Prudential Shariah Section 12J Fund


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Prudential Shariah Section 12J Fund
The Shariah way to create sustainable wealth in quality permissible Shariah assets

Section 1


FUND DESCRIPTION

Prudential Shariah Section 12J Fund offers investors the opportunity to invest in a Shariah compliant investment product with quality underlying assets offering above market income and capital growth opportunities. Predictable cash flows and assets in high capital growth areas in South Africa whilst the investor receive the SARS registered S12J VCC tax benefit of up to 45% on their investment make our investment offering worth considering. Investment capital is fully deductible for tax purposes.

The fund invests in hospitality properties that cater for students, business and tourist travelers ranging from bed & breakfasts, boutique hotels, serviced apartments to student accommodation, fully managed and overseen by the management company.

The fund further invests in movable asset rental opportunities that qualify in terms of Section 12J of the Income Tax Act. Investment opportunities are screened by our Shariah Supervisory Board and approved for compliance. We offer a unique first to market S12J Shariah Compliant investment fund.


Section 2


FUND OBJECTIVES

The fund aims to create long-term wealth for investors through a store of value backed by high capital growth assets in the form of hospitality properties and high yielding opportunities in Asset Rentals. The fund aims to outperform alternative Shariah low to medium risk investment funds and instruments.

In year 6 the fund will liquidate its investments with surplus cash being distributed to Investors as dividends.


Section 3


TARGETED BENCHMARK RETURNS

Up to 45% tax benefit on invested capital in the first year.
CPI +2% p.a. target dividend yield on net risk capital invested (paid quarterly).
16% IRR p.a. on net risk capital invested.

Investors should note that returns cannot be guaranteed and are targets only.


Section 4


SUITABLE FOR THOSE INVESTORS WHO

● Seek steady long-term capital growth underpinned by stable assets;
● Want to invest in a diversified Shariah compliant Section 12J Fund consisting of hospitality property (student and leisure) and movable asset rentals);
● Typically have an investment horizon of more than 5 years;
● Wish to take advantage of the Section 12J tax benefit.
● Seek alternative Shariah compliant investments in the market
● Seek an investment offering substantial tax breaks.


Section 5


MINIMUM INVESTMENT AMOUNT


Minimum lump sum per investor is R1,000,000 by invitation only (not an offer to the general public to subscribe for shares).


Section 6


HOW WE AIM TO ACHIEVE THE FUND's OBJECTIVES

The investment strategy is to find hospitality properties that fit the Prudential Shariah Section 12J Fund investment mandate, acquire at a discounted or under market related price, appoint and manage best of breed hotel / student accommodation operators to drive maximum yield. The fund's objectives are achieved through the following four key drivers:-

1. Leverage SARS Section 12J to maximize investors tax benefits:

South African Taxpayers who invest in a Venture Capital Company (VCC), in this case Prudential Shariah Section 12J Fund, are entitled to a 100% tax deduction on monies invested, subject to the provisions of Section 12J, thereby achieving an immediate return of up to 45% on their investment.

 

 

 

 

 

 


For an individual investor, an investment in the Futureneers® Hospitality Property Fund simply means that up to 45c* out of every R1 invested is immediately returned (reducing tax for the next tax payment, or claiming back tax already paid), with a remaining capital exposure of only 55c* - significantly mitigating investment risk, as illustrated by the example below :


*Different effective tax rates may apply in respect of different investors.









Description Individuals Trusts Companies
Initial Investment R 1,000,000 R1,000,000 R1,000,000
Effective Tax Rate* 45% 45% 28%
Tax Relief (in the financial year of the initial Investment) (R450,000) (R450,000) (R280,000)
Net cost of Investment R550,000 R550,000 R720,000



*Assuming the individual & trust is taxed at a 45% marginal tax rate.

 

2. 70% of the fund's asset weighting to be in the student hospitality property sector:

Student hospitality accommodation is an attractive opportunity for investors due to the high demand taking the current student accommodation shortage of 220,000 student beds into consideration and demand is projected to further increase based on the projected enrollment figures. The fund invests in student accommodation properties that deliver high capital growth rates and yield. This in combination with the Section 12J Tax benefit for investors, makes student hospitality accommodation and important and primary focus for the fund.



