legal question, a stokvel is not a recognised juristic entity in South Africa and can therefore not acquire anything in its own names, how exactly are these properties acquired, if members are not shareholders in the a company, beneficiaries in a trust, partners in a partnership or individual owners, how exactly is their interest noted and value of that interest calculated as presumably there are hundreds of members (See: https://propertylink.africa/structuring-a-property-purchase-using-the-various-legal-entities-through-which-property-can-be-owned/).
Speaking to either members or the administrators of ‘property stokvels’ has not yielded any satisfactory answer but rather a series of deflections and rhetoric aimed at stirring emotion. Until the above questions can be answered, I will personally consider ‘property stokvels’ a serious danger to society and would advise members of the public to stay far away from these. By the time authorities wake up to this lots of people would have lost their hard earned money and tears will be flowing like a flooded river.
The only stokvels that seem to be successful in investing in property are the traditional stokvels who have used the stokvel mechanic a saving tool to keep each other accountable and then gone on to invest in property via companies where members are shareholders (with company owning the property), trusts where members are beneficiaries (with the trust owning the property), as individuals where each person’s name appears on the title deed and each person owns an undivided share of such property or where members at the end of the savings pay out lump sums to members in order for members to acquire property, renovate existing property, or pay down mortgages. The important principle to note here is once you become a shareholder or trust beneficiary or make an acquisition as joint individual, the law and SARS see you as such. You are no longer a member of a stokvel in the eyes of the law. It is important to note and use such terms correctly so as to help those with a lessor understanding not to be taken advantage of by being bamboozled with such terms.
It is easy to see how members of ‘property stokvels’ can be taken advantage. Stokvels are meant to be risk free savings socials clubs and should remain as such. They were never meant to be complex business enterprises and people wishing to undertake the risky business of property investment, where you can lose your shirt, false teeth and weave should do so using the correct legal entities. It is also easy to see how easily members can be frustrated in trying to get recourse often against in inaccessible administrator, simply because there is no regulation and members are not know to each other.
*Disclaimer: The contents of this article should not be considered as legal, professional, financial or any other form of advice. These are merely views based on the writer’s personal experience. Readers should obtain independent advice on any matter prior to making any decision.