"Sharemax Investments hereby notifies readers that they totally disagree with Deon Basson's interpretation of the facts. Any readers who wants to use this information in a negative manner are requested to consult with Willie Botha, managing director of Sharemax to obtain the correct perspective. Call him on 082 555 0474".

Incredible property valuations 
14/12/2005 00:00 AM
By: Deon Basson

IN THE LATEST issue of Plus 50, a magazine aimed at senior citizens, PricewaterhouseCoopers director Jan Swanepoel warns against financial scams.
He says: "Many people have lost money by investing in unlawful investment schemes that promise exceptionally high returns. We have experienced numerous of these schemes in SA over the years. Remember, if an investment opportunity offered seems too good to be true, it is."

In the same issue the magazine runs a promotion article and advertisement for Sharemax written by the group's marketing director, André Brand. There's also a glossy photo of one of the new syndications, the Flora Centre in Roodepoort. Brand warns investors against accepting generous predictions too readily.

The advertisement claims that the Pretoria Council for the Aged has evaluated Sharemax's products and recommends them to its members. However, in the light of recent events, the council would be well advised to give the matter further thought and reconsider its recommendation.

The Flora Centre's prospectus has already closed and the syndication has been finalised. However, it's a very good example of the "wolf in sheep's clothing" syndrome in the property syndication industry.

Until March this year, the Flora Centre belonged to listed property giant Growthpoint. The property was valued at R68,5m and was reflected at that value on Growthpoint's balance sheet. In March the property was sold at that book value to a private company called Zelpy 2095 (Pty) Ltd. In its annual report, Growthpoint said that it had sold the property because it no longer complied with their criteria for a long-term investment.

Zelpy is a company in the stable of the Georgiou family of Bloemfontein. They're known in that city and elsewhere as exceptionally wealthy property magnates, who own properties such as the Fourways Mall, north of Johannesburg. The family lives on the slopes of Naval Hill with the strictest possible security.

In August, Sharemax began marketing units in Flora Centre Holdings.

From the prospectus it appears that Flora Centre Holdings' wholly owned subsidiary Flora Centre Investments bought the Flora Centre from Basfour 2297 (Pty) Ltd for R92,5m and syndicated it to the public for R118,5m. Basfour 2297 is also in the Georgiou stable.

This series of transactions raises many questions. An experienced group such as Growthpoint wouldn't sell any property at less than a reasonable market value. Nevertheless, the Georgious succeeded in selling the property almost immediately to Flora Centre Investments for a profit of R24m (+35%).

Of course, part of the answer is that Sharemax investors used Flora Centre Holdings' money and not their own. The transaction benefited the directors of Sharemax and they'd therefore not embark in too tough negotiations to acquire the property as cheaply as possible on behalf of investors.

It's strange to see the name Basfour 2297, because the company's name doesn't appear in the records at the Deeds Office as a previous owner of the property.

The fast profit raises the question of who really benefited from the transaction and where the tax liability will vest? Neither Sharemax nor Michael Georgiou was prepared to comment.

Fast profits by well-known third parties such as the Georgious or other phantom parties ? as was the case earlier with the Witbank Highveld syndication (Finweek, 13 April and 15 June 2005) ? seem to be a pattern with the syndications of Sharemax and its competitor, PIC. For the SA Revenue Service that's potentially a huge source of income ? if it's aware of all these sales.

In the case of the Flora Centre, Sharemax added a further R26m to the buying price of R92,5m. The greater portion of that (R11,85m) was for marketing costs, while about R7,256m was Sharemax's profit in the syndication.

It's obvious that everyone who could squeeze blood from the Flora Centre stone has already done so. There's simply not much more value to add for investors. Unsuspecting senior citizens are footing the bill for the cream that Sharemax and the Georgious are skimming off for themselves.

It's astounding that a property sold for R68,5m by Growthpoint could be palmed off on the public at a price 73% higher within months. The Pretoria Council for the Aged should take note of that because, after all, it has a fiduciary duty towards its members.

The valuator, by the way ? a certain Sarel Eloff, of New World Valuations ? valued the property at R94,5m. That's 38% more than Growthpoint valued the property at and sold it for, which should have been sufficient reason for some awkward questions to the marketers, whom senior citizens often find themselves confronted with.

