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Black property fund eyes state leases

Jun 17 2012 11:31 City Press

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Johannesburg - Thousands of black investors are preparing to enter the lucrative government property lease market, estimated to be worth R300bn, thanks to a new property fund from investment firm Siga Capital.

The move will open doors to investors who have found it difficult to enter the market.

Siga Capital plans to list the fund on the JSE to raise the billions needed to acquire and develop properties for leasing to government.

The state is the country’s largest occupier of commercial office space.

The Siga Capital Property Fund is expected to enter the market before the end of the year, according to veteran investment banker David Goss, who will manage it.

Goss is bullish on the government lease market despite industry concerns borne out of an ongoing investigation by the Treasury into nearly 4 000 lease contracts entered into by the Department of Public Works with property companies.

The probe was sparked by the ill-fated R500m lease deal involving the relocation of police headquarters to a building owned by businessman Roux Shabangu.

The contract was overturned when Public Protector Thuli Madonsela found that it had been irregularly awarded.

Now, hundreds of state lease contracts may be cancelled if they are found to have been awarded using underhanded methods.

Goss believes the state is a good, well-paying tenant that honours its rental commitments.

“We have seen an increase in demand for office space by government. The risk of default on rent by the government is minimal, unlike private businesses that sometimes collapse and end up defaulting,” he says.

Goss says Siga’s property portfolio will constitute 75% of government-tenanted properties while 25% would cater for commercial and retail tenants.

The group is the developer of the Tshwane Precinct Development, which will cost R4bn to construct on 200 000 square metres of prime land in the Pretoria central business district.

The development is a stone’s throw from the Gautrain station and will boast an International Convention Centre, a 10-storey hotel and office buildings for government departments.

“The government is sitting in a lot of old, run-down buildings which are inefficient and expensive to maintain.

“The government wants to expand its services, but the existing buildings do not meet its expansion plans because there isn’t enough space to accommodate additional employees,” said Goss.

Siga is building a war chest of up to R10bn. It has already raised about R6bn in debt and an additional R4bn will be raised through the listing.

By listing, Siga will follow in the footsteps of other black-managed listed property funds - Ascension Property Fund, Rebosis (run by property baron Sisa Ngebulana) and Dipula Income Fund, led by Izak Petersen.

In nearly 10 years, the listed property market has seen rapid expansion, growing its market capitalisation to more than R150bn this year from R23bn in 2003.

Black-managed property funds account for about 3% of the market capitalisation.

With interest rates at the lowest level in more than three decades, listed property has proved to be an attractive investment option for investors.

Bonds offer yields of about 7.8% growth while cash provides negative real yields.

On the other hand, listed property is expected to provide returns of between 12% and 16% a year over the next five years.

The Public Works Department wants to help the likes of Siga and Rebosis take advantage of this growth by putting long-term leases in their hands.

This move is expected to help the property sector meet its BEE charter, which has a target of 25%.

Public Works wants to give 10-year leases to black companies and two-year leases to white companies in a bid to fast-track transformation.

However, this approach has backfired as white property owners, who hold a large chunk of stock, are selling properties to blacks (who have leases but no stock) at inflated prices.

The Black Property Owners Association confirms that white owners, who hold about 95% of government leases, sell stock at inflated prices.

“Sometimes you find guys selling property at R50m even if the underlying lease is short-term. It would have made sense to sell at that price if the lease was long-term.

“Besides this you still have to refurbish the building, pushing the costs even higher. We are struggling to make money,” a member of the organisation said.

Fearing commercial reprisal and comebacks, he asked to remain anonymous.

Lack of access to funding is another barrier to entering the market for many black companies.

“Black-managed funds are effectively deemed the landlords, which may aid in attracting longer term government leases but access to funding across all aspects of development is by and large the key barrier to entry by other black developers,” said Ngebulana.

 
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