There has been considerable interest lately regarding government leases and their benefits and challenges. In reality, government leases can be both lucrative and problematic for landlords.
To start with, landlords are attracting higher rental rates from government leases. However, this practice came under intense fire in the recent budget speech given by Finance Minister Pravin Gordhan, who accused landlords of taking advantage of government by demanding inflated rental rates.
The reality is that landlords are able to command these higher rental rates as a result of the government’s own inefficiencies and shortsightedness. It’s commonly accepted that the South African government is known for reckless spending, so it’s no surprise that landlords are pursuing these leases with vigour. In addition, government will only engage with BEE-certified businesses, which means that only a handful of Real Estate Investment Trusts (REITs) are acceptable transacting partners. Because of this, the REITS that have managed to achieve the required BEE certification know that government choices for facilities are few and far between, so they know they can demand a premium due to this limited availability.
Although government tenants seem like the most lucrative option for landlords, they do come with certain risks. Government tenants can put severe strain on cash flow as it’s not uncommon for monthly rent to be paid late. It’s also generally accepted that government tenants don’t look after the buildings they occupy. So, in the event a lease is not renewed, the landlord is likely to have a run-down building requiring large capital investment. This capital investment could easily erode away any profits accrued over the duration of the lease in question.
Only time will tell whether landlords will emerge as the winner when transacting with government. For the time being though, government tenants are an attractive prospect for any landlord.