Count carefully

INVESTORS HAVE already put R1,14bn into The Villa Retail Park, the biggest development yet by Sharemax, the Pretoria-based marketer and manager of property syndicates. But they should start getting worried. Start worrying even if you're still regularly receiving your monthly interest cheque. The actual market value of those investments - if it were at all possible to realise them - is probably already less than 50% of what you paid in. The promise - or, more likely, simply the dream - of the current generous interest rate of 12,5% a year - will also disappear in about three years' time or even become a nightmare.

Sharemax has just issued its 17th prospectus, and the group's active agents are already out in force, with the aim of collecting a further R75m before the expiry date of that prospectus. Sharemax's total target for this project is R3,53bn.

The purpose of this report is to give some guidance to investors - usually senior citizens, who are going to be put under considerable pressure by Sharemax's extremely dynamic marketing team over the next few weeks.

Remember, the 12,5% a year (on fixed deposits the interest is around 7% and on the two-year RSA retail bonds it's 8,75%) the marketers will guarantee you between now and September 2011 - and indications of 11% for the first full year after September 2011 - are attractive, very attractive. Especially for senior citizens who are now so hard done by with low interest rates it sounds like a wonderful option.

Our warning is simple: Be very careful and come along with us to conduct the necessary research and assessment of the risks associated with this investment. And remember: a wily grey-haired old timer in the United States called Bernie Madoff recently caught out some of the world's leading investors with promises of returns of more than US$50bn, which were just too good to be true.

The very first bit of research any prospective investor in The Villa Retail Park must do is to visit the partially built shopping centre. It's easy to find. From the N1 (the main highway between Johannesburg and Pretoria) take the Polokwane bypass and turn off at Delmas Road. The road is fairly narrow and bumpy. About 5km further on - corner of De Villebois Marceuli and Delmas Road - you'll see the building site. There are currently five cranes on site. Stop and count how many of the five are actually working.

After that, return to the N1, go north and turn off at Atterbury Road in an easterly direction. Stop for a coffee at the Menlyn centre and take a stroll around. This is essential research. Just like the famous Warren Buffett, who is already 80, all senior citizens should conduct thorough research before they entrust their last bit of pension money to a smart-talking young fellow with a nice red tie.

This is your research: The Menlyn centre belongs to Old Mutual. It has a massive 118 307sq m of space to lease and Old Mutual estimates the centre is already worth R3,4bn. That's a healthy R28 800 per sq m. That's expensive (see table). But remember: the Menlyn centre is by far the biggest and most popular in Pretoria.

The price investors are coughing up to Sharemax for The Villa is a hefty R3,53bn. According to Sharemax, The Villa Retail Park will consist of 90 000sq m of retail space, 16 000sq m of office space, a boutique hotel of 6 000sq m and a lifestyle centre of 5 000sq m. However, R3,53bn is only for the first phase: 90 000sq m for the shopping centre. The price converts to R39 222 per sq m, which comfortably makes it the most expensive shopping centre in South Africa. Yes, even more expensive than Cape Town's Canal Walk at R32 527 per sq m.

The first question to ask if you follow Buffett's advice is whether it's wise to invest in an unproved new shopping centre in the current economic climate, especially if it's more expensive than the best in the country.

The reason why investors consider the unlisted share/debenture combination of The Villa is because Sharemax's promoters - they don't want to be called agents - offer you 12,5% interest, virtually from day one of the new investment. It's paid into your bank account monthly, even though The Villa is still far from finished. That's much better than Absa's 7%, even after its senior citizen bonus.

But be careful: don't let your imagination run away with the 12,5% interest. Get in your car and drive around the Menlyn centre. If you're from the platteland, ask someone else to drive. There are hundreds of thousands of metres of additional retail space around the centre. You can buy any car your heart desires there, new or old. There's even a place that sells golf clubs that drive every ball dead straight. Drive up Garsfontein Road, get lost in Lynnwood. Come back to Atterbury, drive around Menlyn once more. Take the N1 south again, turn off at Delmas Road and take another look at the partially built Villa Retail Park.

