A property scandal is breaking. Property unit trust (PUT) Cenprop has lost R120m - 23% of its net asset value - in six months. Has Cenprop's property manager, JHI, been incompetent? Or has the value been engineered down to favour the companies that will now buy Cenprop's portfolio? Or both?

Net assets have been revalued from R517m in December to R397m in June. Income has dropped 20% to 14,51c/unit from 18,08c. This is a disaster in an industry that attracts investors because of its stable, long-term income and capital growth. Cenprop has given a compound 8%/year earnings growth over 22 years. The board of PFM, Cenprop's fund manager, is winding down the 10-property fund.

Now Hyprop will buy Rosebank Mall, the jewel in the Cenprop crown, and ApexHi will buy two Johannesburg CBD buildings - at the new value. Both are listed property loan stock companies (PLSs) in Corpcapital's sphere of influence. The rest of the portfolio will be bought by Cenprop's sister fund, Capital. Redefine and Old Mutual each own a third of Capital.

Large investors are angry with JHI's lack of transparency in not warning them of the sudden fall in value. It has wiped out the properties' premium over the listed value of Cenprop.

JHI chairman Les Weil says dramatic changes since the collapse of the rand, as well as growing office vacancies, have reduced the value. But many listed property funds and unlisted institutional funds have been using 'independent values' as window-dressing to make their performances look better than they actually are.

One investor says Weil was warned that Cenprop's values were too high. Weil denies this. The saga also revives questions about the role of valuers in property (Property February 22).

Corpcapital's property deal maker Marc Wainer is making good his promise when he launched the hybrid PLS Redefine: that it would become actively involved in the funds it bought into if they performed poorly. Redefine and Old Mutual recently elbowed their way into PFM with a 25% share each.

Redefine and Old Mutual apparently insisted on Hyprop's valuer, Property Partners, doing the June 2002 valuation alongside JHI's valuers.

The result will not surprise many in an industry full of conflicts of interest. For example, property managers control the fund managers who employ them as administrators, valuers and agents, ensuring a flow of fees. But nobody is suggesting fraud or illegal accounting.

Managers worry that the saga could set the property sector back just as it is becoming practically the only investment game in town (see Personal Wealth Weekly and this week's Special Report).

The potential for conflict of interest goes beyond JHI. Wainer and his colleague, Wolf Cesman, are involved in Cenprop, Capital, PFM, Redefine, Hyprop and ApexHi. Corpcapital, adviser to Hyprop, is project manager for all the parties in a bid to save costs. Wainer and Cesman say they eliminated any conflict by recusing themselves from voting on any matter.

But one fund manager says investors should focus on Cenprop itself. 'Cenprop unit holders face collapsing income with important tenancies ending in key Cenprop offices,' he says.

Mike Watters, CEO of Corovest, which jointly manages Hyprop with Corpcapital and Standard Bank, says: 'We believe we are paying a full price for Rosebank Mall, one that is slightly earnings-enhancing for Hyprop. A higher (earnings-diluting) price would not be acceptable to unit holders.'

Watters adds: 'Wainer is shaking the tree, and it's up to unit holders on both sides to decide if that's a good thing.'

Financial Mail