LET THE NUMBERS DO THE TALKING
WHY THE SHAREMAX INVESTMENT MODEL CANNOT WORK
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