Then ask yourself three questions and reply to them honestly, without the help of that Sharemax man with the red tie:

* Will The Villa and its surrounds be able to offer anything at all similar over the next three and even 10 years to what the Menlyn area currently does?

* Where would you, as a shopkeeper or businessman, like to have your business and where would you be prepared to pay premium rental? At The Villa or at Menlyn?

If you're able to answer the first two questions it will certainly not be difficult to decide where you should invest your money - even though Sharemax promises 12,5% from day one.

The time has now come to work through the very difficult matter of financial figures in order to make an informed investment decision. The first question is easy and the answer is right there in prospectus number 17. With prospectuses one to 16, Sharemax has already collected R1,14bn. Of that, Sharemax took 17,77%, or R212,4m (including marketing costs). The agents, who are now out and about looking for new investments, received R114m - just more than half of Sharemax's share of R212m - in commission. Remember: each one of Sharemax's marketing people earns 10% commission on everything they collect. That's by far the highest figure paid in the financial industry, where commissions of between 1% and 3% (for example, such as in the case of Satrix and Momentum) are currently the norm. That's why they're so keen and don't easily take "No" for an answer.

And Sharemax itself doesn't work for nothing. Its directors all have addresses in the best suburbs and live a luxury lifestyle. According to prospectus 17, Sharemax makes a profit of around R5m from every prospectus issued. So 16 are already completed and number 17 is out now. It looks as if Sharemax's profit from its first 16 prospectuses is already R80m.

Just another quick calculation, which could also be another question for prospective investors. The requirement for the entire project is R3,53bn. Once prospectus 17 is successfully completed, the amount collected will be R1,215bn. That's far short of the R3,53bn required. There's a shortfall of R2,315bn, or another 31 prospectuses if R75m is collected from each one. That's not a bad financial prospect for Sharemax. Along with prospectus 17 there's a profit of R160m for them before year-end 2011. No wonder some of the four directors can walk around Pretoria and boast of their best year ever. Not necessarily the best for investors but certainly the best for Share-max's directors, who are also the only shareholders.

I think we first need a very strong coffee before we can try to understand the rest of the flow of the funds, as well as your proposed investment. Of the R1,14bn already collected from prospectuses one to 16, Sharemax received 17,77% - or R212,4m. The balance of R894m was lent by The Villa Retail Park Holdings: ie, the company that issues the prospectuses and collects your money (call it Holdings), to The Villa Retail Park Investments (Pty) Ltd. That's for buying the land and paying the builders for the work done so far. That's not all. The Villa Retail Investments (Pty) Ltd (let's call it Investments) also pays interest to Holdings - and that's what Holdings pays you, the prospective investor, the 12,5% per year interest.

By now we're all properly confused. It will be easier to explain in terms of R100 how your investment in Sharemax flows between Holdings and Investments. Put R100 in change down on top of prospectus 17 and now do the following: Give R18 - that is, the 17,77% - to Sharemax. Let the Sharemax rep take R10 of that R18. That's his commission. Pile up the remaining R82. For every month between now (February 2010) and September next year the prospective investor takes R1 out of the pile. That's the 12,5% a year interest, which is around 1% a month or R1 on R100 you earn from month one. The investment is for 20 months and that's why the investor must take R20 back. If it feels rather strange taking your own money back as interest, don't worry - that's how it works. You invest in Holdings, which lends your money to Investment, which in turn pays interest to Holdings, which pays the investor his guaranteed 12,5% a year.

The investor who is now looking in some confusion at the pile of money - of the R100 there's now R62 left after Sharemax's R18 and the investor's R20 interest - suddenly realises he never received any interest. Sharemax and/or Holdings and/or Investments simply used some of the investor's own money to pay the 12,5% interest. No, it's not a Ponzi scheme. Such a scheme uses a new investor's money to pay the first investor's interest. This scheme simply uses your own money to pay your interest.

In brief: Look carefully at the pile of money in front of you. The investor kicked off with R100. Of that, Sharemax took R18 and R20 was paid to the investor as interest. But his statement shows the investor still has R100 invested and with that he starts off year three with a return of 11% or R11 a year. But there's only R62 left to use.

