This is the third chapter in Moneyweb’s follow-the money-investigation related to the failed Highveld Syndication property schemes. For proper context, this article should be read with the first two chapters.
The valuations of the 78 properties syndicated to 18 000 investors for R4.6 billion through the Highveld Syndication (HS) companies have been contentious since the schemes failed in 2011.
A Moneyweb follow-the-money investigation into the sales transactions and valuations of these properties found significantly divergent valuations that had been aggressively slashed when the HS companies went into business rescue in 2011, as well as when the Section 155 Scheme of Arrangement took effect in 2013.
The Moneyweb investigation compared the syndication valuations of a total of 46 of the 78 properties with those that feature in the business rescue plan (BRP) and found that the valuations of these properties were reduced by 40% on average. In some cases, the valuations of individual properties were slashed by as much as 80%.
Picvest marketed these 46 properties to investors for R3.2 billion as part of the HS 15 to HS 22 syndications. As the syndications were oversubscribed, it is also the amount the investors paid for the properties. However, when the HS companies were put into business rescue, the properties were valued at only R2 billion. This is a whopping R1.2 billion or 38% less than the original syndication valuations.
It is important to note that the valuations used in the BRP were influenced by the international financial crisis. The extent of this impact is not apparent as the properties were not independently valued. These valuations could have been influenced by the selling off of parts of these properties. Moneyweb sent detailed questions to property magnate Nic Georgiou, a key individual in the HS scheme, but he did not respond before the time of publishing.
Moneyweb also sent questions to HS business rescue practitioner Hans Klopper, but he also did not respond.
Overvaluation restricts a property’s ability to return high yields
The overvaluation of a property means that the property is not able to generate the income required to pay high yields to its owners. If a property is valued at R1 million, for example, and generates net income of R100 000, it will deliver a 10% return. However, if the same property is valued at R2 000 000 and still only generates R100 000 of income, the yield will drop to 5%.
This is relevant in the context of the HS companies where returns of between 10% and 12% were offered, and if properties were overvalued, the properties would not be able to generate the promised returns. Any overvaluation could, therefore, have contributed to the HS companies falling into financial difficulty.
Carl Nel, the official property valuer of the HS schemes, denied that his valuations were inflated. He said that his valuations for properties in HS 15 to HS 18 were based on an income-based method using audited figures. Nel also valued the properties in HS 19 and HS 20 on verified and audited financial figures, while Georgiou, and entities related to him, also signed head lease and buyback agreements as a guarantee.
Nel denied that he ever provided individual valuations for the properties syndicated in HS 21 and HS 22, saying that he only valued the total property portfolios for these syndications. He added that he could not use the income valuation method for the properties in HS 21 and HS 22, and that he was “ordered” by Derik Reichel, CEO of Picvest at the time, to value the portfolios based on the head lease agreements and the buyback guarantees as audited figures were not all available to proceed with this method.
Moneyweb requested interviews with Reichel, but he failed to respond.
Nel also later withdrew his official valuations for HS 21 and HS 22 when Picvest did not adhere to his condition that the full head lease and buyback agreements were to be published in the prospectuses to allow brokers and advisors the opportunity to measure the risk prior to making an investment decision (see further down).
Syndication and business rescue valuations
The different valuations related to individual properties listed in the table below were sourced from the original syndication values published in the HS prospectuses and from the BRP. Unfortunately, the source of the BRP valuations was not disclosed in the BRP. Klopper wrote in the BRP that he did not have sufficient time to procure valuations and that it would have been too costly. He did, however, say that the disclosed valuations were completed earlier in 2011, a few months before the HS companies were put into business rescue.
Klopper did not respond to questions to shed light on the source of these valuations, or who advised him on the auction values.
Interestingly, in the Section 155 Scheme of Arrangement that established Orthotouch as the rescue vehicle for HS investors, the same BRP valuations were used. However, the 155 document states that valuations were done in May 2011 by the HS companies (para 188.8.131.52). Again, the actual valuer of the properties was not disclosed.
Interest was however paid to investors on the original syndication values.
