Inside Sharemax's "magic"

JOHANNESBURG - Property syndication company Sharemax continues to defy its critics. For years its business model has been questioned, and a recent Reserve Bank investigation declared its debenture structure illegal. But there has yet to be a collapse.

Sharemax investors receive millions of rand in interest every month, in full and on time. Several properties have been sold at a profit, and investors, apparently happy with the results, have mostly reinvested their proceeds in new Sharemax syndications.

Is this the sign of a healthy investment company? Or are the monthly payments to investors unsustainable - a ticking bomb, as some have suggested. You be the judge.

To answer these questions, Realestateweb chose to follow the money. To do this, we needed audited financial statements. Sharemax did not give us an outright refusal. But it attached conditions to viewing (mostly relating to copying and distribution) which we found unacceptable.

After all, Sharemax syndications are public companies and therefore their financial statements are required, by law, to be freely available to investors and interested members of the public.

To get unrestricted access the financial statements, wecontacted the Companies and Intellectual Property Registration Office (Cipro). Realestateweb thanks Cipro's public relations department for their assistance in our request for documents.  

For an analysis, we chose Flora Centre (see photos), a shopping centre and office park west of Johannesburg. Flora Centre was chosen because it is one of Sharemax's oldest (and largest) syndications. This centre has four years of audited financial statements. Thus, enough time has passed for any skeletons that might exist to show themselves.

The most recent Flora Centre results are for the 12 months to June 30 2009. Readers who want copies may e-mail julius@moneyweb.co.za.

The Flora Centre history makes for an interesting study. The centre used to be owned by Growthpoint, South Africa's largest listed property holding company. Growthpoint sold the centre to the Georgiou family (more on them here) for R68.5m in March 2005. A few months later it was sold to Sharemax investors for R92.5m, realising a (very) fast 35% profit of R24m, apparently for the Georgious.

The Flora Centre syndication raised R118.5m from Sharemax investors. This money was apportioned as follows:

The fast profits, together with the stiff syndication costs, did raise a few eyebrows, including those of deceased financial journalist Deon Basson. But the real mystery is how a property that cost just R68.5m has managed, for years, to return so much cash to its investors.  

Since October 2005, the Flora Centre has paid an average of R960 000 a month to its investors. That's an annual return of 9.7% on the syndication price of R118.5m. That's a good return. But it's even more impressive when it's calculated on the original Flora Centre selling price of R68.5m. Then the return jumps to 16.8%.

Did Growthpoint sell too cheaply? Or is some other magic at work? The answer can be found in Flora Centre's financial statements.

The statements disclose that the building is not earning - and has never earned - enough rent to cover the monthly payments to investors. The average monthly rental income for the past four years has been R790 000. That's not enough to pay the monthly R960 000 to investors. And it's before expenses, such as maintenance, management fees, accounting charges etc, are taken into account.

How did Sharemax fund this shortfall? Part of the funding can be explained by the cash flow shortfall fund of R3.7m mentioned above.

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