The problem with shareblock

The problem with shareblock

Posted on July 21st, 2008 Huis-Huis 2 comments

In October last year Property 24 reported that the National Credit Act was responsible for shareblock sales along the Durban beach front plummeting. Is this still the case? I can’t seem to find more articles along the same line, so maybe not? I don’t know. But I’d love to hear from readers with share block property about their experiences!

The problem with shareblock

Prior to the NCA coming into effect, a few financial institutions offered shareblock financing. Buyers could qualify for a maximum loan of 66% of the purchase price (after verifying that the purchase price correlates with a market related valuation). The loan would typically carry an interest rate of 2,5% above prime, over a maximum period of 7 to 10 years – which wasn’t terribly attractive, I’m sure you’d agree.

But now it seems as if no banks are extending loans for shareblock buyers! So, only cash buyers can invest in shareblock schemes today. And especially in this period of high inflation, those folks are few and far between.

The reason for financial institutions’ lack of interest in financing shareblock purchases is simple: They can’t get enough security for a shareblock loan. All the banks get as surety is a certificate of shares ownership.

A loan on a shareblock property is not a mortgage. A share block buyer only buys shares in the company that owns the property, so banks cannot register a mortgage against the title. The shares are the only surety for a shareblock purchase.

Buyers don’t receive full title to their units. They simply receive the right to use and occupy their allocated unit in terms of a use agreement with the holding company.

And a certificate of share ownership does not even begin to compare with the surity provided by a registered first mortgage the bank has when financing freehold property. The bank sees shareblock loans as too much of a risk.

Why choose shareblock then?

If shareblock properties are so hard to finance, and you only get the rights to use a unit, why would people buy it? Well, the question is not as simple as it seems.

Where a property is held in terms of a lease, as much of the property on South African beach fronts are, local authorities (and most importantly the deeds office) will not sanction an application by a leaseholder for the opening of a sectional title register. For sectional title, the land must have a freehold title. Leasehold just won’t do. So, in places like Durban, to share property ownership so that multiple buyers could buy into property developments such as apartment buildings or townhouse complexes, share block schemes became the preferred method.

So, buying a property in a shareblock scheme is often not a choice. Buyers looking to acquire property in highly desirable areas or specific share block schemes hove NO OTHER CHOICE but to buy shareblock shares. In other words, if the desirability of the property makes the undesirability of the shareblock scheme pale in comparison, it’s really a no-brainer.

Shareblock schemes actually have some distinct advantages over other forms of property ownership. For instance, back when, shareblock owners did not have to pay transfer duty! But more recent changes to legislation have changed the situation. Buyers are no longer exempt from transfer duties.

In a shareblock scheme, potential buyers can also be scrutinised by means of a company interview before their offer to purchase shareholding is accepted or declined. (Er, now after reading that sentence again, shareblock sounds like a cover for buyer discrimination! Well, under the new constitution, company shareholders can’t afford to be seen summarily rejecting potential buyers based on their race, religious preference, sexual preference or sex.) But beggars can’t be choosers, so in the current tight real estate market, and the shareblock market in particular, this option seems rather daft.

Solving the problem

The shareblock problem is not an easy one to solve. Converting the shareblock scheme to sectional title ownership would seem the way to go. And the number of share block schemes being converted to sectional title schemes are growing.

The problem with converting shareblock to sectional title, however, is that it can only be done once at least 75% of the share block company shareholders have agreed to the conversion. And getting a whole lot of owners to agree can be near impossible, because it costs money and because sectional title ownership is not all puppies and roses either!

But let’s face it – people often don’t have surplus cash lying around the house nowadays!

To make things worse, the shareholders might lose some of the rights they had under share block ownership once the scheme converts to sectional title. For instance, if the shareblock agreement provided for the shareholder’s right to build extensions and/or other improvements to the unit when they feel like it, they will not have the same rights under sectional title ownership.

Converting Shares to Sections

If the shareholders can come to an agreement to convert the shareblock scheme to sectional title, there’s a whole process to go through.

If the shareblock land is subject to a leasehold, the municipality has to value the property at current market rates (yes, the valuation costs is for the shareholders’ account). And then the shareblock company must pay the determined land costs (practically each of the shareholders must pay their pro-rata share) to convert the land from leasehold to freehold. And only once the leasehold has been converted to freehold can a sectional title register for the improvements to the land be opened.

When a sectional title register is opened for a former shareblock scheme, all the units in the shareblock scheme are at first registered in the name of the share block company. But once this has been done (and providing, of course, that their portion of the land costs and transfer duty have been paid in full), shareholders are able to take transfer of their sectional title units.

The problem with shareblock

The most important difference between the two ownership schemes is that a shareblock transfer of ownership is not registered anywhere, while sectional title transfers of ownership must be registered at the deeds office.

But converting share block schemes to sectional title schemes does not solve ALL problems. Once the complex becomes sectional title, we have a whole herd of owners who might have no experience with the finer details of living with sectional title property.