Source: Department of Higher Education and Training

 

It is projected that by 2030 an extra 400,000 beds, excluding the current shortage, would be needed to meet the enrolment targets set out in the Post-School Education and Training policy and the National Development Plan. This together with the government's drive to alleviate the student accommodation shortfall by allowing these student hospitality properties to qualify as Section 12J investments, creates an attractive opportunity in the market for investors.

 

3. 30% of the fund's asset weighting to be invested in the following opportunities

 

2.1 Business and Leisure Hospitality Property

 

Business and leisure hospitality property is an attractive opportunity for investors due to the historical increase in demand taking annual statistical accommodation expenditure into consideration. Demand is projected to keep on increasing based on the projected increase in tourism and decentralization of businesses activities around the country. Investing in hospitality properties that deliver above average capital growth and good yields, combined with the Section 12J Tax benefit for investors, makes business and leisure hospitality property an important investment focus for the fund.

Despite a challenging political landscape, South Africa has shown a steady growth in tourism numbers over the past 10 years, with a strong projected growth for the foreseeable future. The number of international tourists is estimated to have increased by 18% from 2013 till 2018. The forecasted growth for the next 4 years is estimated to be over 16% as shown below:



Source: PWC, Statistics SA, Wilkofsky Gruen

South Africa's annual expenditure on accommodation has grown by 9.5% over the last 5 year. It was approximately R7.4 billion in 2014, R7.5 billion in 2015, R8.2 billion in 2016, R7.6 billion in 2017 and is estimated to be R8.1 billion in 2018. 2016 was an exception with a slight downturn in 2017 mainly due to the water crisis in the Western Cape as shown below:



Source: Stats SA – Domestic Tourism Survey 2015 – 2017

Quality business and leisure hospitality properties are therefore in high demand. This together with government's drive to stimulate investment into the tourism industry, by allowing leisure hospitality properties to qualify as Section 12J investments and the relaxation of tourist visa regulations, creates an attractive opportunity in the market for investors.

2.2 Moveable Asset Rentals

The asset rental market in South Africa is estimated to be between R6bn and R7bn p.a. Many corporates and SME's use rental finance as a means to procure the use of depreciating assets that is used in the business. This innovative off-balance sheet rental structures enable businesses to procure the assets that they need in a seamless manner.

The asset rental market is too small for the big banks to focus on when the mortgage business is worth more than R500bn p.a. Suppliers of technology equipment and moveable assets are looking for tailor-made financial solutions that will benefit all parties involved.

There are different classes of moveable assets i.e. office automation equipment, telecommunications equipment, information technology equipment, security equipment, medical equipment, yellow metal such as grader and excavators and many more.

 

4. Only hospitality property assets in high student & tourist driven areas that deliver above average capital growth:

 

The Futureneers® Hospitality Property Fund invests in hospitality property assets in areas most attractive to tourists and students, but that also delivers the highest national capital growth rates. Cape Town (City Bowl and Atlantic Seaboard), Boland (Paarl & Stellenbosch), KZN North-Coast and Pretoria have therefore been selected as the preferred areas. Investments in Stellenbosch and Pretoria will primarily be focused on student accommodation. Other areas my me evaluated from time to time.

 

Cape Town is one of the leading destinations in the world and is SA's most popular destination for domestic and international visitors. Cape Town has over 17,000 active listings on AirBnB (40% of SA's total), which puts it just behind the AirBnB's top 10 most popular destinations.

● In 2017 Amdec launches Harbour Arch in the Cape Town foreshore - a R10 bill urbanized living development.
● In 2017 Western Cape voted Golf Destination of the Year, 2017, Africa and Gulf States (IAGTO – International Association of Golf Tour Operators).
● In 2018 Cape Town is once again crowned as the number one city in Africa for business tourism events - fifth consecutive win.