Comparison of valuations
The comparison of the syndication and BRP valuations of the 46 properties is shown below:
|Property name||HS prospectus valuation||BRP valuation||Valuation difference|
|1||Key Largo (HS15)||R36 885 000||R38 969 472||R2 084 472|
|2||Safeside Autocity (HS15)||R17 500 000||R16 248 248||(R1 251 752)|
|3||Cascades (HS16)||R30 170 000||R14 424 350||(R15 745 650)|
|4||Eden Terrace (HS16)||R51 930 000||R33 937 036||(R17 992 964)|
|5||Rock Cottage (HS16)||R48 135 000||R67 908 760||R19 773 760|
|6||Waterford (HS16)||R50 945 000||R41 774 724||(R9 170 276)|
|7||Southdale (HS17)||R205 560 000||R164 192 090||(R41 367 910)|
|8||12 Main Ave, Melville (HS18)||R12 000 000||R4 193 485||(R7 806 515)|
|9||14 Main Ave, Melville (HS18)||R16 000 000||R6 985 733||(R9 014 267)|
|10||5 Main Ave Melville (HS18)||R14 000 000||R6 221 658||(R7 778 342)|
|11||7 Main Ave, Melville (HS18)||R16 000 000||R15 063 242||(R936 758)|
|12||9-11 Main Ave, Melville (HS18)||R42 000 000||R28 221 291||(R13 778 709)|
|13||Absa Witbank (HS18)||R15 100 000||R7 727 273||(R7 372 727)|
|14||Beacon Isle (HS18)||R26 150 000||R22 077 664||(R4 072 336)|
|15||Eshowe Mall (HS18)||R58 800 000||R107 013 484||R48 213 484|
|16||Basil Green (HS19)||R50 234 939||R30 565 369||(R19 669 570)|
|17||Corporate Park (HS19)||R45 342 479||R20 308 704||(R25 033 775)|
|18||Highway Gardens (HS19)||R47 371 363||R31 612 125||(R15 759 238)|
|19||Leaping Frog (HS19)||R177 005 830||R140 330 188||(R36 675 642)|
|20||Meschape (HS19)||R45 469 800||R30 213 569||(R15 256 231)|
|21||Spar Plaza Potgietersrus (HS19)||R39 541 661||R27 776 318||(R11 765 343)|
|22||Storegate (HS19)||R44 635 758||R34 992 762||(R9 642 996)|
|23||Wilropark (HS19)||R18 020 871||R8 802 344||(R9 218 527)|
|24||Absa Brakpan (HS20)||R28 549 761||R16 758 791||(R11 790 970)|
|25||Banbury Cross Village (HS20)||R84 436 933||R57 401 110||(R27 035 823)|
|26||Blairgowrie Plaza (HS20)||R165 105 061||R85 190 358||(R79 914 703)|
|27||East Lynne (HS20)||R43 807 792||R34 971 264||(R8 836 528)|
|28||Flora Office Park (HS20)||R116 717 658||R82 874 725||(R33 842 933)|
|29||Game Centre – Paarl (HS20)||R29 836 655||R29 609 556||(R227 099)|
|30||ILO House (HS20)||R11 485 842||R10 745 622||(R740 220)|
|31||Markinor House (HS20)||R26 823 638||R19 273 110||(R7 550 528)|
|32||Nedcor Building – Germiston (HS20)||R31 478 436||R12 768 975||(R18 709 461)|
|33||Standard Bank Building – Nelspruit (HS20)||R36 236 384||R26 065 755||(R10 170 629)|
|34||Wonderboom Plaza (HS20)||R30 120 783||R21 413 660||(R8 707 123)|
|35||Glen Gables (HS21)||R200 722 759*||R59 613 263||(R141 109 496)|
|36||Highveld Centurion (HS21)||R141 879 018*||R63 781 147||(R78 097 871)|
|37||Pembury Retirement Lodge (HS21)||R234 998 813*||R44 150 490||(R190 848 323)|
|38||The Mill House (HS21)||R64 023 288*||R28 198 960||(R35 824 328)|
|39||Tyger Manor (HS21)||R44 955 000*||R55 178 176||R10 223 176|
|40||Vaal Sanitaryware (HS21)||R63 440 989*||R27 307 120||(R36 133 869)|
|41||1 Charles Crescent (HS22)||R206 342 421*||R107 044 630||(R99 297 791)|
|42||10 Charles Crescent (HS22)||R36 680 366*||R19 547 978||(R17 132 388)|
|43||9 Charles Crescent (HS22)||R68 856 123*||R30 324 040||(R38 532 083)|
|44||Cell C (HS22)||R216 082 357*||R127 923 588||(R88 158 769)|
|45||Ethos (HS22)||R115 502 957*||R59 168 700||(R56 334 257)|
|46||Primovie Park (HS22)||R110 175 458*||R75 283 500||(R34 891 958)|
|R3 217 056 195||R1 994 154 407||-R1 222 901 788|
|* Not the official valuation of Carl Nel. Nel did not value the properties market via HS 21 and HS 22 individually, but as a collective based on the head lease agreements.|
Official valuer raised concerns
Nel’s assertion that he valued the properties in the syndication as a collective and not individually is interesting, as the prospectuses disclose valuations of the individual properties.
