Rotten real estate

Posted On Thursday, 25 September 2003 02:00 Published by eProp Commercial Property News
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How promoters can turn a R2 investment into less than R1 in the middle of a property boom

Property-Housing-ResidentialThe sorry sagas of Bonatla, a listed property company, and Arnold, a property loan stock company, are exposing a problem at the core of the institutional property industry. Both companies have had their value destroyed in a few years through the apparent complicity in overvaluing properties of promoters, valuers, banks and even investors.

Some investors have lost as much as 85% of their initial investment. Investors in Bonatla, who were issued shares at R2 between 1997 and 2001, will finally get back about 70c after the sale of the company's portfolio.

But much of that payout will be linked units in Alpina, a new fund being launched by Niki Vontas, the man behind Bonatla.

And those are the lucky ones. Pretoria property developer Mike Viljoen says he sold Bonatla his R130m property portfolio in 1999, receiving 14,3m Bonatla shares at R2/share in part payment. He also bought other shares at R2, giving him total value in Bonatla shares of R40m.

Viljoen negotiated an option with Bonatla that allowed him to sell back the shares if they dropped below a certain value. But when he took up his option, he found the agreement was flawed because of badly worded clauses and he was unable to claim. He settled his claim last September by selling his shares to Vontas and US-based trader Sam Meltzer for 27c/share.

Viljoen complains that he ended up with less than R8m in cash. But Vontas says he is also getting an "agterskot", which will give him a total of about R1/share.

In 2000, Durban-based Bill Tyler received 8,5m Bonatla shares, then said to be worth R17m, from the sale of his R100m portfolio to Bonatla. He calculates that he is due to get back about R5,5m.

Vontas's response: "Their properties were never worth what we paid for them and they knew it. They were bailouts to people who were overgeared and we were the only ones prepared to pay them up to 80% of the purchase price in cash. Their 70c/share reflects the real worth of their assets."

Johannesburg developer Brian Peters sold his Ormonde factory to Bonatla when it was listed in 1997. It was valued at R6,7m and had a bond on it of R4,1m - at about 60% borrowings, hardly overgeared. He was paid out 1,3m linked units worth R2,6m. At the current price of 50c, they are worth less than R1m.

"I bought into Bonatla because I thought its diversified portfolio was a safer bet than holding a single property," says Peters. "Isn't that what you'd expect from a listed fund? I was not in trouble or looking for a bailout."

But some investors are not so innocent. Corpcapital's property deal maker Marc Wainer was mystified, when he was preparing to list Redefine, as to why he was being outbid by Vontas, who was listing one of his funds at the same time. He says he discovered that vendors who sold to Vontas were often aware that the property prices were inflated. They were taking the chance that the share prices of the Vontas funds would hold up as the property market improved.

The banks that financed the Bonatla and Arnold purchases would have done their own valuations and must have been aware that the "independent" valuations were higher than their own.

Vontas says Tyler's financier at the time, BoE Corporate Bank, to which Vontas is also heavily indebted, brought Tyler's portfolio to him. He says the debt equalled the value, but that BoE insisted on the 8,5m shares to cover other exposure they had to Tyler.

David Gorven, commercial property divisional director of what is now called Nedbank Corporate Property & Asset Finance, emphatically denies this.

"We did not broker the deal. When Tyler approached us with the offer from Bonatla, all we did was request that Bonatla offer more cash and less shares," he says.

"It is possible that Niki asked us if we had any clients with properties suitable for Bonatla and we might have brought the Tyler portfolio to his attention," says Gorven.

BoE did finance the Bonatla purchase because, says Gorven, "obviously, we would have been happier with our loan spread over the broader listed portfolio than over the Tyler portfolio".

Of banks' responsibility to alert the market to valuations, he says: "We never reveal our own valuations and it is not for us, as the lender, to comment on what is effectively the valuation of the equity portion of the property. Our focus is to ensure that the loan is repaid - the earnings per share and share price are not the province of lending banks.

"We would only see an argument for responsibility to the investment community if we actually sold properties we own into a listing," says Gorven.

It is now clear from a recent trading statement made available by Arnold's newly appointed fund managers, Corovest, that most Arnold properties were overvalued by 20%-25%.

The write-downs are likely to wipe out most shareholder value from the company.

This is not the first time the FM has alerted investors to the overvaluing of property. "It's generally known in the industry that overvaluations are widespread," says one leading property asset manager.

Another wonders: "Isn't it amazing how the independent valuers always reach a level close to the actual purchase prices of properties in a fund about to be listed?"

Insurance companies and pension funds overvalue their policyholders' property portfolios to make their performance look good. Details of these valuations never have to appear on the balance sheets of listed institutions such as Metropolitan, Old Mutual and Sanlam (Property February 22 2002), where they could be questioned.

Listed funds appear to use overvaluation to ensure they get good-quality properties. Property owners are suckers for the flattery of an unrealistically high value. And they tend to ignore the fact that overvalued properties determine the (over) valuation of the shares they get in payment. This makes them party to the deception, too.

Another strong incentive to overvalue is that the promoters are also paid fees as a percentage of the value of the property portfolio bought into the fund - usually 1,5%.

The problem is that management and, in Arnold's case, the promoters, too, had to make the portfolio perform. They hoped to achieve this partly by getting performance guarantees from the vendors. Mainly, though, they just seemed to live in hope.

It worked for neither Bonatla, hit by rising interest rates in late 2001, nor Arnold. Arnold was unable to meet its deferred payment obligations to vendors and seems to have solved this by issuing (dilutionary) linked units in lieu of cash and by restructuring borrowings.

This appears to have led to further misbehaviour. When Arnold could not meet its deferred payment obligations, some vendors agreed to receive shares instead of cash - on condition that performance obligations by them were written off. This further diluted income.

The role of Coronib, in which  has a 40% stake, also raises questions. It was named in the prospectus as an asset manager and investors could expect this highly rated property asset manager to look after their interests. But Corovest's Mike Aitken says Coronib only managed the performance of the properties themselves and not the broader strategic issues or the performance guarantees. In other words, it was not actually the asset manager.

The problem starts before the overvaluations. JSE rules require a history of performance, rather like a normal, non-property trading company. But property is different. Its income is contracted, usually by leases over five, 10 or 15 years. The history of a property's income from, say, a long Woolworths lease means nothing if the lease ends a month or two after listing. If Woolworths did not renew its lease and no other tenant could be found, there would be no further income.

The JSE does not require an auditor's report on the contracted future income on each property. Investors would get a better picture of a property fund's potential future payouts from such a report published in the prospectus as well.

Investors should buy new property listings with caution until the industry or the JSE roots out this rot.


Last modified on Friday, 09 May 2014 21:37

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