By Ian Fife
The Atlantic Corporate Finance (ACF) property consortium that won the right to buy Johannesburg mixed-use icon Melrose Arch for R1,27bn is failing to come up with the funds.
It has missed the July 5 deadline to produce guarantees for the purchase price and the current shareholders have little prospect of raising the money. The terms of sale have had to be changed and now it seems new shareholders are being sought to save the deal. The failure of this sale will be the latest in a series of bungles and poor judgments by the Mines Officials Pension Fund (MOPF) and its successor, Sentinel Mining Industry Retirement Fund .
It is also likely to be a setback for the further development of Melrose Arch, a development of offices, shops and flats and one of Johannesburg's top entertainment locations. It was launched amid much fanfare in the late 1990s. The MOPF was the original developer of Melrose Arch - which may be a favourite destination of Johannesburg at play, but has been a financial burden for the 30 000 mine pension members who own it.
This raises a broader question. How can there be so little accountability or transparency among institutional property managers, such as pension funds and insurers? The central character in the Melrose Arch saga is Colin Barnard (51), a property dealer with a history of less-than-spectacular results. His renovation of a Craighall shopping centre belonging to his mother was bankrupted after Pick 'n Pay stopped paying rent.
In 2001 he bought a commercial property in Johannesburg's Suideroos through Interactive Trading 19 (Pty) Ltd for R4,3m. After three years of trying to get Barnard to pay, Johannesburg Metro cancelled the deal. Interactive sued, and lost. It gave notice of appeal, but after the city demanded a deposit for legal costs, Barnard withdrew. Yet Sentinel was either unaware of Barnard's track record or ignored it.
He was working for Randburg-based ACF when estate agent Traverse le Goff introduced him to Sentinel CE Eric Visser around December 2003. Barnard's relationship with Le Goff is typical of his history, according to former associates. He and Le Goff became confidants, constantly in each other's company, according to Le Goff, and planning big things for the R30m commission they were to earn and share on the Melrose Arch deal.
But Le Goff says that by early this year Barnard had dropped him for Visser, and refused to pay Le Goff's commission.
ACF bid R1,27bn for Melrose Arch - R700m cash and R570m payable in 36 months - beating an offer of R1,07bn from a consortium consisting of Cavalleros, Marriott and Absa and R880m from listed fund Sycom. The delayed payments would be secured by scrip held by Sentinel lawyers Bell Dewar & Hall.
About R500m could be raised against Melrose Arch's net income stream, which at present amounts to R60m/year. Barnard told his partners at ACF that scrip would be supplied by US backers and a local institution. Visser announced in February that ACF had won the tender. Barnard then transferred the deal to Katharra Investment & Trading , a company formed by accountants for Barnard's wife, Audrey.
Audrey Barnard is the sole director of Katharra, though other ACF shareholders took up their holdings in Katharra. Then there was an unprecedented event. Barnard appears to have moved on site at Melrose Arch and started dealing with the tenants without the sale being approved by the competition commission or Barnard having produced any proof of Katharra's bona fides. Barnard replies that he is responsible for all future events at Melrose Arch while Sentinel controls current activities. But tenants say that he behaves as if he already owns the place.
Some professionals working at Melrose Arch say they were told by Visser to communicate with him through Barnard. A sale of this size and complexity needs close co-operation between buyer and seller. But Barnard seems to have particularly impressed Visser and the relationship reportedly became close, with almost daily breakfasts at the Sunnyside Park Hotel next to Sentinel's offices. Visser refuses to answer questions on his relationship with Barnard and other matters. But he appears to have accepted Barnard as a man of substance, telling the FM (see FM Focus </04/0528/focus/afocus.htm>May 28) that he was "quite happy" with the guarantees and warranties from Barnard, whom he described as having substantial property experience. Investec's management team also seemed happy to work closely with him.
But his poor understanding of development and retail basics quickly worried the quantity surveyors, engineers, architects and other professionals involved in the deal. For instance, at one meeting in March, Barnard appeared shocked when told of the blasting needed to expand the complex. Tenants say Barnard's relationships with some of them has soured and they don't understand why Visser cannot see through Barnard. A rudimentary credit check would have shown Visser evidence of recent bad debts for small amounts against him and other signs that Barnard might not be a man of substance. The FM has been contacted by some of Barnard's former associates.
They describe a pattern: Barnard first paints a picture of himself as extremely wealthy to property sellers, banks and prospective partners; they become eager to do business with him, but eventually discover he is relying on their assets to finalise his property deals. Early this year Barnard and his consortium were mapping out ambitious plans for the future of Melrose Arch. However, by May all was not well.
Signs emerged that the consortium was having difficulty backing its deferred commitments. The sale agreement went through a series of changes. Its third addendum, signed in May by Barnard and Visser, increases the cash payment to R1,07bn and decreases the deferred payments from the sales of development rights to third parties to R200m over three years. Barnard has been offering parts of Melrose Arch for sale to other prospective buyers. The second-highest bidder, Cos Cavalleros says he was offered the already-built portion of Melrose Arch for R650m, "R50m less than I offered for it" a few weeks ago. Barnard gives the FM mixed messages about his plans for Melrose Arch, saying first that he never intended to hold the property but has already sold its constituent parts to other developers, then giving details of his own plans to develop it as SA's prime fashion centre. Shareholder schedules for Katharra show Barnard holding 31,9% and ACF shareholders the rest. Visser is not a direct shareholder in Katharra but Barnard told his co-shareholders that he would "look after" Visser. Barnard has changed Katharra's name to Melrose Arch.
