The vultures are circling this property syndication carcass
Have you ever played the popular building-block game called Jenga? It’s a multi-player game in which you build a tower out of 54 rectangular blocks. Each player takes turns to pull one block out of the structure and add it to the top of the tower. After each turn the structure becomes increasingly rickety before inevitably collapsing. The loser is the last person to “fiddle” with the blocks. If you replace these blocks with “wads of cash” you’re left with an interesting proxy for the property syndication game.
The players in this game are the thousands of investors lured into property syndication by market-beating returns. Each investor brings a line of fresh capital which is then applied to the property syndication’s activities. The trick is to use the steady flow of “new” cash to meet administrative expenses and commissions, make payments to developers and keep existing investors happy by meeting monthly interest obligations. Miss a few payments and the entire system becomes shaky, before landing in tatters at investors’ feet. This is more or less what happened at Sharemax Investments (Pty) Limited. Beginning August 2010 the outfit stopped making interest payments on some of its property syndications – and reined in the payments on others...
What went wrong?
While the group points fingers at the South African Reserve Bank and the financial media for its woes – blaming them for “scaring” new investors away – the truth is the company was unlikely to bring in enough capital to fund both Zambezi Retail Park and The Villa AND continue servicing market-leading interest commitments on all of its existing syndications. Whether the companies established to house each of the Sharemax syndications “conducted the business of a bank” is a moot point because financial difficulties were already looming. Setting regulatory issues aside the question that should be asked is how management gave the go ahead for a multi-billion rand shopping mall (such as The Villa) without financial guarantees in place?
Perhaps they drew confidence from the apparent success of their “build now / secure cash later model” in previous projects... My guess is Sharemax started taking strain months before the Reserve Bank investigated and ruled against them. And I’m willing to bet Sharemax’s directors harboured concerns over the long-term sustainability of their product from day one too!
What happens now?
I’ve been inundated with queries from readers for up-to-date information on investments in Sharemax syndications. The latest communication from Sharemax Investments (Pty) Ltd to the general public is dated 20 October 2010. They say: “We recognise and appreciate the interest in the progress [Sharemax] and the Reserve Bank appointed managers are making in terms of finding positive solutions for the investors in the different property syndication companies.” They (Sharemax) have promised to release a bi-weekly progress report to all interested parties. The best way for Joe Average to stay “up to date” on developments is to visit the Sharemax website (http://www.sharemax.co.za/) every fortnight or so – financial advisers will continue to receive their ‘once per week’ correspondence – and investors will receive statements and correspondence as usual.
Neels Alant, partner in law firm Hahn & Hahn and Jaco Spies, director of Facct Forensic Consulting have been serving as Reserve Bank-appointed managers since 16 September 2010. According to Sharemax their mandate “is to manage and oversee the repayment process.” How they tackle this process could be “make or break” for investors. If they’re forced to liquidate the individual syndications – as many investors are pressing them to do – investors will receive only a fraction of their investment. And there’s a risk the “viable” assets might go for a song too!
Investors are bottom of the pile again...
The Financial Mail, 22 October 2010 published “probable market values” for a selection of Sharemax retail centres – with some frightening conclusions. Writes Ian Fife: “Of the 38 syndications, probably fewer than 10 can be shifted smoothly into a listed vehicle and recover quickly.” He reckons at least 10 of the syndications owe more than they’re worth – and would leave investors with nothing in the event of a forced sale. Concerns over valuations have been confirmed by Sharemax’s decision to link future interest payments to actual rental incomes – with a significant decline in yields. The new yields suggest even unencumbered Sharemax syndications will sell for fractions of the capital invested.
Investors in Zambezi Retail Park and The Villa have additional hurdles to overcome. They’re still waiting for the former’s assets to be transferred into their names, while the latter has yet to be completed. Directors of Zambezi Retail Park (not Sharemax) and Capicol (the developer) will enter arbitration to agree the final settlement amounts so that the transfer to investors can take place. Investors in Zambezi Retail Park will then receive interest payments in line with actual net rental income received on the property. Sharemax is in discussion with various “interested parties” who may wish to “pick up” The Villa. Unfortunately for investors these “interested parties” will more likely fit the “circling vulture” than “white knight” bill!
Editor’s thoughts: Its early days in the Sharemax saga. The Reserve Bank-appointed managers will have their work cut out to determine how best to “settle” each of the property syndications. As things stand investors will receive much less “interest” income than they banked on… And they’ll be left with less capital should they choose (or be able to) exit their investments. Do you think Sharemax could’ve raised enough cash to fund The Villa to completion – and should I even be asking the question? Add your comment below, or send it to [email protected]
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