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The shopping centre called The Villa Retail Park to the far east of Pretoria (already about 45% complete) and the Zambezi Mall north-east of Pretoria (which has just been completed) can’t generate sufficient rental income to pay the interest or dividends that Sharemax, the promoter of these developments, has promised or offered to investors. Simple calculations show the gross rental per square metre in those two buildings must be more than R400/month for that to be possible. That’s simply not on.
The current debate between the Registrar of Banks and Sharemax about whether Sharemax is a deposit-taking institution or not, is irrelevant as far as that’s concerned. Zambezi Mall and The Villa aren’t viable developments and can’t service their loans at the promised interest. The average gross income Hyprop – SA’s unquestioned leader in the field of large and luxury regional shopping centres – received for the year to 31 December 2009 was less than R175/sq m/month.
And even with the best will in the world, The Villa and Zambezi Mall can’t be compared with Hyprop’s Canal Walk, The Glen, Hyde Park, The Mall, Stoneridge and South Coast Mall. In fact, the opposite is true. A visit to the completed – but largely unoccupied – Zambezi Mall is depressing. In addition, the huge rubbish dump – still in use and full of squatters – next to the Villa is enough to put anyone off.
Let’s explain in detail the calculations for arriving at the required monthly rental of more than R400/sq m for The Villa. On the basis of a valuation that The Villa will be worth R2,9bn after completion, The Villa Retail Park Holdings, with Sharemax as the promoter, has undertaken to buy it at that price from the developer, Capicol 1. The funds were obtained from investors by means of a linked unit, a micro share and a debenture. Those are the things the Registrar of Banks and Sharemax are now arguing about: whether they’re deposits or not.
As far as the calculations are concerned, that’s irrelevant because, as mentioned above, The Villa won’t be able to earn enough rental income to service the promised income of 11%/year on those loans.
Only R79 of every R100 promoter Sharemax has attracted and will attract from the public is used to pay the buying price of R2,9bn. The other 21% goes to Sharemax – from which, for example, the commission of as much as 10% is paid and part deposited in a so-called stabilisation fund that will be used to supplement the rental income during the first three years if it isn’t enough to cover the promised 11% interest.
However, the full R100 is recognised as the amount invested – and that’s the amount on which the investor receives the interim interest of 12,5% until the building has been completed and the 11%/year after the completion of the building and its transfer by the developer.
Therefore, promoter Sharemax has to collect more than just R2,9bn for The Villa. The effective buying price is R2,9bn, divided by 79 multiplied by 100 – for those who wish to follow the simple calculation precisely. That pushes the effective purchase price up to R3,67bn. And it’s on that R3,67bn promoter Sharemax is promising investors an annual return of 11% after completion of the building. A simple calculation shows that’s an annual interest burden of R403m.
According to the various prospectuses that have already elicited money from the public for The Villa, the centre has a lettable area of 90 000sq m. That’s quite big: but we need a still bigger calculation. Interest – and now dividends, since Sharemax decided to do away with debentures – is more than R400m/year. Divide that by the 90 000sq m and also by 12 – for the 12 months in a year – and the answer is that a net rental income of R373/sq m/month is necessary to service the interest on the investment of R3,67bn.
Owners of shopping centres know net rental income is seldom more than 70% of gross rental. But let’s assume the ladies and gentlemen at Sharemax and Capicol are better managers than those of the other large property businesses. Divide the required net rental of R373/sq m by 0,8 for a required gross rental income of R466/sq m/month. In the table (on p21), that’s compared with that of a few other large property managers. The figures speak for themselves.
Let’s return to Hyprop’s annual report and a few of its calculations. Hyprop says its gross rental income for the year to 31 December 2009 was R790m. In its annual report that’s described as “gross collections”. Hyprop’s six large shopping centres mentioned above have a total lettable area of 378 482sq m. Hyprop also earns a small amount of income from hotels and offices.
But to make the calculations easier – and to make The Villa look more attractive – let’s say Hyprop’s full income of R790m refers to the lettable 378 482sq m of its six large shopping centres. Our little calculator now gives the answer: the gross annual rental Hyprop earns on those six lovely centres was less than R174/sq m for the year to 31 December 2009.
Let’s go through the sums – a second time – so that we can be sure of everything. Hyprop’s total receipts of R790m divided by 378 482sq m, divided by 12 (for the months in a year), gives the answer of R174/sq m/month rental. (Oh, sorry: a small error. It’s R173,999, plus a few more decimal points per square metre.)
