Finweek English Edition - - COVER STORY - By Vic de Klerk

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

Even un­der the most favourable con­di­tions, the po­ten­tial rental in­come from a com­pleted Zam­bezi Mall and The Villa Re­tail Park won’t be enough to pay the promised in­ter­est of 11%/year to those in­vestors who Share­max re­cruited – and are still re­cruit­ing

– for the projects...

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

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