Cloud hangs over govenment leases

Delta Property Fund (DLT) CEO Sandile Nomvete says the cloud hanging over government leases needs to be resolved as it makes it difficult for black-empowered companies to get new leases.

In an interview with Business Day on Friday after Delta Property made its debut on the JSE‚ Nomvete said government and business needed to come together and resolve government’s billions of rands worth of leases because uncertainty is making it difficult for empowered companies to get funding from banks.

The new property charter requires property companies with which government signs lease agreements to have a black economic empowerment (BEE) rating. Only about 10% of government’s 3‚000 lease agreements are with black owned property companies‚ indicating there is a lot of opportunity for BEE companies.

Nomvete said while the perception might be that it was simple for black empowered companies to get leases “the reality is that government lease challenges has made it difficult for these companies”.

A key problem is the desired buildings are mostly held by big property companies‚ and new black entrants are finding it difficult to get funding to buy these assets.

“The Department of Public Works has a mandate on a number of projects‚ which includes among others construction of roads maintenance of government buildings. There are a lot of things that the department is doing well‚ but the lease issue is the one dominating (problem) at the moment and the process need to be cleared and agreed upon‚” Nomvete said.

Some listed companies are putting together a portfolio of offices tenanted by government departments and wants to sell these properties to BEE companies because they are best placed to deal with the government.

Nomvete said Delta had put a team together to deal with government departments on leases‚ which was a important for any company dealing with the state.

“What you need to realise is that some companies do not have this kind of capacity‚ and I understand government as a client. It is not that government does not want to pay‚ it is a question of process. For instance when the auditor general comes every year and does auditing of all leases‚ that means for the next months or so government stops all payments‚ which can be a challenge for some companies‚” he said.

Some property companies have bemoaned the time it took to renew a lease with a government tenant — 18 months on average — a difficult period for a company with multiple leases to renew.

Government continues to be an anchor tenant for most property companies and BEE companies stand to benefit as big companies are increasingly shunning the government as a tenant because they can only sign short-term leases of up to two years. The firms clearly prefer long-term leases‚ which typically run to 10 years which is where empowered companies come in.

Restricting leases with non-empowered companies is unrealistic in practice because the government is often unable to use black-empowered companies.

While government policy looks good on paper‚ it is difficult to implement because most BEE companies do not have sufficient or appropriate stock and added to that corruption allegations are making it difficult for these same companies that should be benefiting.