In May Barnard split from his ACF partners, saying he had a secret partner who would pay them R30m for their 68,1% share in Katharra. His partners accepted, but after the FM's most recent report on May 2, Barnard said the buyer was unhappy with the publicity and would pay only R10m. His partners accepted this too but have yet to be paid. The shares are being held by Barnard's lawyer, Connie Myburgh, but the R10m has not been forthcoming. Myburgh and Barnard assured the shareholders that Sentinel was aware of the new partner.
Bell Dewar & Hall waited until July 13 to give Katharra notice of breach, setting the final deadline to produce it for August 11. But Barnard says he is unaware of the notice of breach - and unperturbed. "In fact, I have given Sentinel notice of breach on certain matters," he replies, citing this as the reason he has held back the guarantee. He has also changed lawyers, from Myburgh, who is associated with Visser, to Schindlers.
Melrose Arch could be over for Barnard, but it's not over for Sentinel's pensioners. And institutional management continues to be opaque about its vital assets. Pensions and insurance are the heart of a country's savings and about R60bn of that is in property . Pensioners and policyholders will find few details of the properties in the annual reports of insurers and pension funds and rarely their individual performances. Sentinel is a case in point. According to its June 2003 annual report , total investments were R19,5bn. Melrose Arch cost about R1,2bn or 6% of that - excluding loss of interest. Yet its rental income was only R32m, or 2,3% of the fund's total R1,38bn annual income.
What miners won't read is that Melrose Arch gave them an investment yield of less than 3%. In fairness, it should produce R75m this year, raising the yield to 6%. But investors can each get almost double that - about R2 500 more a year - in blue-chip properties listed on the JSE Securities Exchange.
From the beginning, Sentinel management has shown it is out of its depth when it comes to Melrose Arch. Four years ago, it was convinced it would get R120/m² rent, which would give Sentinel a yield of more than 10% and justify the controversial investment.
It was wrong, as it has been with other aspects of the development. And the professional costs have been unusually high, making Melrose Arch extremely lucrative for professionals and suppliers. For instance, the professional team, including architects Osmond Lange, engineers Ove Arup, quantity surveyors and town planners, received a combined 15% of the development cost. Most experienced development companies usually squeeze these down to about 10% or 11% of total costs. But in the case of Melrose Arch the professionals were, in effect, the developers. Costs for the new residential building are running at close on R19 000/m², according to Barnard.
So though it is selling at R23 000-R34 000/m², there is unlikely to be much profit accruing to mines pensioners. Magnum, the Bidvest-owned security company serving Melrose Arch, gets a much higher fee than the going rate in this highly competitive industry. Investec Property Group will get more than 5% of the gross rent as a property management fee. The going rate is about 2,5%-3% and competitors such as Broll and Pace would normally charge a third of that. The problem seems systemic. For instance, Liberty Life's policyholders may not be aware that Liberty Properties charges 6% for managing Sandton City . "There has been dissatisfaction for a long time about the lack of arm's length between the pension funds and the institutional managers," says Broll CEO Arnold Meyer.
However, Investec saved the mines pensioners' bacon when it took over the management of the newly completed but largely unlet Melrose Arch in 2001 . It slashed rents by up to 50%, filled the property and triggered it as an entertainment destination. Melrose Arch, at less than a 100 000/m², is only one-third complete, and Sentinel appears not to have worked out how it will fund the R2bn-R3bn expansion cost without having to sell its equity and other investments and reduce payouts to its members. About R200m and two years will have to be spent on blasting hundreds of thousands of tons of granite and extending the "super basement" needed to supply parking to the finished development, before buildings are completed over a further two years. So it will be at least four years before pensioners will get any more income .
Expansion is essential for the retail component, which is too small and will lose momentum soon if it cannot grow. Two big tenants, Europa supermarket and Kilimanjaro nightclub, are not paying rent at present. This leads to the next bungle. Sentinel had no plan for extending the property if the R120/m² rent was not achieved. It had little choice but to sell. Problem is, it was likely to be at a loss: the highest independent valuation has been about R925m.
Most buyers valued Melrose Arch at around R850m at the time of the sale, except Cavalleros, who bid R1,07bn, backed by Absa and Marriott. His due diligence seems to have overlooked the cost of the blasting. It would still mean a loss for Sentinel. Pension fund members may never know the full cost of Melrose to Sentinel or the full story of its sale.
There are many questions from the FM that could clear up matters but which Visser refuses to answer. His lawyer, David Hoffe, says Visser is "concerned at the many false assumptions and defamatory innuendos" that lie behind those questions. The FM, he says, is "making false and inaccurate assertions with breathtakingly misplaced confidence". Of course, he could answer the questions and correct everything.
Publisher: Financial Mail
Source: Financial Mail
Another bungle at Melrose Arch points to wider problems of poor pension management
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