Now, let’s test The Villa again. The buying price was R2,9bn, but only 79% of every rand collected by the promoter is used for the purchase price. The actual amount that has to be collected from investors is therefore R2,9bn, divided by 79 and multiplied by 100. That’s R3,67bn. On that, Sharemax promises interest of 11%/year after completion. That’s R403m/year, or R33,58m/month, just to look at the calculation from the other side.
There’s 90 000sq m of space available at The Villa. To service the interest of R33,58m/month, every square metre must contribute R373. But that’s net rental and it must be adjusted to make provision for other expenses, such as rates and taxes, electricity and also the payment to the property manager, in this case Sharemax. To obtain a net rental of R373sq m/month, Sharemax and Capicol will have to find tenants prepared to pay R466/sq m/month.
That’s a bit much, is all we can say – especially if you still want to boast anchor tenant Shoprite is going to take as much as 12 500sq m of the available 90 000sq m. Whitey Basson isn’t the kind of man who will easily pay R466/sq m, even at Canal Walk, which is a rather smart place where overseas tourists don’t care what they pay. The Villa isn’t near a tourist area – it’s next to a rubbish dump full of squatters.
Sharemax’s method of buying a shopping centre on behalf of investors at the valuation rather than at cost price plus a standard profit margin for the developer has always looked rather suspect to us. Either it gives the developer a huge profit or it creates a large financial black hole if the promoter can’t attract enough money.
In their financial statements, SA’s different listed property trusts give fairly full valuations of their properties. That’s not necessarily the price that can be fetched on the market but what the property is worth for them at a certain discounted rate.
Both listed big guns – Hyprop (market value R8,6bn), with its classy centres, and Growthpoint (market value R26bn), with its 12 equally impressive regional shopping centres – have no hesitation about giving figures. Growthpoint puts a value of R12 673/sq m on the 492 109sq m of lettable space in its regional centres. Hyprop says its six fashionable centres with a total area of 378 482sq m are worth R26 088/sq m. The reason is the enormous Canal Walk of 150 394sq m is valued at R33 578/sq m.
Nowhere in the prospectuses of Zambezi – and now The Villa – does the promoter state the actual selling price per square metre of those two centres. Nor in a single one of the many critical letters Finweek has received – mainly from Sharemax’s foot soldiers, the financial planners who offer the products to their clients – is a comparison of the cost price per metre of Zambezi Mall and The Villa put forward for the information of investors.
Once again, with the assistance of the prospectuses for Zambezi Mall and The Villa and the same little calculator, we’ll do this calculation. Zambezi Mall (selling price: R930m): amend that with the practice of only 79% of the collected investment going to the developer, Capicol, and the effective selling price becomes R1 177m. Divide that again by the lettable 30 000sq m and the cost is R39 240/sq m. That’s more than just a shade more expensive than Canal Walk was valued at by Hyprop.
Let’s do the same calculation for The Villa. Selling price R2,9bn: adjust that with the fact only 79c of every rand of your investment is used to pay the buying price and the effective price rises to R3,67bn, or a very hefty R40 777/sq m. That’s considerably more expensive than Canal Walk.
The table compares the market value per square metre of a number of shopping centres, as well as the rental per square metre where available with what the investor must pay for Zambezi and now The Villa.
Investors – and especially Sharemax and its salesmen and women – should decide for themselves whether they again see this as sensationalistic and uninformed reporting.
Interim interest
Who’s paying the interest at The Villa?
THERE’S A MAJOR slanging match currently on the go about whether new investors in The Villa are in fact paying the interim interest existing investors are receiving while the centre is being built or whether the developer – Capicol 1 – is paying it. If it’s the new investors, then it’s simply an illegal Ponzi scheme. It’s no surprise Sharemax is denying that most strongly.
Investors and readers are advised to decide for themselves on the basis of the following facts. With the issuing of debentures – and now ordinary shares – the promoter, Sharemax, has already collected around R1 500m, of which about R1 185m (79%) has been paid to Capicol 1 for the construction work already done.
However, at The Villa investors are receiving interest of 12,5% on the funds – ie, the R1 500m that’s already been collected – even though the building is still far from finished and no tenant is yet paying rent. The monthly interest therefore currently amounts to around R15,5m. Sharemax says it receives that from Capicol 1, the developer, as interest on the amount already paid for the partially completed building work.
The developer, Capicol 1, currently appears to have no other source of income than the payments it receives from Sharemax for the building work already completed. Capicol 1 and the builder, GD Irons, are in turn trying to synchronise the building work to fit in with the rate at which Sharemax is collecting new investments. That’s why it sometimes seems to be very quiet at The Villa – such as now.
