Pinnacle Point: Deep in the ruff

Big money woes, legal tussle with Absa: Will luxury property developer survive 2010? Around the globe, the evidence is still glaringly obvious that the world overspent on luxury property last decade. Dubai's got the ostentatious Burj Khalifa - the world's tallest building - to remind us of some of the most extravagant real estate spending. South Africa has had a plethora of upmarket developments and houses for sale with no takers.

But, in South Africa at least, there are signs the market is turning. Developers and other sellers who have been taking strain thanks to buyers finding it very difficult to come up with finance are optimistic that, with lower interest rates and 2010 soccer cup euphoria, making money will be easier this year.

Hoping to also catch the wave of renewed enthusiasm for residential property is South Africa's publicly-listed Pinnacle Point Group. The luxury property developer known for its beautiful homes and golf course attractions said, in an end-of-year Stock Exchange News (SENS) release that the residential market is "showing early signs of recovery" and that it is "well positioned to take advantage of that growth".

Pinnacle's executives will be pinning their hopes on Absa's decision-makers holding the same view about the real estate market, for Pinnacle's future is hanging by a thread.

Pinnacle's fate, by its own admission, is in Absa's hands, yet according to the bank the property developer has not been playing ball on certain issues. A dispute between the two could keep lawyers either side very busy.

Absa was forced to buy a stake of about 28% in Pinnacle Point, and a number of other small companies, after clients defaulted on payments related to futures contracts.

On New Year's Eve, Pinnacle Point narrowly averted suspension from the JSE by submitting its interim report, for the six months ended 31 August, as its final deadline drew to a close. The JSE had warned through the SENS in early December that the group had "failed to submit its interim report within the three-month period stipulated in the JSE's listings requirements". The JSE said at the time that Pinnacle's securities were "under threat of suspension and possible termination".

That last-minute condensed interim report - which has not been reviewed or reported on by auditors - makes for depressing reading for the developer's shareholders.

It reports losses amounting to more than R64m for the period and says revenue was sharply down, at just over R9m, because selling came to a "virtual standstill" while the company grappled with the capital restructuring process.

Pinnacle admits that its ability to continue as a going concern is dependent on a successful rights offer and, in particular, on resolving a dispute with Absa.

Last year, when problems emerged at Pinnacle, the developer said it would aim to raise cash in the Nigerian market as a way of getting out of the quagmire. Maria Ramos, who had just taken the helm at Absa, said the bank had impaired Pinnacle Point fully in its books but would support some measures to help the company.

Ramos suggested to Moneyweb's editor-in-chief Alec Hogg that the bank might assist Pinnacle with R150m: "We have taken a decision which we believe is in the best interest of Absa shareholders. We will make a further commitment and investment in Pinnacle Point, but there are whole lot of conditions precedent, including the fact that Pinnacle Point would have to raise R100m of fresh capital."

Then, in December, Pinnacle Point revealed that only 33% of shareholders had followed their rights, leaving Absa and Lagos-based investment manager Goldblanc Management Associates to stump up R220m and R40m respectively. Absa said it would withhold payment for its shares until some "issues" are resolved.

Pinnacle Point said that prior to the close of the rights offer it "became aware that not all of the legal requirements relating to the transfer of ownership of the Lagos Keys development in Nigeria had been completed."

Lagos Keys is a massive golf estate development on 400 hectares in Nigeria's largest city. Ambitious plans include 5 000m² of waterfront retail, a five-star, 160-suite hotel and 430 "palatial homes" surrounding the estate.

The December announcement did not elaborate on which legal requirements had not been fulfilled. It is reliably understood, however, that Absa is looking at, among other things, development rights and other property ownership issues in connection with the Nigerian golf estate development.

Pinnacle's future is likely to become a whole lot clearer when Absa releases its final results, probably on 28 February. Currently, the bank's executives are pondering whether Pinnacle, and a number of other entities, is worth more financial support. Absa is already a reluctant investor.

The litmus test will be whether any further assistance would be good for Absa shareholders. The developer's share price has plummeted by almost 90% over one year, showing there is little confidence left in Pinnacle among stock market investors

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