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More woes for investors

Those Sharemax-promoted investors who poured R765m into the Zambezi Mall development since 2007 will receive their documentation on the proposed Article 311 scheme in a week or two. It may be a huge shock. In terms of income as well as the repayment of capital, their investments will probably be worth nothing. The pretty pictures currently being painted by the so-called new independent directors only benefit the financial advisers who involved the innocent investors in the worthless investment in the first place.

Those investors who put R1,55bn into The Villa can also start preparing themselves for bad news. Their investment is also beyond redemption – not by an A311 or in any other way.

The latest letter to Sharemax-promoted investors under the name of the new directors – ironically dated 1 April 2011 – contains a superficial description of the A311 scheme that will soon be submitted to investors. The news for investors is the building on stand 5, Derdepoort Township – on which a shopping centre called Zambezi Mall has been built – will no longer be transferred to them. In short, you didn’t buy a property with the R765m.

Our enquiries have revealed briefly that the developer – Capicol – erected a shopping centre with a lettable area of approximately 30 000sq m on stand 5, Derdepoort. Capicol still owes around R70m to the builder, WF Kroon, for work completed. To construct decent access roads to the centre will cost another R10m or so. So Capicol needs about another R100m to complete the project. To obtain that, Capicol must register a first mortgage on the property. That can only be done if the Sharemax investors relinquish their right to the building and give their approval that the current covering mortgage of R600m on the property be cancelled.

But you won’t go home empty-handed. And that’s the good news for those financial advisers who, after the second part of the scheme, will apparently no longer be held responsible for the bad advice they gave to especially senior citizens.

Capicol will pay R1bn back to the Sharemax-promoted investors over the next 15 years. That’s a bonus of 30% on the R765m they invested. The repayment will take place as follows over the next 15 years and the payments will even be made monthly. Every month for 15 years the investors will receive 70% of the net rental income earned by the Zambezi Mall. Remember, it’s 70% of the net rental income: that is, after provision has been made for the interest on the R100m mortgage Capicol still has to obtain. Capicol head Paul Kyriacou is even optimistic he’ll be able to repay the full capital to investors before the end of the period of 15 years.

I’m sorry to be cynical, but my advisers and I are a down-to-earth bunch who like to make calculations to check claims made willy-nilly.

Let’s begin at the beginning. The expectation created – and the thing investors will have to think hard about before they give their approval to the A311 – is whether 70% of the net rental income from 30 000sq m over the next 15 years will be enough to repay R1bn. Let’s have a look. Divide R1 000m by 15 years and divide that by 12 months and then divide that by 30 000sq m. That gives R185. So 70% of the average net rental income from Zambezi over the next 15 years must be R185/sq m. Divide again by 0,70 to get the full required net rental income. That works out at R264/sq m. However, owners of shopping centres know net rental income is seldom more than 70% of gross rental income. The adjustment from net rental to gross rental – that is, the monthly rental tenants pay – requires us to divide the R264 by 0,7 again. That gives gross rental of R377/sq m if the centre is 100% occupied at all times, which is quite a tough call.

Before investors and financial advisers become too excited about this new miracle, Finweek suggests you do the following. Ask your financial adviser to join you on a nice long visit to Zambezi Mall. Perhaps some of the new directors could join you… You’ll find that only around 80% of its lettable space is currently being leased by tenants in any way able to pay the monthly rental. One of those is Checkers – and you can be sure it doesn’t pay anywhere near R377/sq m.

Ask the directors what the average gross rental income per square metre earned by SA’s top 10 shopping centres owned by JSE-listed Growthpoint Properties is per month. Ask them what they think must happen to make it possible for Zambezi Mall to earn more rental per square metre than those top 10 shopping centres. We’d like to share that information with readers and investors in Sharemax.
 
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