But with the SA Reserve Bank no longer prepared to allow Sharemax to make use of debentures, the latter is now offering ordinary shares at a premium. The shares are being offered in The Villa Retail Park Holdings 2 Ltd. The second of those prospectuses that will attempt to attract R75m from the public was registered on 28 June this year. If Sharemax succeeds in attracting the full R75m, some R59,225m will be paid to Capicol 1 for building work on The Villa already completed.
But at the same time Capicol 1 will have to pay R15,5m/month to Sharemax as interest on the loans or withdrawals already received and that Sharemax, in turn, uses to pay the interim interest, now dividend, to existing investors.
If Sharemax succeeds in filling one of those prospectuses every month, Capicol 1 receives R59,225m of it – but has to pay R15,5m to Sharemax as interest. In terms of that scenario, interim interest is already devouring 26% of the new funds being received from investors.
The debate about whether new investors are paying old investors’ interest is open to many interpretations. If the full R59,225m flows through Capicol 1’s bank account and it pays R15,5m out of its bank account to Sharemax again, it can be regarded as an arm’s length transaction. If Sharemax were to conveniently keep the interest of R15,5m/month back when the payment is made to Capicol 1, it may perhaps alter the debate slightly.
We aren’t taking sides in this matter. The new investor must decide for himself.
THE LAST WORD
Sharemax, Zambezi Mall and the Villa
THIS IS – hopefully – the last report I have to write about this subject. It’s just not worth the time and trouble anymore. To the poison pen writers, such as CJ Marnewick, who criticise me for being a junior, inexperienced and uninformed journalist, and John Craven, who wants me to state my financial background and agenda at the beginning of reports in future – plus the excitable Elsie van den Bergh – you’ll find most of your answers on Google.
But for those who don’t have Internet access, I’m 65 years old, have a Master’s degree in economics and several other professional qualifications. Before my retirement in 1999 I was a member of the JSE for almost 20 years and practised as a stockbroker. Note: stockbroker, not insurance salesman.
I don’t have any hidden agenda in my reports about Sharemax and I’m not paid for my contributions to Finweek by anyone other than Media24, a full subsidiary of Naspers. Positive reporting – and looking for investment opportunities – has always been a pleasure and if Finweek and its readers still find that valuable I’ll continue doing so.
However, sometimes it’s necessary – and in my modest opinion that was so with Sharemax over the past year – to point out the dangers of certain types of investment, especially to vulnerable senior citizens, who really need all the protection possible against sometimes overzealous investment advisers, most of whom even boast of a registration number with the Financial Services Board.
It will really be a wonderful day if some advisers – especially those who have squandered the money of old people – are held personally liable for what they’ve done.
The current debate between the Registrar of Banks and Sharemax about whether Sharemax is a deposit-taking institution or not, is irrelevant as far as that’s concerned. Zambezi Mall and The Villa aren’t viable developments and can’t service their loans at the promised interest. The average gross income Hyprop – SA’s unquestioned leader in the field of large and luxury regional shopping centres – received for the year to 31 December 2009 was less than R175/sq m/month.
And even with the best will in the world, The Villa and Zambezi Mall can’t be compared with Hyprop’s Canal Walk, The Glen, Hyde Park, The Mall, Stoneridge and South Coast Mall. In fact, the opposite is true. A visit to the completed – but largely unoccupied – Zambezi Mall is depressing. In addition, the huge rubbish dump – still in use and full of squatters – next to the Villa is enough to put anyone off.
Let’s explain in detail the calculations for arriving at the required monthly rental of more than R400/sq m for The Villa. On the basis of a valuation that The Villa will be worth R2,9bn after completion, The Villa Retail Park Holdings, with Sharemax as the promoter, has undertaken to buy it at that price from the developer, Capicol 1. The funds were obtained from investors by means of a linked unit, a micro share and a debenture. Those are the things the Registrar of Banks and Sharemax are now arguing about: whether they’re deposits or not.
As far as the calculations are concerned, that’s irrelevant because, as mentioned above, The Villa won’t be able to earn enough rental income to service the promised income of 11%/year on those loans.
Only R79 of every R100 promoter Sharemax has attracted and will attract from the public is used to pay the buying price of R2,9bn. The other 21% goes to Sharemax – from which, for example, the commission of as much as 10% is paid and part deposited in a so-called stabilisation fund that will be used to supplement the rental income during the first three years if it isn’t enough to cover the promised 11% interest.
However, the full R100 is recognised as the amount invested – and that’s the amount on which the investor receives the interim interest of 12,5% until the building has been completed and the 11%/year after the completion of the building and its transfer by the developer.
