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Monday Mar 10, 2014

'Treasury directive on leases unrealistic'

A new directive issued by the National Treasury limiting the terms of renewals on expiring leases by the Public Works Department would have unintended and negative consequences, the SA Property Owners' Association (Sapoa) has warned.

The official voice of the commercial and industrial property sector said the key strict conditions placed on the renewal of expiring leases by the directive were a maximum lease term of three years and the capping of rental escalations at a maximum of 5.5 percent a year.

It claimed the directive was prompted by high rentals charged on Public Works Department leases by unscrupulous landlords.

Jabulani Sikhakhane, a Treasury spokesman, said on Friday it had become necessary for the Treasury and the recently established office of the chief procurement officer to allow the Public Works Department to extend existing leases while the department reviewed the state's property lease portfolio.

He added the three-year limit on the lease term and capping of annual lease rental escalations were necessary when an existing lease was renewed because the procurement of this office accommodation had not gone out to tender.

In last month's Budget speech, Finance Minister Pravin Gordhan said the initiative by the Public Works Department to review the validity and cost effectiveness of all government property leases had exposed several deficiencies.

These included accommodation that was unoccupied but being paid for; accommodation occupied by non-governmental entities; discrepancies between the size of accommodation occupied and what was paid for; marked divergences from market rates a square metre; procurement through inappropriate non-competitive procedures; and missing or invalid lease agreements and unsubstantiated payments to landlords.

Gordhan said that as a result of this initiative, the department now had a turnaround strategy that would enable it to regularise the lease portfolio while ensuring continuity of services to client departments.

Neil Gopal, Sapoa's chief executive, said while it commended National Treasury for tackling corruption and overcharging by unprincipled landlords, it was concerned that these criteria were not sustainable. 'Our greatest concern is that no industry consultation was undertaken as part of this matter.' He said the directive would have a negative impact on the department itself.

The restriction on lease terms would compromise the quality of premises and any tenant allowances or incentives the landlord would otherwise be willing to offer, he added.

Gopal said landlords would find it increasingly impossible to sign at the suggested level because lease and operating cost escalations were running at more than 5.5 percent. 'Market-related escalations on market-driven leases in South Africa are on average 8 percent, so the stipulated cap is out of step with market reality.'

Gopal added that Sapoa was also concerned that the directive would actively discourage long-term investors, which would have negative spin-offs for the commercial and industrial property sector.

'Lack of consultation, disregard for the property charter and the BEE property management strategy does not bode well for the Department of Public Works or the industry.'

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