 

Durban together with the KZN North Coast is not only one of South Africa's domestic tourism leaders, but is also popular among visitors from throughout Africa and the rest of the world. Tourism to the KZN North Coast has showed steady growth and increased by 9% over the past three years.

● In 2015 Durban was officially recognised as one of the new 7 wonder cities in the world.
● In 2017 Durban is the winner of the Award for Excellence at the International Society of City and Regional Planners.
● In 2017 Zimbali Resort wins the World Luxury Spa Awards and World Travel Award for Africa's Leading Luxury Resort

 

Stellenbosch is South Africa's culinary capital and regularly features among the top 10 restaurants in SA, playing host to over 80 restaurants. Stellenbosch is an emerging business tourism hub and been ranked in the top ten cities on the African continent for business meetings by the ICCA.

● In 2017 Stellenbosch University rank amongst the top 400 in the QS World University Rankings.
● Stellenbosch University is home to an academic community of 29 000 students on five campuses.
● The University has a shortage of 13,600 student beds.

 

Paarl boasts true country hospitality, award winning wine routes and estates and accommodation. The towns provide excellent conferencing venues and some of the most idyllic wedding venues on the Cape Winelands. You can revel in beautiful fynbos-rich walks and hiking trails, superb mountain biking trails making it a popular choice for both local and international travelers alike. Surrounded by the mountains and vineyards of the famous Paarl-Franschhoek valley, Val de Vie is one of the most spectacular polo estates in the world that has played host to many international tournaments and high society events.

● KWV (Established in 1918, the year Nelson Mandela was born), located in Paarl is the largest wine cellar in the world under one roof.
● Paarl is home to the Africa's safest home located in the internationally award-winning lifestyle and polo & golf estate, Val de Vie Pearl Valley.
● Pearl Valley golf course ranks in the top 3 course in the Western Cape year after year and is a popular golfers destination.


Pretoria is known as the 'Jakaranda City' due to the approximately 50,000 Jacarandas that line its streets. Apart from serving as South Africa's administrative capital, Pretoria boasts the reputation as being an 'academic city' with 3 Universities and the Council for Scientific and Industrial Research (CSIR).

● Since 1997, Pretoria University has produced more research outputs every year than any other institution of higher learning in South Africa.
● Pretoria University has close on 60,000 students.
● The University has an estimated shortage of 50,000 student beds.

 

5. Underpin all fund assets with an all comprehensive Property Management & Servicing solution:

To manage the fund's hospitality property asset(s) and optimise the investor's returns, Futureneers® Properties (the management company) in partnership with various best of breed service providers has been appointed to offer an all-in-one comprehensive hospitality property management solution that include the 9 key service offerings as per the illustration below.


Search & Screening Asset acquisition & Procurement Bank Gearing Conveyancing & Legal


  Marketing & Booking Servicing & Guest Relations  Catering & Breakfast  Reporting & Accounting 






 
Property Agency Shariah Screening     

   


Section 7


ASSET MIX

Assets already secured by the fund represent a targeted 70/30 ratio between student (70%) and business / leisure accommodation properties and asset rental opportunities. The management company has successfully submitted conditional offers to purchase on various assets that fit the investment mandate.


Section 8


THE FUND'S INVESTMENT MANDATE

A combination of high-income and high-capital growth assets have and shall be targeted by the fund. Typical high-income assets should produce a targeted yield of between 7% to 10% and a 6% p.a. capital value appreciation, while targeted high-capital growth assets should return a targeted annual yield of 5%, and between 8-12% annual value appreciation.

Although the correct location may be one of the single most important investment criteria, many other subtle characteristics could make the difference between a good or bad hospitality property investment, even if the property is perfectly located. The management company are therefore cognizant of these factors and apply rigorous screening methods in consultation with local property experts.

