23 February 2018
Provincial Report Report
Comparative Review on Provincial Government Office Rental Accommodation / Gauteng Government Technical Advisory Centre (GTAC)
Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Acknowledgements
We wish to acknowledge the participation and support of the Gauteng Provincial Government, in particular the Gauteng Department of Infrastructure Development, as well as stewardship of the National Treasury Intergovernmental Relations (IGR), GTAC and the National Department of Public Works
Disclaimer
This document is expressly provided to and solely for the use of Government Technical Advisory Centre (GTAC) on the Comparative Review on Provincial Government Office Rental Accommodation and takes into account their particular instructions and requirements.
This report has been prepared based on information received from Provinces. Whilst reasonable endeavours have been used in the filtering of data, the results of the analysis will be impacted by inaccuracies and/or omissions in the information and documentation provided to us.
The information was provided by the provinces during July 2017 – September 2017. The analysis hence reflects the state of leasing at that point in time. The scenario analysis is based on a reference data of 01 December 2017.
The market data used has been source from independent reports. Assumptions have been made in extrapolating market data to areas not covered in the independent market reports.
The scenarios tested in this report in respect of potential saving have been executed at a portfolio-level in line with scope of the project, and in a particular time frame. Actual savings must be determined on a lease-by-lease basis, and the relevant time.
Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Contents
1 Introduction 1 Scope 1 1.1.1 Delimitations 1 2 Policy and Institutional Context 1 Asset Custodianship 1 Lease Expenditure Budget 1 Procurement 1 Other Relevant Comments 2 3 Lease Data 2 Urban Classification 2 Assumptions 3 Parking 3 4 Expenditure Analysis 3 Analysis 3 4.1.1 Factors impacting expenditure 3 4.1.2 Descriptive analysis 3 Results Overview 4 Rental expenditure per urban classification 4 4.3.1 CBD & Main Centre 5 4.3.1.1 Current leases 5 4.3.2 VTSDs 6 4.3.2.1 Expired leases (MTM) 6 Rental expenditure - effect of lease maturity (current leases) 6 Rental expenditure – effect of expired leases (MTM) 7 Landlord Profile 7 5 Potential Cost Savings 8 Appendix A 13 Lease Register 13
Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
List of Tables
Table 1: Portion of provided leased used for the expenditure analysis ...... 2 Table 2: Proportion of leases above market ...... 4 Table 3: Current Leases in the CBD & Main Centres ...... 4 Table 4: Proportion of leases above market per urban classification ...... 4 Table 5: Current leases, in the CBD/Main Centre, contributing the most to expenditure above market ...... 5 Table 6: Expired leases, in the VTSD, contributing the most to expenditure above market ...... 6 Table 7: Expenditure per landlord (top 10 of known landlords) ...... 8 Table 8: Gauteng Leases ...... 8 Table 9: Potential Savings (best case scenario) ...... 11 Table 10: Potential Savings (premium to market) ...... 11
List of Figures
Figure 1: Rentals relative to percentage of lease completed, in the Gauteng CBD & Main Centre areas ...... 7 Figure 2: Period that leases have been expired, in the Gauteng VSTD area ...... 7
Rev Originator Approved Date draft Turner & Townsend 11 December 2017 draft 2 Turner & Townsend 28 February 2018 final Turner & Townsend 27 March 2018
© Turner & Townsend (Proprietary) Limited. This document is expressly provided to and solely for the use of Government Technical Advisory Centre (GTAC) on the Comparative Review on Provincial Government Office Rental Accommodation / Gauteng and takes into account their particular instructions and requirements. It must not be made available or copied or otherwise quoted or referred to in whole or in part in any way, including orally, to any other party without our express written permission and we accept no liability of whatsoever nature for any use by any other party.
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Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Abbreviations
Adj Adjustment
Avg Average
CBD Central Business District
Exp Expenditure
MTM Month-to-Month
PER Performance and Expenditure Review
GTAC Government Technical Advisory Centre
VAT Value Added Tax
VTSD Villages, Towns and Small Dorpies
Glossary of Terms
Benchmark Industry benchmark for rentals costs, provide by Rode Report and other. Term used interchangeably with “Market” in this report.
Extent Leased area – referenced in square meters (m2)
Grade Office building classifications according to definitions as set out by SAPOA (South African Property Owners Association)
Main Centre Main Centre refers to an urban area with significant economic activity and an office rental market for which there are industry benchmarks
Market Market refers to the Benchmark (as above). Term used interchangeably with “Benchmark” in this report.
MTM Month-to Month leases are expired leases, that are running on a month-to-month basis Month-to (leases that are not yet renewed or terminated after expiry) Month
VTSD The term “Villages, Towns and Small Dorpies” is used to refer to non-urban areas, where there is not necessarily an established office rental market, and does not have industry benchmarks.