Therefore, promoter Sharemax has to collect more than just R2,9bn for The Villa. The effective buying price is R2,9bn, divided by 79 multiplied by 100 – for those who wish to follow the simple calculation precisely. That pushes the effective purchase price up to R3,67bn. And it’s on that R3,67bn promoter Sharemax is promising investors an annual return of 11% after completion of the building. A simple calculation shows that’s an annual interest burden of R403m.
According to the various prospectuses that have already elicited money from the public for The Villa, the centre has a lettable area of 90 000sq m. That’s quite big: but we need a still bigger calculation. Interest – and now dividends, since Sharemax decided to do away with debentures – is more than R400m/year. Divide that by the 90 000sq m and also by 12 – for the 12 months in a year – and the answer is that a net rental income of R373/sq m/month is necessary to service the interest on the investment of R3,67bn.
Owners of shopping centres know net rental income is seldom more than 70% of gross rental. But let’s assume the ladies and gentlemen at Sharemax and Capicol are better managers than those of the other large property businesses. Divide the required net rental of R373/sq m by 0,8 for a required gross rental income of R466/sq m/month. In the table (on p21), that’s compared with that of a few other large property managers. The figures speak for themselves.
Let’s return to Hyprop’s annual report and a few of its calculations. Hyprop says its gross rental income for the year to 31 December 2009 was R790m. In its annual report that’s described as “gross collections”. Hyprop’s six large shopping centres mentioned above have a total lettable area of 378 482sq m. Hyprop also earns a small amount of income from hotels and offices.
But to make the calculations easier – and to make The Villa look more attractive – let’s say Hyprop’s full income of R790m refers to the lettable 378 482sq m of its six large shopping centres. Our little calculator now gives the answer: the gross annual rental Hyprop earns on those six lovely centres was less than R174/sq m for the year to 31 December 2009.
Let’s go through the sums – a second time – so that we can be sure of everything. Hyprop’s total receipts of R790m divided by 378 482sq m, divided by 12 (for the months in a year), gives the answer of R174/sq m/month rental. (Oh, sorry: a small error. It’s R173,999, plus a few more decimal points per square metre.)
Now, let’s test The Villa again. The buying price was R2,9bn, but only 79% of every rand collected by the promoter is used for the purchase price. The actual amount that has to be collected from investors is therefore R2,9bn, divided by 79 and multiplied by 100. That’s R3,67bn. On that, Sharemax promises interest of 11%/year after completion. That’s R403m/year, or R33,58m/month, just to look at the calculation from the other side.
There’s 90 000sq m of space available at The Villa. To service the interest of R33,58m/month, every square metre must contribute R373. But that’s net rental and it must be adjusted to make provision for other expenses, such as rates and taxes, electricity and also the payment to the property manager, in this case Sharemax. To obtain a net rental of R373sq m/month, Sharemax and Capicol will have to find tenants prepared to pay R466/sq m/month.
That’s a bit much, is all we can say – especially if you still want to boast anchor tenant Shoprite is going to take as much as 12 500sq m of the available 90 000sq m. Whitey Basson isn’t the kind of man who will easily pay R466/sq m, even at Canal Walk, which is a rather smart place where overseas tourists don’t care what they pay. The Villa isn’t near a tourist area – it’s next to a rubbish dump full of squatters.
Sharemax’s method of buying a shopping centre on behalf of investors at the valuation rather than at cost price plus a standard profit margin for the developer has always looked rather suspect to us. Either it gives the developer a huge profit or it creates a large financial black hole if the promoter can’t attract enough money.
In their financial statements, SA’s different listed property trusts give fairly full valuations of their properties. That’s not necessarily the price that can be fetched on the market but what the property is worth for them at a certain discounted rate.
Both listed big guns – Hyprop (market value R8,6bn), with its classy centres, and Growthpoint (market value R26bn), with its 12 equally impressive regional shopping centres – have no hesitation about giving figures. Growthpoint puts a value of R12 673/sq m on the 492 109sq m of lettable space in its regional centres. Hyprop says its six fashionable centres with a total area of 378 482sq m are worth R26 088/sq m. The reason is the enormous Canal Walk of 150 394sq m is valued at R33 578/sq m.
Nowhere in the prospectuses of Zambezi – and now The Villa – does the promoter state the actual selling price per square metre of those two centres. Nor in a single one of the many critical letters Finweek has received – mainly from Sharemax’s foot soldiers, the financial planners who offer the products to their clients – is a comparison of the cost price per metre of Zambezi Mall and The Villa put forward for the information of investors.
Once again, with the assistance of the prospectuses for Zambezi Mall and The Villa and the same little calculator, we’ll do this calculation. Zambezi Mall (selling price: R930m): amend that with the practice of only 79% of the collected investment going to the developer, Capicol, and the effective selling price becomes R1 177m. Divide that again by the lettable 30 000sq m and the cost is R39 240/sq m. That’s more than just a shade more expensive than Canal Walk was valued at by Hyprop.
