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Friday Nov 09, 2012

State's lease problems headache for commercial property owners

Redefine plans to exit from its portfolio of government tenanted office buildings because of administrative problems at the Public Works Department.

One of Redefine's properties in downtown Joburg.

David Rice, Redefine's chief operating officer, said Redefine had a portfolio of about R2 billion that was tenanted by the government and confirmed last week that the company was trying to put something together to allow them to exit.

However, Rice said the difficulty was that it could be diluting if they were to sell it off because the portfolio was so large. "We have people in here every day looking to buy the portfolio but nobody wants to pay a market price for it. Everybody wants it for nothing," he said.

The predicament faced by Redefine in disposing of this portfolio is that the value of a property portfolio is largely determined by the value of the leases. However, the Public Works Department only approves short-term leases for buildings that are not owned by black people, while providing long-term leases of about nine years to black landlords.

Rice said the department only considered the ownership of the asset, which made it increasingly difficult for listed property companies. He said all the property loan stock companies had been to the department to complain about the its policy but "you are knocking your head against a brick wall".

This was despite the Public Investment Corporation (PIC), which manages the government employees pension funds, being a major investor in listed property companies.

Rice added that another problem at the department was officials were scared to sign off on leases because of the investigation taking place into the leases concluded with businessman Roux Shabangu.

"So they are saying: ' Am I authorised?' And you have got things going around in circles," he said.

Redefine has 97 168 square metres of offices rented by the government that are currently on month-to-month leases.

Rice said the department had about 2 500 leases that they managed but it could take "any number of months" after negotiating a lease agreement before it was finalised and in some instances the department reopened lease negotiations.

Marc Wainer, Redefine's chief executive, highlighted one example where Redefine reached an agreement on a three-year lease, but it took 18 months from the conclusion of the agreement until the documentation was finalised.

Wainer said that until a lease was documented, it was a monthly lease and very often they did not get paid the new rent while the monthly lease was still in force.

"When the document is signed, you'll get it backdated [the increased rental] after a whole big hassle. In the meantime, it's classified as a monthly lease and you've got all of these cash flow issues because you are billing them at the new rent but they are paying the old rent. It's a disaster. We've got plans to exit that market," he said.

Rice added that the government did not pay rates, which were increasing at high escalations rates, and the Public Works Department did not want to pay the escalation on the rent.

"It's actually commercially bad business to do business with the government. I have been talking to Public Works but their hands are tied because officials are scared about overstepping the mark. Administratively, it's a nightmare. That's why we are going to get out of it," he said.

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