01 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
1 Introduction This report provides the results of the spending review on office accommodation in Gauteng, as part of a National Treasury commissioned study into Provincial Government Office Rental Accommodation across the country.
Scope GTAC commissioned a comparative spending review of provincial government office rental accommodation allowed for assessment of current spend against market norms.
The objectives of the project were to:
. Quantify and analyse expenditure by provincial government on the rental of office accommodation
. Assess value for money by providing relevant comparators for rental costs . Determine the key drivers of rental cost expenditure and escalation . Make recommendations for achieving greater value for money in expenditure on rented office accommodation 1.1.1 Delimitations The scope was specifically on commercial office accommodation, leased in from private land lords and excluded expenditure by provinces on the rental of agricultural land, offices in specialised facilities (e.g. schools, hospitals / clinics, polices stations etc.).
2 Policy and Institutional Context Asset Custodianship
. In terms of the Government Immovable Asset Management Act, Act No 19 of 2007, (GIAMA), the Department of Public Works is the custodian of all state immovable assets, including leased accommodation.
. As of 2012 all Head Office space is leased through Gauteng Department for Infrastructure Development (GDID). Lease Expenditure Budget
. Lease Expenditure Budget for Head Office Premises falls under the GDIFD. . Budget for Regional Offices falls under Client Departments. . Payment is made by the Client Departments through BAS and on the basis of an SLA between the DPW and the relevant Department. Procurement
. Gauteng follows the open-tender process for acquisition of leases. . GDID interrogates Client Departments’ needs analyses based on Client UAMPS. . Market analysis is done at time of bid. Gauteng enjoys relatively good access to market data relative to other Provinces.
. Short term leases (5 years or less) are being negotiated due to the proposed Precinct plan. . GDID is discouraging negotiation of leases.
01 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Other Relevant Comments
. Office Grade is not recorded by GDID . Verification of lease occupation & premises data is only done at time of bid, not during lease term.
. Lack of supply in some areas is identified as a key challenge to obtaining market related rentals.
. The expected substantial increase in Assessment Rates in JHB is seen as key risk to the Province. 3 Lease Data
Lease data as per Lease Registers provided by the Province were filtered. Leases meeting the following data criteria were used in the Expenditure Analysis:
1 Leases of “commercial” office accommodation only. Leases on land, warehouses etc. and leases on offices located in schools, hospitals etc. were excluded. This was done because those leases may not have been concluded on a pure “arm’s length” basis and had the potential to skew the results of the analysis.)
2 Leases where the entry in the lease register included physical address, leased area / extent, start and end date, monthly rental, escalation rate and landlord. This was the minimum set of lease data points that would allow for meaningful analysis
The lease data provided by Gauteng Province was classified as follows. Table 1: Portion of provided leased used for the expenditure analysis
No of leases Monthly rental Extent [m2]
Leases provided 95 R 54,168,954 386,611
Leases used 45 R 41,280,818 351,372
Appendix A provides the leases that have been used, and the leases that have been excluded.
The lease analysis was carried out with a separation between the status of the lease and its geographic location: Lease were thus categorised as follows:
. Current leases and Expired leases (or Month-to-Month (MTM) leases), as at September 2017
. Area classification (urban/non-urban) – the classifications used are CBD and Main Centre for urban and VTSD for non-urban / outlying areas. Urban Classification
Leases were split into the categories (below) depending on location, market supply and economic activity.
. CBD or Main Centre . VTSD
02 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Assumptions
The following assumptions were made on the lease data:
1 Rentals are deemed to be inclusive of net rentals and operating costs, unless otherwise specified.
2 The grade of the buildings are deemed to be B-Grade, unless otherwise specified 3 All rentals are assumed to exclude VAT.
Parking As the lease data does not specifically note parking costs, we have assumed rentals costs exclude parking costs. No adjustment is being made to the rentals in the lease register provided.
Where there are no actual parking costs provided, the following adjustment are made in the expenditure analysis:
. The number of parking bays and associated cost will be determined as follows: i 2 parking bays per 100m2 of leased office space ii Parking cost based on Rode benchmark for cost per bay
. The calculated parking costs will be stripped from the monthly rental provided in the lease register.