The prospectuses of HS 21 and HS 22 each contain a table reflecting the amounts Picvest apparently ‘paid’ to acquire the properties. The tables also show that these acquisition amounts included an 11% markup and that the sum of these amounts was deemed the valuation of the property. It was therefore not based on an income valuation method. Yet the tables reflect the collective valuation of the properties as the same amount Nel’s signed valuation certificates indicate.
In the case of HS 21, the table and Nel’s valuation were R1.3 billion. The table and explanatory information can be seen below:
It is unclear on what basis these valuations were made, as the title deeds of the properties show Picvest never acquired the properties.
A similar disparity is found in the prospectus of HS 22. The table in this prospectus seems to value the properties on a similar methodology as HS 21, where the acquisition prices of the properties are inflated by an 11% markup. The properties were therefore also not valued on the income method. Interestingly, although Nel’s valuation certificate states that his valuation was based on a head lease agreement, the HS 22 prospectus does not include any reference to such an agreement.
The table appears below:
As is the case for HS 21, the title deeds of the properties show Picvest never acquired the properties and that they were not transferred to HS 22.
Individual transactions showing overvaluation
There are four properties that stand out in the table comparing the syndication and BRP valuations.
All four properties were syndicated, or sold to investors, in 2009 as part of HS 21 and HS 22 for R784 million. Two years later the BRP valued the properties at only R275 million, or 35% of the original syndication values.
The properties are Glen Gables (HS 22), 1 Charles Crescent (HS 22) and Highveld Centurion (HS 21).
Another example is the Glen Gables shopping centre in Pretoria East. The centre was successfully syndicated in 2009 as part of HS 21 with the table in the prospectus showing a value of R200 million. In 2011 the BRP valued the property at R59.6 million. As was the case with Pembury, the Glen Gables title deed shows Picvest never acquired the property and it was not transferred to HS 21, so it is also unclear what happened with the R200 million the investors paid.
A summary of the title deed appears below:
|Syndication value as per HS Prospectus||R200 722 759|
|Value as per BRP||R59 613 263|
|Glen Gables Investments (ex Sharemax)||2003||R28 000 000|
|Zelphy/Zephan||2006||R59 000 000|
|Orthotouch||2013||R123 304 205|
|Accelerate||2013||R32 556 543|
The title deed shows Zephan acquired the property from a Sharemax company in 2006 for R59 million. Zephan then sold the property in a back-to-back transaction in 2013 to Orthotouch for R123 million and then immediately to the Accelerate Property Fund for R32.5 million – barely 16% of the original syndication value of R200 million.
Georgiou’s son Michael is the CEO of Accelerate.
The Highveld Centurion property in Centurion is another interesting case study. It was syndicated in 2010 as part of HS 21 for R141.8 million. The BRP valuation was only R63.7 million, less than half of the original syndication value. Zephan acquired the property in 2006 for R39.8 million, and in 2013 sold it for R132 million to Orthotouch, which immediately sold it to Accelerate for R43.5 million. Accelerate sold the property in 2015 for R57 million.
|Syndication value as per HS Prospectus||R141 879 018|
|Value as per BRP||R63 781 147|
|Centurion Highveld Park||2002||R21 000 000|
|Zelphy 2095/Zephan||2006||R39 800 000|
|Orthotouch||2013||R131 925 066|
|Accelerate||2013||R43 459 756|
|Vresthena Pty Ltd||2015||R57 000 000|
1 Charles Crescent
The same pattern repeated itself at 1 Charles Crescent, a property located in Eastgate in Johannesburg. The property was syndicated in 2009 as part of HS 22 for R206 million. A year later the BRP valued the property at R107 million, virtually half of the syndicated amount investors paid.
The title deed shows that Zephan acquired the property in 2006 for R41 million, and that it was never transferred to HS 22 following the successful syndication. In 2013 Zephan sold the property to Orthotouch for R216 million; Orthotouch then immediately sold it to Accelerate for R110 million.
|1 Charles Crescent||Valuation|
|Syndication value as per HS Prospectus||R206 342 421|
|Value as per BRP||R107 044 630|
|Zelphy 2095/Zephan||2006||R41 040 000|
|Orthotouch||2013||R216 434 338|
|Accelerate||2013||R110 805 516|
Moneyweb sent detailed questions to Georgiou and Klopper, but they did not respond or provide answers by the time of publishing.