Slump reduces hard sell and hype to rubble

Investors who fell for it pay the price

Hard-selling promoters of property schemes are common in the industry. They’ve boomed during the upswings, feeding on unsophisticated investors willing to believe there is a magic formula to quick wealth. Two of them are big retail property promoter Sharemax and Treoc, one of the biggest operators in the buy-to-let market. Others are PIC (not the Public Investment Corp) and Capital Investments

Take Sharemax’s schemes: even Pick n Pay has closed down at the Fern retail centre at the gates of the Dainfern estate north of Johannesburg. It’s a disaster for its investors. So are Rivonia Square shopping centre, north of Johannesburg, Flora Centre on the West Rand, and many other small retail malls around SA. Sharemax says these centres are only 15% vacant, but some of the tenants appear to be “fillers”.

The companies attract investors through agents and financial advisers, who earn big commissions. And Sharemax gets its profits upfront. FM calculations show at a R15m upfront profit per scheme (this is based on the R14m it made on Rivonia Square), Sharemax has raised over R300m plus commissions and fees over the past decade.

But the small investors who stuck with these properties might be in for a fright when the cash runs out.

Sharemax has launched over 30 syndications (schemes) in a decade, and is believed to have raised more than R6bn from investors by presenting its properties as low-risk investments with higher returns than unit trusts.

But the nonperforming retail centres show that the Sharemax schemes were based on hard sell and hype. Of course, some projects have succeeded and been profitably sold. It was probably the property boom that saved them.

Take Rivonia Square, on Rivonia Boulevard, a well-known retail dud. Sharemax bought it from listed property fund ApexHi in 2007 for R200,5m, valued in expectation that the net income would give an 8,2% return on investment in the first year. Sharemax shared the sales commission, without disclosing this fact to investors.

One property broker estimates the value was close to R160m at a 10,5% yield. Sharemax added R58m in costs to bring the price to nearly R260m. Investors bought in at this price. The extra charges were disclosed in Sharemax’s prospectus. About R25,8m of these costs were for marketing the project to the investors, most of it in commissions to sales staff and the investors’ financial advisers.

The second-biggest portion was a R14,3m upfront profit to Sharemax, part of a total package of about R17,5m in profit, fees and expenses — including R154000 for travel and accommodation. Sharemax’s Pretoria offices are a 40 minute drive from the shopping centre. The third-biggest portion was a R13,8m cash-flow shortfall fund to ensure steady monthly returns to investors in about the first year. That surely hasn’t been enough to cover the rent shortfall from all the empty shops. Sharemax claims its centres are successful and is expanding Flora Centre to add “about R58bn in capital growth for our investors”. It also insists it “vacated” Pick n Pay because it was a “poor operator and didn’t add any value to the centre”.

As with Sharemax, a bleak future awaits an unknown number of investors with Treoc, a buy-to-let promoter founded by Coert Coetzee. He punts “The Treoc Way” as “a holistic way” to achieve “everlasting results”. That is until interest rates rise and property prices drop.

Coetzee claims he has 47000 subscribers to his newsletters and seminars. According to Ryno Engelbrecht, the liquidator of one of Coetzee’s investors, in his application for an Insolvency Act inquiry, about 4000 have invested through Treoc. He says Treoc finds the properties to buy (no word about whether Treoc earned commissions from this but it is likely) and, as a mortgage originator (more commission), arranges finance for the investor. Then the investor has two trusts formed by a lawyer, costing R5000 each (no relationship with the lawyer is disclosed) for a complex structure in which properties go into one trust and the income from the properties, along with nonproperty assets, goes into the other, a family trust. Treoc manages the property.

But is this a scam, as some investors are now claiming? The inquiry into investor Werner Britz’s property trust revealed that Britz, who earned a salary of R17000/month at retailer Ackermans, owned six properties with a total bond of R3m, and at one stage appeared to have a negative cash flow of R33000/month.

In this case the “owner’s” R17000 salary was supplemented by rental income and money being paid from his family trust into his personal bank account. An accountant was then asked to confirm that Britz’s income was actually higher than his salary. This “income” was added to future rents to create a fictitious total monthly income of as much as R45000, according to Treoc documents presented at the inquiry.

Coetzee confirms to the FM that the rent was added to Britz’s total income and this amount was shown to the banks. “Absa would include 100% of the rents as income in allocating the bond. In this way the investor could get double what he would from his normal salary.”

Bonds were registered for more than the value of the property so that the properties could be revalued and the home loan increased. But once the market turned and the surplus of bond over property cost was used up to cover the monthly shortfall, there was little hope for the investor. “The real problem here is that the investor lied about his income,” says Coetzee. Britz admits this. “They told me that what they were advising was off the record, but that’s what they told me to do,” he tells the FM.

Engelbrecht, the liquidator, says many Treoc’s investors are in the same position as Britz. “I’m also liquidating the trust of an elderly woman who owes R2,5m. My biggest concern is that if thousands of people have lost their money, who will stop these organisations?”

The other red flag is that Treoc, on behalf of its investors, has applied for bonds on four different properties at different banks almost simultaneously, so the banks don’t know that the applicant may be incurring other debt. The “investor” thus gets more finance on each of four properties than he could afford on one.

Coetzee denies this is part of the Treoc Way. “We would never do that,” he says. “We never lie to the banks. This was done by [someone] who no longer works for us. We tried to stop him but we couldn’t get proof.” But Britz says it was standard practice at Treoc to apply for different bonds at different banks. “Coert [Coetzee] is lying,” he says.

In addition, the investor’s nonproperty assets are hidden in the family trust, away from the banks that had his surety. As Coetzee says: “They can sequestrate me today, I shall be living in the same house and driving the same car . they are not in the same entity as my bonds.” And that could be a lot of assets. If he does have 4000 investors and earned R20000 from each of them, that’s R80m. But, said Louis Olivier, advocate for the liquidator, at the inquiry: “He is defrauding his personal estate of assets, while retaining obligations in that estate. That’s pure fraud on creditors.”

Sharemax and Treoc will argue that they have many happy investors. That’s true. But their deals are structured to give them the first profits and not to act entirely in the investors’ interests.

Source: Financial Mail