Let’s do the same calculation for The Villa. Selling price R2,9bn: adjust that with the fact only 79c of every rand of your investment is used to pay the buying price and the effective price rises to R3,67bn, or a very hefty R40 777/sq m. That’s considerably more expensive than Canal Walk.
The table compares the market value per square metre of a number of shopping centres, as well as the rental per square metre where available with what the investor must pay for Zambezi and now The Villa.
Investors – and especially Sharemax and its salesmen and women – should decide for themselves whether they again see this as sensationalistic and uninformed reporting.
Interim interest
Who’s paying the interest at The Villa?
THERE’S A MAJOR slanging match currently on the go about whether new investors in The Villa are in fact paying the interim interest existing investors are receiving while the centre is being built or whether the developer – Capicol 1 – is paying it. If it’s the new investors, then it’s simply an illegal Ponzi scheme. It’s no surprise Sharemax is denying that most strongly.
Investors and readers are advised to decide for themselves on the basis of the following facts. With the issuing of debentures – and now ordinary shares – the promoter, Sharemax, has already collected around R1 500m, of which about R1 185m (79%) has been paid to Capicol 1 for the construction work already done.
However, at The Villa investors are receiving interest of 12,5% on the funds – ie, the R1 500m that’s already been collected – even though the building is still far from finished and no tenant is yet paying rent. The monthly interest therefore currently amounts to around R15,5m. Sharemax says it receives that from Capicol 1, the developer, as interest on the amount already paid for the partially completed building work.
The developer, Capicol 1, currently appears to have no other source of income than the payments it receives from Sharemax for the building work already completed. Capicol 1 and the builder, GD Irons, are in turn trying to synchronise the building work to fit in with the rate at which Sharemax is collecting new investments. That’s why it sometimes seems to be very quiet at The Villa – such as now.
But with the SA Reserve Bank no longer prepared to allow Sharemax to make use of debentures, the latter is now offering ordinary shares at a premium. The shares are being offered in The Villa Retail Park Holdings 2 Ltd. The second of those prospectuses that will attempt to attract R75m from the public was registered on 28 June this year. If Sharemax succeeds in attracting the full R75m, some R59,225m will be paid to Capicol 1 for building work on The Villa already completed.
But at the same time Capicol 1 will have to pay R15,5m/month to Sharemax as interest on the loans or withdrawals already received and that Sharemax, in turn, uses to pay the interim interest, now dividend, to existing investors.
If Sharemax succeeds in filling one of those prospectuses every month, Capicol 1 receives R59,225m of it – but has to pay R15,5m to Sharemax as interest. In terms of that scenario, interim interest is already devouring 26% of the new funds being received from investors.
The debate about whether new investors are paying old investors’ interest is open to many interpretations. If the full R59,225m flows through Capicol 1’s bank account and it pays R15,5m out of its bank account to Sharemax again, it can be regarded as an arm’s length transaction. If Sharemax were to conveniently keep the interest of R15,5m/month back when the payment is made to Capicol 1, it may perhaps alter the debate slightly.
We aren’t taking sides in this matter. The new investor must decide for himself.
THE LAST WORD
Sharemax, Zambezi Mall and the Villa
THIS IS – hopefully – the last report I have to write about this subject. It’s just not worth the time and trouble anymore. To the poison pen writers, such as CJ Marnewick, who criticise me for being a junior, inexperienced and uninformed journalist, and John Craven, who wants me to state my financial background and agenda at the beginning of reports in future – plus the excitable Elsie van den Bergh – you’ll find most of your answers on Google.
But for those who don’t have Internet access, I’m 65 years old, have a Master’s degree in economics and several other professional qualifications. Before my retirement in 1999 I was a member of the JSE for almost 20 years and practised as a stockbroker. Note: stockbroker, not insurance salesman.
I don’t have any hidden agenda in my reports about Sharemax and I’m not paid for my contributions to Finweek by anyone other than Media24, a full subsidiary of Naspers. Positive reporting – and looking for investment opportunities – has always been a pleasure and if Finweek and its readers still find that valuable I’ll continue doing so.
However, sometimes it’s necessary – and in my modest opinion that was so with Sharemax over the past year – to point out the dangers of certain types of investment, especially to vulnerable senior citizens, who really need all the protection possible against sometimes overzealous investment advisers, most of whom even boast of a registration number with the Financial Services Board.
It will really be a wonderful day if some advisers – especially those who have squandered the money of old people – are held personally liable for what they’ve done.