4 Expenditure Analysis Analysis
The analysis of rental expenditure entailed
. identifying key factors impacting lease expenditure . analysing rental expenditure against these factors . assessing trends
4.1.1 Factors impacting expenditure The following factors were identified and which formed the basis of the expenditure analysis:
i Area / urban classification: the market for lease office accommodation changes significantly between CBD and Main Centres and outlying areas (VTSD)
ii Lease maturity of current leases: the percentage of lease completed
iii Duration leases running month-to-month 4.1.2 Descriptive analysis Descriptive analysis of the following factors was undertaken to better describe the features of the leasing in the provinces. Correlation to expenditure could not be undertaken based on the information available:
i A landlord profile was undertaken to illustrate any particular concentration of leasing with certain landlords
03 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
ii A government cluster profile was undertaken to illustrate any concentration of leasing with any particular cluster Results Overview
Of the 45 leases analysed, 71% of the leases (see table below) were observed as above market, resulting in monthly expenditure above the market of R9.3 million (25.4% of monthly expenditure):
Table 2: Proportion of leases above market
Number of lease above market 32 71.1%
Rental expenditure above market R 9,271,914 25.4%
The expenditure above market is observed to be primarily due to Current Leases in the CBD & Main Centres (see below).
Table 3: Current Leases in the CBD & Main Centres
Total number of Number of lease Rental expenditure leases analysed above market above market
Current Lease – CBD & Main 44 31 R 9,206,032
MTM – VTSD 1 1 R 65,882
Rental expenditure per urban classification The result of the comparison against the market is as follows:
Table 4: Proportion of leases above market per urban classification
No of Extent Average Comparison to market leases [m2] Monthly rental
CBD & Main VTSD
Current CBD & Main 44 350,346 R 70% of leases 41,121,607 leases were found to be above market benchmarks (number of leases)
rental expenditure
04 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
No of Extent Average Comparison to market leases [m2] Monthly rental
CBD & Main VTSD
was found to be 25% above market benchmarks
Expired / VTSD 1 1,026 R 159,211 100% of leases were MTM found to be above market benchmarks (number of leases)
rental expenditure was found to be 45% above market benchmarks
4.3.1 CBD & Main Centre 4.3.1.1 Current leases In terms of current leases, although 70% of the leases are above market, 25% of the rental expenditure is above market.
Whiles 31 of the 44 leases in this category featured rates above market there are a small number of leases that have a significant impact:
. 1 lease has a rate that is more than 200% higher than the benchmark . 4 leases have expenditure above market of R0.5m or more These 5 leases are listed in the table below.
Table 5: Current leases, in the CBD/Main Centre, contributing the most to expenditure above market
No. % Avg Total Avg Exp of Total above Town Client Dept Cost per Monthly Benchm above Leas Extent m2 Benchm m2 Rental ark market es ark
Johannesburg Infrastructure 1 R 283.45 11,204 R 3,044,387 R 77.38 251.2% R Development 2,177,421
Johannesburg Infrastructure 1 R 118.72 31,900 R 1,897,253 R 77.38 105.9% R 975,812 Development / GDARD & GDRT
Johannesburg Sports 1 R 181.05 11,908 R 3,349,500 R 77.38 35.7% R 881,078
05 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
No. % Avg Total Avg Exp of Total above Town Client Dept Cost per Monthly Benchm above Leas Extent m2 Benchm m2 Rental ark market es ark
Johannesburg Education 1 R 129.67 22,555 R 2,590,955 R 77.38 48.5% R 845,621
Johannesburg Community 1 R 157.17 10,450 R 1,308,621 R 77.38 61.8% R 500,000 Safety
4.3.2 VTSDs 4.3.2.1 Expired leases (MTM) There is only one lease classified under the VTSD area (listed in the table below). The lease expenditure is 94% above benchmark.
Table 6: Expired leases, in the VTSD, contributing the most to expenditure above market
Exp No. of Avg Total Total Avg % above above Town Client Dept Lease Cost Exten Monthly Benchmar Benchmar marke s per m2 t m2 Rental k k t
Meyerto HUMAN 1 R 1,026 R R 80.00 80% R n SETTLEMENTS 155.18 147,961 65,882
Rental expenditure - effect of lease maturity (current leases) Lease maturity indicates how far into the lease term the lease is. The expected trend is that newer leases would be closer to market. As leases reach the end of term, the effect of compounding escalation is expected to cause rentals to diverge further above market as the lease maturity increases.
Apart from a few outliers, rentals in the CBD & Main Centres, on average, remain fairly flat above market.
06 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
% Lease Complete - CBD & Main Rental per m2 per Rental
Average Cost per m2 Avg Weighted Benchmark Avg
Figure 1: Rentals relative to percentage of lease completed, in the Gauteng CBD & Main Centre areas
Rental expenditure – effect of expired leases (MTM) Expired leased, that are running month-to-month (MTM) over a long period, and attracting the escalation as per the lease agreement, can have the effect of driving rentals above market.
There is insufficient data to determine a trend in Gauteng.