That tale is now repeating itself with the syndication of the Waterglen shopping mall (a Pretoria suburb) for R80m. Four Arrows Investments 50 bought the centre for R30,65m in April 2004. The shareholders in that company appear to be well-known Pretoria furniture dealer Etienne Lewis and a company called Business Partners Properties. The director of the latter is one Izak Minnie.

Waterglen Shopping Centre Holdings' wholly owned subsidiary Waterglen Shopping Centre Investments bought the centre from Four Arrows Investments 50 for R62m. That means a fat capital gain for the latter. Eloff valued the property at R63m.

Sharemax, as usual, had no hesitation about skimming off more cream from the deal and increased the price by R18m. The company earned a R4,5m profit from the transaction and, in addition, spent R8m on marketing, most of which went to brokers.

Finweek asked an experienced and independent valuator, Richard Currie, of Donald & Richard Currie Valuations, to look objectively at the valuation of the Waterglen centre as a test case.

Obviously, it wasn't possible for Currie to make a fully motivated valuation, as only limited information was available. Nevertheless, he came to the conclusion that the value of the centre was around R51,7m (see table p18), which is R11,3m less than Eloff valued it at and R28,3m below its syndicated figure.

The Waterglen shopping centre is situated at the corner of Louis Botha Avenue and Garsfontein Road in Waterkloof Glen Extension 5. The centre has stiff competition from the nearby Menlyn and Atterbury centres, as well as the modern Moreleta Plaza.

Currie says it's a building that suffers from design obsolescence when compared to competing buildings. He says that there's insufficient parking.

There's an inadequate tenant mix, because there are too few national chain stores. Pick 'n Pay as an anchor tenant is one of the few national chains.

Other tenants complain because there are no banks, no chemist and no national clothing stores. The general appearance of the centre is poor. The provision of R500 000 for immediate upgrading and R72 000/year for maintenance and repairs is definitely insufficient. The centre actually needs a major revamp soon, and that's not been adequately accounted for.

Eloff's valuation is, obviously, based on Sharemax's predicted profit performance for the syndication year ending 31 January 2007. Naturally, Currie also used Sharemax's figures as a starting point and made adjustments where he considered it necessary.

The fact of the matter is that the Waterglen prospectus ? like previous Sharemax prospectuses ? doesn't say a word about the historical profit performance of buildings. It's very easy to make predictions, but much more difficult realising them.

For example, one would like to see how the previous year's actual figures compare with the coming year's predicted figures. One would also like to see how profits grew in the past.

In fact, the intention of the Third Schedule of the Companies Act is that this information should be contained in the prospectus. Admittedly, it's true that the buildings bought by syndication companies are often not the only buildings built by the previous owner. In such a case, the building was presumably no doubt a business undertaking as intended by paragraph 6 (h) of the Third Schedule, and the profit performance of the previous five years must be disclosed.

In the Waterglen prospectus it's striking that the building can't achieve the desired return promised to investors under its own steam in the first year.

The predicted net income of about R6,7m gives a return of 8,4%. Calculated according to Currie's figures, it will be 7,8%.

Most of Sharemax's syndications initially promise an interest return of 10% for the first year, which would then increase by 10% annually. An example of that kind of promise was published in 2003 in IRA, the official journal of the Insurance Brokers' Council.

Brand now warns investors in the promotion report in Plus 50 to be careful not to be caught out with predictions of rental income growth of more than 8%.

Nevertheless, Waterglen's prospectus shows that the company's rental income will increase by exactly 10%/year. It's almost as if the increase is automatically keyed into the company's computer programs.

Sharemax has found a new trick for financing its interest commitments to investors. In the case of Waterglen, R2,3m of the R80m collected from investors is set aside as a cash flow reserve that can be used later to make up interest deficits.

Already in the 2007 financial year, R1,2m of that will be used to increase the interest income to 9,9%. That creation of the cash flow reserve looks very much like a case of Peter's capital being used to bolster the very same Peter's interest.

That brings the spotlight once again to bear on the fact that the properties are being syndicated for too large amounts and that the reality is quickly catching up with Sharemax and its competitors, such as PIC.

Waterglen will probably be their watershed.