In addition the following (but not limited to) investment criteria are carefully considered when evaluating potential fund assets:

● Discounted or under market related prices.
● Geographically focused in areas that deliver above average capital growth.
● Assets that deliver above average yields.
● Areas located close to selected key Universities.
● Areas that are business traveler focused.
● Areas that are tourist focused.
● Areas with good public transport.
● Specific characteristics e.g. orientation, amenities etc.
● Assets managed by reputed operators.
● Property assets with high occupancy levels.
● Assets with predictable revenues and proven business models.
● Student accommodation properties with University recognition and accreditation.
● Asset classes that have growth potential.
● Assets with a proven track record for reliability and longevity.
● In terms of Asset Rentals, the assets have to qualify as moveable assets and a good test would be whether the assets are listed under s11(e) of the Income Tax Act.
● Match the risk of the industry to the return of the investment. (Asset Rentals).

 

More detailed information could be obtained in the investment mandate section of the Private Placement Memorandum.


Section 9


LEVERAGE

Total portfolio leverage shall, on average not exceed 30% Loan to Current Market Value as at the end of the relevant reporting period as prescribed by Shariah Law and approved by the board. No surety will be required from investors since all gearing will take place in the investee companies that own the respective assets.


Section 10


BENEFITS TO THE INVESTOR

Investors would benefit from investing in Prudential Shariah Section 12J Fund as follows:

● Income Tax Benefit of up to 45%.
● Blend of high capital growth and yield generating assets.
● Annual dividends.
● Investing alongside other investors sharing investment risk.
● A transparent property investment fund with all-inclusive fees - no hidden costs.
● Access to top investment opportunities, pre-screened and vetted by the management company.
● All investment opportunities and assets screened by Shariah Supervisory Board adhering to strict Shariah practices.
● Investments overseen and supported post-investment by an experienced property management team, business partners, service providers and advisory team.
● Diversification into an alternative asset class.
● Investment exposure in the R6bn asset rental market in SA.
● Above market income and capital returns.


Section 11


THE MANAGEMENT COMPANY

Prudential Shariah Section 12J Fund has entered into a comprehensive management agreement with Futureneers™ Properties (Pty) Ltd and Prudential Shariah (Pty) Ltd (collective the management company) who will be responsible for the setup, administration and management of all the fund's investments according to the stringent requirements and regulations of the Investment Mandate, Companies Act, SARS and the FSCA (formally the FSB).

The Management company will fulfill the following roles and responsibilities:

● Perform an evaluation on the business plan and financial model in respect of each investment opportunity.
● Find investment opportunities that fit the investment mandate and criteria.
● Inspect all properties before investment.
● Conduct a detailed due-diligence on targeted properties and going concern operations;
● Assist with transfer of ownership and registering the property.
● Marketing the accommodation.
● Servicing the properties, including providing food and cleaning services in partnership with various service providers, funded through the hospitality property accommodation income.
● Facilitate the disposal of property assets at liquidation of the fund's assets in year 6 and 7.


Management Team & Advisory Board:


Deon Lewis - N.Dip Electrical Engineering (Light Current)
CEO: Futureneers Properties
Previously: CEO and Co-Founder at Cipla Nutrition, CEO and Co-Founder at X/procure® Software, CIO at Finstruct Group, and Head of Department at PWC


John Hibbert - BCom Commerce
Director & Advisory Board

 

 

CEO at Prudential Shariah.
Previously: PSG Wealth, Personal Trust International, Old Mutual Group.


Jaco Gerber - CA (SA), BCom Hons and CTA, Bcom Accountancy (Cum Laude)
CFO: Futureneers Group & Key Individual on VCC
Previously: Partner at PWC, CEO at Marketel Money and Dinner in the Sky. Director at The Giving Organisation.


Mufti Ismail Desai – BSc Banking:
Advisory Board, Shariah Compliance
CEO – Global Islamic Financial Services


Alwyn Rossouw - CA(SA)
Group Chairman & Advisory board
CEO & Founder - Marathon Consulting.
Previously: CFO and COO at BoE Bank, Nedbank Executive Team


Stefan van Niekerk - BA (Law), LLB, Master Practitioner in Real Estate
Advisory Board
Partner at Minitzers Attorneys specializing in property transfers and property development.