Without guaranteeing anything, Share-max says that from 30 September 2011 - when the building is completed and all the tenants have moved in and paid their first month's rent - investors will no longer receive the guaranteed 12,5% a year interest but will probably start off with 11% net rental income. The 11% will of course increase handsomely every year as the rental of the stores in the building is regularly increased.

If you're confused, don't worry. Your R100 investment remains and you'll earn 11% on it. Nobody guarantees it but, don't worry, you'll get it, the marketing fellow will assure you. Look again at the pile of R62 remaining. That's all that's left to use. Out of that someone must earn R11 a year. That's 18% a year. And that looks high, very high, in the current economic climate.

That's probably enough for one day. Pay for your coffee at Menlyn, get into your car and drive around The Villa Retail Park again. Tell the agent you want to think about it.

Think about what Menlyn looks like, what the surroundings at The Villa look like but especially about that little pile of money: the R62 that's left to use. And if you're still interested, remember there will be at least 30 more prospectuses for The Villa Retail Park Holdings, so you definitely don't have get into it now. If you're still uncertain, just give us a little time. There will be a second and even a third follow-up report.

We also want to tell you about what's happened at the Zambezi Retail Park, who Capicol (Pty) Ltd is and how the so-called knockout clauses in its prospectus work.

SHAREMAX-II

Investment in Sharemax products illiquid

PROSPECTIVE INVESTOR, whoever you may be, bear in mind the investment that now seems to be bringing in such a good return will have to be realised one day. Sharemax says in the past that was very easy and done quickly. However, that's not necessarily the case - especially not with its huge The Villa project.

Paragraph 4.8.3 of prospectus number 17 reassures investors that the original investor who sells his units after 60 months and uses the services of one of Sharemax's promoters to facilitate such a sale to a buyer introduced by the promoter is guaranteed the return of his capital. Just two minor conditions: provided the investor followed option B, which guarantees him only an investment return of 6%. And then the sting in the tail: it must be the original investor and not his successor-in-title. In other words, the "guarantee" of withdrawal can't be passed on to your heirs. The prospectus also warns if the investor were to sell his investment in The Villa to a fourth person during the first five years, the various guaranteed return rates will lapse.

Forewarned is forearmed: the return rates the Sharemax promoters are offering to prospective investors don't nearly make up for the illiquid nature of the investment. And what's more, the Sharemax promoters are constantly marketing new products - or the same old ones, just with a new prospectus. They earn 10% commission on the new products. The promoters won't market your second-hand investment at a lower commission.

SHAREMAX-III

'Several factual errors'

THERE ARE SEVERAL factual errors in the report. One can see immediately it's De Klerk's intention to attack Sharemax rather than sharing balanced and tested information with the public. Firstly, The Villa isn't a Sharemax development. It's being developed by the owners of the land - that is, Capicol.

If De Klerk had taken the trouble to read the prospectus supplements for The Villa he would have seen immediately the project operates as follows: Sharemax is the promoter of The Villa. The money from the investors who invest in The Villa is used to build the regional shopping centre.

Capicol is the developer that owns the land and is putting up the building. Capicol has appointed the main contractor CJ Irons (one of the largest building contractors in the country) to erect the building.

Weavind and Weavind Attorneys receive investors' money. Weavind and Weavind then register a covering mortgage over the property as security for the investors. When the building is completed, the tenants will move in. Only then can the purchase price of the building be determined. The deed of sale shows the building is bought by the investors at a fixed capitalisation rate ("caprate") of 11,6%. That means the net income from the property is used and set off against a capitalisation of 11,6% to pay the purchase price.

The net income is determined by calculating the rental income and then deducting the expenses, such as municipal rates and taxes, cleaning services and security. The rental income is determined by market trends in the area. I say that because the tenants, almost all of whom are national or international tenants, have themselves done a market study of the area to determine the rental at which they can hire the premises to make their businesses a success, therefore also to earn a profit.

About 70% of the available space has already been leased, while the occupation date of the centre is still one and a half years away.

The net income will determine the purchase price after occupation. Since we're in a global recession, tenants of course negotiate harder for a lower rental than under normal circumstances. That's why we should be able to negotiate better rental escalations in the future when the economy has recovered and the tenants are operational than are projected in Sharemax's prospectus.

