SA’s biggest property owner and user, the national department of public works, is drawing fire over a controversial plan to favour 100% black-owned property companies.

Its new property management strategy is causing anxiety and confusion in the commercial property industry where many black economic empowerment (BEE) companies, created to feed off the department’s massive portfolio, could lose much of their business.

Established group entities like Broll Properties, JHI Properties and a number of listed property funds may find themselves out in the cold when it comes to winning government business. This is after they have put in place structures which, according to broad-based BEE rules, currently qualify them.

A group of companies have raised their concerns with the SA Property Owners Association (Sapoa). “We have engaged the department and are hoping for an amicable solution,” says Musa Ngcobo, CEO of Kensani Properties and chairman of Sapoa’s transformation committee.

The new strategy is contained in a draft document prepared by the department. Though it has yet to become official policy, sources in the property sector say some proposals are already being implemented.

The department did not respond to questions from the FM.

Public works is the custodian of state property assets and administers property on behalf of government departments. Its property portfolio is estimated to be worth over R100bn. It occasionally disposes of buildings on lucrative leaseback terms and is thought to be the country’s biggest single lessee of buildings.

The new strategy proposes using the department’s muscle to groom a new class of black property owner and manager.

The draft document makes it clear that public works considers its portfolio has achieved little in the way of BEE in the past 14 years. So it has decided to tweak the rules to speed up the process.

Figures show BEE entities account for less than 10% of the department’s business with third parties. Public works aims to increase that by leasing to, and from, wholly black-owned groups.

In most instances, says the document, established landlords have created effective monopolies in certain areas. As a result, the state is forced to enter into expensive leases with these landlords, who have little desire or incentive to transform.

In many cases, apparent transformation proves to be little more than lip-service or black “fronting” on behalf of white companies.

The document suggests “set-asides” for 100% BEE entities. The concept of “set asides” refers to the practice of reserving business opportunities for a particular group of enterprises.

It recommends a sliding black-ownership scale to be used by the department when conducting business with third parties.

At the top of the scale are 100% black property companies, which will get preference when the most lucrative deals are issued by the department. These will be first in line when government enters into commercial-property leases of 10 years or more.

Companies with 90% black ownership entities are lined up for nine-year leases, 80% for eight years, and so on down the scale. Companies with less than 51% black ownership will be considered for leases of two years or less.

A similar pattern will be followed when the department grants property management contracts, as well as build, operate and transfer (BOT) programmes. Leases with a present value of over R100m are earmarked for property management entities with more than 50% black ownership. Companies less than 20% black will have to settle for leases valued between R5m and R20m. In BOT programmes, 50-year leases are for 100% black entities.

Residential property leases are also affected. Companies with BEE below 51% will be limited to one-year deals.

Emerging black property players who have found it hard to break through the commercial property glass ceiling welcome the new strategy. Noluthando Gosa, CEO of black women-controlled property group Akhona Properties, says: “I do not understand what this fuss is about.” Akhona has a 25% interest in property management group Broll.

“As a black property player, I welcome the new strategy because it promotes BEE in the commercial property industry. Government spend on leases is an important lever to bring black players into commercial property ownership.”

However, the proposed new rules could hurt existing BEE initiatives and even be in conflict with the mainstream BEE framework, broad-based BEE codes of good practice and the property charter.

BEE “set-asides” have been banned by national treasury because of concerns that they may be unconstitutional.

Few would question the department’s intention of promoting the development of black landlords. But its strategy will have to face market reality, particularly in the office sector, which is running on record low vacancies and where quality stock is limited. Unless the department focuses on greenfield development projects, finding 100% black-owned buildings will be a challenge.

The real bone of contention is the description of BEE entities in this strategy. By concentrating on 100% black-owned businesses, the plan may sideline a number of existing BEE initiatives designed with the broad-based BEE scorecard in mind. These entities have amassed black ownership levels around the 25% mark as stipulated in the codes and the property charter. But they have also put in place initiatives to comply with other sections of the broad-based BEE scorecard.

Accordingly, public works’ strategy may be in conflict with broad-based BEE, where credentials do not relate exclusively to black ownership. They include management, skills development, enterprise development, employment equity, preferential procurement and, of course, ownership.

With this approach, a black-owned entity is not necessarily an empowered one. A formerly white company with 10% black ownership may gather far better BEE credentials than a 100% black entity and would be within its rights to question public works’ set-asides.

“In reality, large portfolio owners would find themselves in an unfavourable position under the new strategy,” says Ngcobo. While the development of black landlords is important, Sapoa believes there is value in BEE initiatives in the form of joint ventures, equity participation and enterprise development.

Ngcobo says: “We must find a solution that will benefit the department’s goals of developing new black entrants, but which also promotes BEE within established entities.”

“I see no contradictions in the codes,” says Gosa. They are a minimum requirement, she says. “Companies should seek to go beyond the requirements in the codes.” - Sibonelo Radebe

Source: Financial Mail