Property stokvels that come with the promise of wealth creation can be very appealing. But you need to be careful when joining a stokvel that claims to be investing in property.

The Old Mutual Savings & Investment Monitor, which tracks shifts in the financial attitudes and behaviour of South Africa’s working metropolitan population, delved into property stokvels for the first time this year, polling 15 founders and 105 members of property schemes.

Lynette Nicholson, the head of research at Old Mutual, says Old Mutual found there are three types: the home ownership property stokvel; the building supplies stokvel; and the property investment / wealth creation stokvel.

Of the property stokvels that focus on home ownership and building homes for its members, the survey found members are predominantly female (89%), with 52% aged between 35 and 49. Those over 50 constitute 31% and members younger than 35 make up 16% of membership.

Nicholson describes the home ownership stokvel as less sophisticated and made up of predominantly women who pool money until they can buy land or housing for themselves or to rent out. “It’s a closed group and they don’t need a loan to buy property and aren’t paying interest.” 

The building material stokvel is very clever, she says. Members pool funds to bulk buy building material at a better rate than if you were to buy for yourself only. Nicholson says one such group went on to buy a brick factory. “It’s very entrepreneurial,” she says.

The wealth-creation property stokvel is the most sophisticated in that members’ money is used to build a property portfolio or to buy land to develop. “Putting up student accommodation is big,” she says.

These stokvels can have hundreds of members. “The largest group that was surveyed had more than 550 members and accumulates a staggering R24 million a year from monthly contributions that range from R3,500 to R15,000 [a month].”

Miziyonke Mtshali, the chief executive of the National Stokvel Association of South Africa (Nasasa), says that roughly 5% of the 800,000 stokvels are investment stokvels. 

Not many people participate in such stokvels, but they hold significant capital, he says. While members of more traditional stokvels contribute between R300 and R1,000, investment clubs collect in the range of R3,000 and R20,000 per member [per month], he says. 

But Mtshali says the majority are investment clubs in name only and they seldom have a sound investment thesis.

“These groups often experiment with various opportunities on a seasonal basis, informed by investment trends.” Funds follow opportunities such as crypto currency, unit trusts, bonds, e-hailing services and property, he says. 

So how does a sound property investment stokvel buy property, if it’s not a registered company? This is an important question because a stokvel is not a legal entity.

Mtshali says a property investment stokvel should register a co-operative or become members of a registered co-operative. “A co-operative is a legal entity that carries the genetic markers of a stokvel. While the primary function of a stokvel is to aggregate funds from members, a co-operative is a widely recognised entity, and allows groups to take part in economic activities more meaningfully,” he says. 

So, how do you, as a member of a stokvel that invests in property, have direct ownership in the property bought by the stokvel? 

“Through the co-operative structure, each member is represented in a manner that aids direct ownership,” Mtshali says.  Many South African investors have lost their life savings in property syndications where their money was loaned to an unlisted company to buy property on behalf of the syndication.

Mtshali says authentic stokvels seldom fall into this trap. It’s more often individuals who believe they are joining a stokvel, but don’t understand the risks involved. “Often, a victim is pulled into a large Whatsapp group. The victim often discovers that the group contains familiar people, which establishes trust. To the new victim, the familiar contacts appear to be in the loop. In such settings, an interesting phenomenon takes place, where each victim becomes the operator, using this newly assumed position to draw more victims into the sphere.” 

He says the initiator of the group is often invisible. “This is done by granting every new participant Group Admin rights. For the benefit of new participants who would not have a view of past group activities, and thus no view of the investment thesis, earlier members would recycle the investment thesis, and so it is repeated while the source is hidden. 

“The second indicator is the investment thesis itself. It is often a long, emotive piece that leans on concepts such as financial freedom, economic empowerment and a general ‘fight the system’ feel.” But when interrogated, the investment proposal is “mathematically defective”, he says.

Other signs include the absence of a registered entity, the inability to prove property ownership through an entity, and the absence of approval from regulators, Mtshali says.

Before joining a property investment stokvel, examine the opportunity on offer. If you are unsure, contact Nasasa on info@nasasa.co.za. Nasasa is a self-regulatory organisation authorised by the South African Reserve Bank.

Property comes with its own risks

Property is an investment that can generate an income (through rentals) and show capital growth (its underlying value can increase). But as with any investment, there are risks:

• Putting all your eggs in one basket – in this case, one asset class – is known as “concentration risk”. It’s the opposite of diversification, which is when you spread your risks. If you put all your money into property and interest rates start to climb, it can cause the property market to go flat, meaning there is less of a demand for property.
• Your capital is not guaranteed. If you make a poor investment – by paying more than market value for the property – you might lose some of your capital.
• You might not be able to sell the property for as much as you planned, meaning your return could be poor.
• You might not be able to sell the property as fast as you had planned, meaning you may have to wait a long time to get your capital back;
• You may battle to find a tenant. Or, worse, you might battle to evict a tenant who doesn’t pay their rent.
• You may not have the time or skills to manage the relationship with the tenant or the property itself.

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