Redefine to disinvest in poorly run municipalities

Johannesburg – One of South Africa’s largest listed property groups has decided to stop investing in areas where local authorities do not function properly.

Redefine’s decision to adopt a firm stance against questionable and poor management by local authorities could have far-reaching financial implications for such malfunctioning municipalities.

Not only has Redefine Income Fund [JSE:RDF] decided to stop investing in areas being poorly managed, but it has also decided to no longer make acquisitions or improve properties it already owns in such areas.

For local authorities this could ultimately mean the loss of millions of rands in municipal taxes and service fees.

In an interview with Sake24 last week, Redefine chief executive Marc Wainer said poor service delivery had got completely out of hand and he was sick and tired of being a cash cow for local authorities. He expects no favours from the authorities – only fair treatment.

He said against the background of a combination of poor infrastructure and a lack of service delivery in those areas, property values will decline over time.

“We don’t have many options with regard to the properties that we already own in such areas, but we can pick and choose in terms of new investments.”

He identified the Kopanong Municipality in Hammanskraal as one of the culprits.

Over the past year Redefine developed a Shoprite alongside the existing Kopanong shopping centre, at a cost of R36m. The store is due to open on November 15.

The project was delayed unnecessarily by sundry demands by the authorities and at one stage Redefine was expected to pay bribes to certain individuals. The company refused and it was then threatened with destruction of the building, said Wainer.

That is why Redefine will no longer undertake any development there. The plan had been to spend a total R110m to R120m on establishing another 22 to 26 additional shops.

Wainer said the Western Cape had the only local authorities in the country whose doors were “open for business”.

Redefine would like to invest more in that province, but the smaller economy offers limited opportunities.

The company also has the option of further investing offshore through its foreign subsidiary, Redefine International.

Professor Francois Viruly, a lecturer in property studies at the University of Cape Town’s school for Construction, Economics and Management, agrees that if conditions in South Africa become more oppressive many property developers could look beyond the country’s borders for future business.

He said it was a pity that the smaller municipalities did not actively seek to attract investment to augment their tax and service fee base, but did the opposite instead.

The extent to which property companies are being “milked” by local authorities can be seen in their financial results.

Redefine, which last week announced its results for the year to end-August, said its property tax and electricity costs had risen by an astronomical 40% in the financial year.

These increases were sending the operating costs of commercial property companies sky high and putting their net revenue margins under pressure.

Norbert Sasse, chief executive of Growthpoint, said not only are property tax, service fees and electricity costs rising faster than rentals, but companies are getting less and less service from the authorities.

“The lack of service delivery results in property owners having to pay out of their own pockets to compensate.”

According to a recent report by the Investment Property Databank commissioned by the South African Property Owners Association, electricity costs in the commercial property sector in the first six months of this year climbed to 29% of total operating costs for the sector, and property tax and service fees to 21%.
[date:] 2011-11-10

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