ANALYSIS: The 'dodgy' property deals

Last Sunday The Sunday Times reported that the Department of Public Works had called for tenders for Durban Police Headquarters despite an ongoing investigation by the Public Protector, Thuli Madonsela, into the previous lease agreement. The previous agreement fell through when the building was bought by someone else.

But why is this lease so controversial? Well, the main reason is that these leases were signed without having gone to tender, which is in contravention of state procurement policies. The other big reason is that they are simply a rip-off. Property is a long-term investment and one would presumable expect it to pay itself off over a long period of time. These deals though result in massive paybacks very quickly. Let's Analyse.

Old Durban agreement (TransnetTowers)

The original agreement to lease Transnet Towers, a ‘shabby’ building in the Durban CBD had a monthly rental of R4,7-million with an annual 10% escalation. This works out to a total lease value of R900-million.

Roux Shabangu was not actually able to buy the building and it was sold to someone else for R15,8-million, only slightly more than three months rental.

Let’s draw a picture…

So, on the graph above, the column on the left shows the value of the lease (money into Mr. Shabangu’s pocket) and the column on the right shows the value of the building (money out). Clearly this would have made Mr. Shabangu very rich.  Unfortunately for him, it fell through.

New Durban agreement (Redefine Towers)

We don’t yet know how much Mr. Shabangu paid for this building - because he hasn’t bought this one yet. Neither do we know much about the lease but according to the Sunday Times, Mr. Shabangu was asking R127/m² and according to Redefine’s 2010 annual report, the building has 46 282m² of lettable space. With a 10% escalation we get a lease value of… mmm… aahhh… yes… R1,1 billion!

But what is the building worth? Well according, again, to Redefine’s own Annual Report for 2010, the building is worth R113-million.

Let’s look at those towers again… Yes this one is definitely not as good a deal as the last one, Mr. Shabangu.

Two other points I would like to make:

• First, if Mr. Shabangu is able to buy the building for the R113-million that Redefine themselves claim it is worth, he will have bond repayments of R1,1-million a month. The police will be paying him R5,8-million in lease payments every month. That’s a pretty good profit.

• Secondly, the average gross rental for the building currently is only R87/m² compared to the R127/m² Mr. Shabangu wants to charge.

Pretoria Building (Middestad)

This agreement, which has caused the greatest stir, is the least profitable of them all. Mr. Shabangu bought the building for R220-million but got a bond from Nedbank for R320-million. That gives Mr. Shabangu a nice round R100-million up front to spend on whatever he wishes. Of course he’ll have to spend quite a lot fixing the building up because from what I’ve seen it could do with some work. And with all the back-handers he’s gonna have to pay out, he may not be left with very much after all.

SEE ALSO
A tale of two cities, some farms and a police station
REFERENCES
Redefine's Annual Reports

Thereafter, the Police will pay him R3,3-million a month for the privilege of using his building while he will pay Nedbank R3,1-million a month for buying it for him.  Not much profit at all for the poor guy. He will have to wait until the tenth year when the rental will escalate to R7,4-million a month before this deal pays as well as the Durban one.