The success of any shopping centre that's built can be measured to a certain extent by the rate at which tenants, especially national tenants, are signed up and the type of tenants who are prepared to sign leases. Further, the quality of the construction work is of course also important. Consult the following website to see which tenants have already signed up: www.thevillalife.net.

The interest paid to investors until such time as tenants move in is paid by Capicol, not by the investors. If what De Klerk says had been correct it would mean the project is a pyramid scheme, which is illegal. Therefore, Sharemax reserves its rights in this regard, because we can't allow someone to make such an irresponsible statement. If De Klerk believes, for whatever reason, that investors' own capital is being used to pay the investors' interest, he's welcome to report the matter to the Financial Services Board, the Registrar of Companies or any other regulatory body.

As soon as the tenants occupy the building, the purchase price is therefore determined and then Sharemax will roll out the last few prospectuses to collect the balance of the purchase price, after which the building will be transferred from Capicol to the investors' company. Then the investors will no longer receive interest from Capicol but from the rental income realised by the building.

If you compare the capitalisation rate of 11,6% with the average capitalisation rate at which super shopping centres (as defined by Sapoa) are trading, you'll see the average rate is between 6,25% and 7,5%, as shown by Sapoa's market report for December 2009/January 2010. The higher the capitalisation rate, the cheaper the building. That means in the case of The Villa Sharemax has negotiated the buying of The Villa at a purchase price of about 7,5/11,6 = 55% below the market value. You're free to check that calculation with a property expert.

When less money flows in from investors, Capicol simply lowers the speed of the building process and when more money comes in we try to speed up the building process. If the building process were to continue longer than planned, it means the developer (Capicol) would make less profit, because it would have to pay more interest to investors.

Capicol can't build any faster now, and when that happens Sharemax will, as at present, make another product beside The Villa available to the public. Sharemax also has permission, if we wanted to, to take out a development loan at a bank to finish the building. Sharemax will consider that as soon as our next development project, also a regional shopping centre, is ready to begin.

Zambezi Retail Park is a similar project to The Villa. The development of the building is almost complete. The opening of the regional centre will be on 15 April 2010. Only four small shops remain to be leased, but they should be taken before March 2010. This is another Sharemax success story. If you're interested I'd like to invite you to the opening of Zambezi Retail Park.

With regard to the Menlyn centre, I agree it's a good regional shopping centre. Old Mutual's management of the centre is also excellent. The Villa's success with the signing of largely national and international tenants for about 70% of the lettable space so long ahead of the occupation date isn't just good luck. Before the project was undertaken, a viability study of the site for a super regional shopping centre was done by a recognised research company, Demacon. The report is available on the website www.sharemax.co.za.

I can also confirm no financial adviser receives more than 6% commission. There are consultants in charge of the financial advisers, regional managers, national managers, corporate contracts and other marketing costs that make up the rest of the 10%. Since property must be seen as a medium- to long-term investment instrument of longer than five years, this means the financial adviser who offers the investment opportunity to investors sees its potential and he/she must also look after his/her client's investment for longer than five years. Then I think that 6% commission, or the potential of about 1% commission per year or perhaps less, isn't too much.

I can confirm Sharemax has now been promoting and managing property investment for 11 years. Right up to today, no investor has lost any money yet. On the contrary, 18 of the projects (buildings) sold to investors by Sharemax for R1 077 590 000, all costs included, have already been sold by those investors to various entities, of which SA Retail is the largest, for R1 461 308 353. That means those investors received an average monthly income of between 9% and 11% per year and also received a gross capital growth of R383 718 353. What do they say? Figures don't lie.

In this global recession Sharemax has received an offer on one of our investors' properties. The potential buyer is busy with his viability study. If the deal goes through the investors in that project (building) will once again receive good capital growth over and above the monthly income they have already received for a number of years.

If you'd like to check any of the information please contact me. We are prepared to meet Vic de Klerk, provided it's in the morning and not late afternoon, so that we can have a meaningful conversation.

Willem Botha

MD Sharemax Investments

Read De Klerk's reply on p7.