Viability of plan to sell state property questioned
JONES LANG LASALLE (JLL), the global real estate and investment management services firm, has poured cold water on government plans to sell inefficient and underutilised state property to raise muchneeded funds, particularly for state owned enterprises (SOEs)
Former finance minister Malusi Gigaba announced the plans in last month’s Budget.
Gigaba said the government recognised that the business models of some SOEs were unsustainable and their capital structures too reliant on debt, and would require restructuring with equity investment.
He said the government in the coming year may be required to provide financial support to several SOEs, which could be done through a combination of disposing of noncore assets, taking on strategic equity partners, or via direct capital injections.
Gigaba said the national government owned up to 195000 properties with an estimated value of over R40 billion.
“We will work with them on a programme to better utilise or dispose of these properties in the short to medium term,” he said.
Tom Mundy, the head of advisory for sub-Saharan Africa at JLL, said that while not impossible, selling nonprime assets into the current market would require a pragmatic approach to pricing that the SOEs may not be willing or able to take.
Mundy believed it would make more sense for the government to focus on a long-term solution to the funding issues with the SOEs rather than a quick fix through selling out assets in a challenging market.
He said an approach that took a long-term view by removing the cronyism and inefficiencies within the SOEs would help fix the sector’s credibility issues and at least give a fighting chance of tapping global capital markets when the time came to refinance.
“A review of the government’s property holdings may be a timely and sensible strategy to improve internal efficiencies and support cash flows within the SOEs. However, it is a tactic that should not be a knee-jerk reaction to mismanagement, rather a longterm, measured approach,” he said. Mundy added that the numbers mentioned by Gigaba sounded impressive, but the proportion of properties the government could tap was likely to be far smaller.
He said the total volumes of commercial real estate transacted in South Africa last year was slightly more than R13bn, about a third of that impressive R40bn mentioned by Gigaba.
But Mundy said only a fraction of those assets could be disposed of, and understanding how many that might be was virtually impossible without a lengthy review process.
Mundy said applying a similar metric to South Africa as the 2010 estimate by the US federal government that about 2 percent of its 900000 buildings were candidates for disposal would imply a potential pot of about R622 million – about 5percent of last year’s total commercial real estate transaction volume.
“Spread across numerous poor-quality assets, this is hardly an attractive proposition,” he said.
Mundy said even assuming these sales could go ahead, the government would be selling into a market at the wrong time in the cycle, with weak volumes and growing supply creating a major challenge for disposals of lower-quality stock.