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Pain, no gain

Picvest’s announcement, last week, that it would immediately cut the cash interest payments on all its property syndicates from the previous 10% and even 12,5% to 6,5%/year is only the beginning of the pain for many a senior citizen who so eagerly invested in the scheme over recent years. The value of the investment – if it can indeed still be realised – is probably not worth more than 40c in the rand on the free market. But that’s still much more than the hoped-for 20c in the rand investors in the Sharemax syndicates will realise under the best of circumstances.

A written request by advocate Michael Blackbeard, Deputy Registrar of Banks, for PICvest to visit him on 15 April for more than just a cup of tea was the death knell for the house of cards of property syndicates and cross-guarantees, the seams of which were already beginning to unravel.

For Bloemfontein property magnate Nic Georgiou it was a golden opportunity to turn his back on his guarantees regarding interest to investors derived from overhead leases, as well as the guaranteed buying back of properties he’d in most instances sold to the PICvest schemes at inflated prices.

The real transaction involving Highveld 15 – one of the first schemes in the current PICvest portfolio – is probably the best illustration for investors as to how the scheme “worked” and also made the SA Reserve Bank see red. It also explains why the Georgiou Group was rather pleased at the apparently legitimate reason to be able to walk away from its guarantees.

In a letter/contract dated 3 September 2009, on a PIC Syndications letterhead addressed to Zelpy (Pty) Ltd (the company in the Georgiou Group providing the guarantees), the following transaction was agreed to:

Highveld Syndication No 15 Ltd

* Syndicate value R253m. This is the amount for which the property was sold to investors.

* Actual net annual rental income R14,4m – a real return of 5,7%.

* Actual value of buildings in the syndicate at a discount rate of 10%/year is R144m, or only 57% of the syndicated value.

Zelpy’s offer was to guarantee investors’ interest at 8,7% from the effective date, while Zelpy guaranteed it would buy back the buildings in the syndicate after no more than five years for R253m, which was also the syndicated value.

In short, Zelpy – and therefore the Georgiou Group – guaranteed the investor a return of 8,7%/year and 100% of his capital back in five years. The true situation was/is that the buildings earned rentals of only 5,7% while the true market value of the buildings in Syndicate No 15 is only R144m, against the “syndicated value” of R253m.

Investors – and particularly financial advisers who were so keen to sell the investment to elderly people – should now be the judge. Just answer one question: Is it an investment in property – PICvest’s motto is: “Where property is the basis of wealth” – or is it simply a deposit at an interest rate of 8,7%, repayable after five years?

Blackbeard and his team have apparently decided on the latter while PICvest CE Rikus Myburgh still believes it’s a property investment. But PICvest has no stomach for a fight with Blackbeard and has therefore opted for the new scheme.

The new scheme, which we believe will also have difficulty in getting past Blackbeard’s office, is that the name Zelpy as the guarantor, overhead lessee and ultimate buyer of the properties be replaced by a new company – Ortotouch Ltd. The guarantees for the syndicates remain at 100% of the current syndicate value, but the annual interest is now reduced to an effective 6%/year.

In the case of Sharemax, Blackbeard has already indicated he doesn’t favour that option, insisting only the actual net rental income – in some cases already as little as 1%/year – be paid to investors.

The guarantee Ortotouch will buy back the syndication in five years at the so-called syndication value – that is, the price at which the money is invested – appears a gimmick. Whoever may be right, investors in the PICvest syndicate should remember Zelpy’s previous guarantees are now worthless. Don’t put too much faith in the new Ortotouch undertakings.

The final part of the PICvest plan is apparently to now gather all the syndicates into one basket. The syndicate value – at which it was sold to investors – is apparently about R4,5bn. Perhaps new investment instruments such as that will be traded or even listed. It gives investors the hope of having an opportunity to realise their investments before the new five-year term. But at what price?

Unlike the case of Sharemax, the respective Highveld Syndicates consist mainly of income- or rental-producing buildings and it would be possible to place a value on them from a properly consolidated statement of the condition of the buildings.

Our guess – especially because many of the buildings have apparently recently been partly mortgaged under the Zelpy agreement – is the syndicated value of 40% of what’s been invested may be achievable. 
We live in a world where facts and fiction get blurred
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