A lot has been written about the transformation of the property industry in the past 20 years, and a policy framework is in place. The challenge now is implementation. The main issue for black property players has been policy confusion. Every time there is a change in the executive of concerned departments, progress in the implementation is either stopped or considerably slowed down.
The main driver of transformation has been Department of Public Works, which increased the pace of transformation in 2010 when it declared that it would sign 10-year leases with companies that had BEE credentials. While this was a good policy, checks and balances were not put in place to evaluate the BEE credentials of companies to prevent fronting. Government leases became low-hanging fruits, opening doors to collusion between some employees of the department and unscrupulous companies.
Once again, what transpired subsequent to this phenomenon has been documented. The encouraging fact is that the clean-up of the mess caused by this has started and will hopefully be completed soon. It is our hope that the industry will emerge strong after this process.
The BEE policy resulted in established property owners selling their government-tenanted office portfolio to BEE companies. This BEE leasing strategy has created about R13 billion BEE companies listed on the Johannesburg Stock Exchange (JSE). It has also created a few unlisted black-owned property companies. Black companies listed on JSE are Rebosis, Delta Property Fund and Ascension Property Fund. Encha Properties has exposure to JSE as a result of its deal with Vukile Property Fund. Another property fund is Indite Property Fund. This is proof that BEE strategy has been a success.
In the short term, there is room for those who raise funding from the financial institutions to purchase a stake in companies and serve as board members. Those who use this method of building property businesses will create wealth and will be celebrated by the next generation.
The current status is that the Department of Public Works is signing three-year leases with established property owners, including BEE companies at 5.5% escalation as per Treasury directive. This decision has adversely affected property owners as they are unable to refinance the maintenance programme and expansion of their portfolios. We hope this decision will be reversed soon. Otherwise, gains achieved by BEE companies will be reversed. As a result of short leases being signed and low escalation, some of the BEE companies have put their properties on the market.
It has taken 20 years to achieve 5% BEE, it will at this rate take 140 years to achieve 50% BEE government-leased buildings. This is an unacceptably a long time. A strategy has to be designed to accelerate the pace of BEE transformation. The increase in the percentage of BEE ownership of real estate will benefit those in the services industry. There will be opportunities for property management, facilities management, plumbing, electrical and so on.
The procurement of leases where a short period specified on tender documents for the landlord to provide building favours those who already have stock. Property leasing strategy has to be put in place to allow new entrants to sign development agreements with adequate time to develop suitable buildings.
The current practice is for BEE companies to make offers for buildings subject to signing lease agreements. While this has worked in some cases, it has also created disappointments where owners of buildings have reneged on the transaction or increased the sale price once the BEE company has been successful with the tender. This practice has led to a situation where buildings were bought above the market price. As a result, the rental rate offered to the client would also be above market. Transformation is not a luxury. It is a business imperative. If the current status quo is left unchanged, it will lead to previously disadvantaged losing patience and resorting to quick solutions that may create uncertainty in the market.