Neil Hobbs - CA (SA), BCom Hons Financial Management
Advisory Board
Partner at Hobbs Sinclair, Director of 1st approved S12J VCC - Iridium Investments, Director at Anuva Investments VCC & Latus Health VCC.
Previously PWC.


Dirk van Loggerenberg - CA (SA)
Advisory Board
CEO - Futureneers™ Asset Rentals.
Previously: CEO at Ambitio Consulting, Director at I to I Technology Services, Director at Dölberg Asset Finance, MD at Scifin.


Section 12


FEES

Initial capital raise fee: 5% (2.75% after Section 12J tax benefit) deducted from initial capital invested by the investor (4% of which is paid to the independent broker network).

Annual Management Fee: 1.75% p.a. of total capital invested.

Performance fee: To incentivise returns to investors the management company will be paid a performance fee of 20% of all returns exceeding 12% IRR p.a. to investors (calculated on risk capital invested).


Section 13


INVESTMENT RISKS

● Investor returns are ultimately dependent on the long-term capital appreciation of underlying assets
● Property prices may be influenced by political, macroeconomic and other factors which are not controllable by the investor or management company like for e.g.
○ Land repatriation without compensation - effects on property market prices.
○ Social unrest & crime.
○ Further domestic debt downgrades.
○ Water shortages.
● The profitability of hospitality properties are dependent on achieving targeted occupancy rates and should occupancy rates not be achieved, projected returns may not be achieved.
● Leisure hospitality occupancy rates are dependent on trends in the tourism industry.
● Asset rentals – Credit screening and vetting done, however Credit Risk is still applicable
● VCC shares are illiquid by nature.

Please refer to the Private Placement Memorandum for additional risks which may apply to an investment in Prudential Shariah Section 12J Fund


Section 14


IMPORTANT NOTICE:

● Not a public offer: Investing in the Prudential Shariah Section 12J Fund is by invitation only and not an offer to the public to subscribe for shares.
● Shares are illiquid: Shares in Prudential Shariah Section 12J Fund are not listed and are therefore not easily tradable. Short-term liquidity will therefore be limited.
● Long-term investment: An investment in Prudential Shariah Section 12J Fund should be seen as a long-term investment requiring a minimum of 5 years to realize capital returns.
● Returns cannot be guaranteed: All returns presented in this document, or otherwise, are targets only and may not be achieved.
● Obtain external advice: This document does not contain all of the information necessary to fully evaluate any transaction and, as such, should not be solely relied upon. Any investment decision should thus be made after appropriate due diligence. In this respect, Investors should not view this document as comprehensive advice in terms of the Financial Advisory and Intermediaries Act (FAIS) of 2002.
● Disclaimer: This document was compiled based on information available and regulations in place at the time of publishing.

Section 15


FUND SUMMARY

Structure: Private Company (FSCA regulated - registration number: 49691).
Fund Focus: Hospitality Property - Leisure & Student and Asset Rentals
Target fund raise: R500 million equity investment (min R250 million).
Investment term: Fund liquidation commences at the end of year 5.
Targeted Benchmark return: IRR of 16% p.a. on net risk capital invested (pre-tax).
Dividend yield: CPI + 2% p.a. on net risk capital invested.
Initial capital raise fee: 5% of investment value on entry.
Annual management fee: 1,75% p.a. of initial capital invested (CPIX adjusted).
Performance fee: 20% of returns exceeding 12% IRR p.a. (calculated on risk capital invested).
Minimum investment: R1,000,000 by invitation only.
Liquidity:
● The funds target a CPI+2% annual dividend, paid quarterly.
● If an investor wants to exit, they may sell their shares.
● Tax recoupment will apply on sale of shares during the initial 5-year period.
Gearing: Gearing may be considered at 30% LTV from year 2 onwards with no surety from investors required.


NEED MORE INFORMATION? You can obtain additional information about your proposed investment from your Independent Financial Advisor, our website at www.prudentialshariah.com or email info@prudentialshariah.com.