Figure 2: Period that leases have been expired, in the Gauteng VSTD area
Landlord Profile
As part of the analysis, we attempted to establish concentration of expenditure amongst the various landlords.
07 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
For the leases where the landlord information was provided, the top ten monthly rental, are listed below:
Table 7: Expenditure per landlord (top 10 of known landlords)
Landlord Name No. Of Total Monthly Total Extent Leases Rental m2
Tamiwell Proprietary Limited 2 R 4,174,799 38,642
Tupelo Properties 1 R 3,175,830 11,204
Rebosis 1 R 2,189,585 24,527
Redefine 1 R 2,155,891 11,908
Johannesburg land company 2 R 2,139,732 14,200
Main Street 1 R 2,061,479 18,349
African Alliance 2 R 2,139,732 14,200
Nickimanzi Proprietary Limited 1 R 2,061,479 18,349
Tendopax Proprietary Limited 1 R 2,026,579 18,349
Some care must be taken with the above data and it is provided for information only as it could not be fully verified within the scope of this project. Due to the ownership of properties by separate companies and the use of managing agents as proxies for landlords, it is entirely possible that a single landlord with multiple leases may not appear on the above list. Similarly, a single managing agent may appear on the list, despite the leased premises being owned by multiple landlords. Further work would be required to verify the true ownership of the premises leased.
5 Potential Cost Savings The potential savings opportunity for Gauteng is leases is on the leases in the CBD (Johannesburg).
In the best-case scenario where lease revert to market rates when they expire, leases will revert from over R100/m2 down to R77/m2 - R93/m2.
Table 8: Gauteng Leases
Town Building Address Client Dept Avg. Adj. Avg expenditure Benchmark Cost m2 above benchmark
Johannesburg 18 Rissik Street, Infrastructure R 77.38 R 271.72 R 2,177,421 Johannesburg Development
08 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Town Building Address Client Dept Avg. Adj. Avg expenditure Benchmark Cost m2 above benchmark
Johannesburg 35 Rissik Street, Sports R 77.38 R 159.33 R 975,812 Surrey house building
Johannesburg 11 Diagonal Infrastructure R 77.38 R 105.00 R 881,078 Development/Gdard & Gdrt
Johannesburg 111 Commissioner Education R 77.38 R 114.87 R 845,621 Street
Johannesburg Game Building Community Safety R 77.38 R 125.23 R 500,000 Pritchard Street
Johannesburg 26&30 Loveday, Education R 77.38 R 97.47 R 368,631 Marshalltown, Jhb
Tshwane: 50 Human Settlements R 97.50 R 182.80 R 341,200 Arcadia Hamilton street Arcadia)
Johannesburg 55 Fox str, Education R 77.38 R 95.76 R 337,255 Marshalltown, Jhb
Johannesburg Umnotho House , Economic Development R 77.38 R 99.69 R 326,663 56 Eloff str, Johannesburg
FLORIDA Standard Bank Education R 80.00 R 139.66 R 298,280 Building, 18e Goldman Road, Florida
Johannesburg 6 Hollard Place, Education R 77.38 R 96.90 R 298,131 Marshalltown, JHB Main Street
Johannesburg Umnotho House, Agriculture R 77.38 R 89.78 R 297,480 56 Eloff str, Johannesburg
(blank) Tenant installations Health R 87.50 R 123.83 R 222,928 for Tshwane/Fedsure lease
PRETORIA President Tower Education R 87.50 R 110.41 R 194,722 Building, 265 Pretorious St, Pretoria, 0001
09 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Town Building Address Client Dept Avg. Adj. Avg expenditure Benchmark Cost m2 above benchmark
Benoni Munpen Building, Education R 93.88 R 131.73 R 189,255 78 Howard Street, Benoni
Johannesburg 111 Commissioner Education R 77.38 R 83.19 R 128,123 St. Joburg Central
SPRINGS The Avenues Office Education R 93.88 R 119.10 R 126,100 Towers, 56 Seventh St, SPRINGS
Johannesburg 11 Diagonal St Health R 77.38 R 113.46 R 125,462
Johannesburg Game Building Community Safety R 77.38 R 108.30 R 115,950 Pritchard Street - Additional Space
KRUGERSDORP Mogale Ciyt: CNR Human Settlements R 80.00 R 142.14 R 85,506 Kruger and Burger Street (Krugersdorp)
PRETORIA Corner Central and Economic Development R 87.50 R 189.80 R 77,235 Pretorius Street, Pretoria
Braamfontein 2 Reserve Road Education R 75.00 R 88.66 R 68,300 Building, corner Biccard St, Jorrisen and Reserve Road. Braamfontein
Johannesburg Johannesburg 129 Human Settlements R 77.38 R 90.42 R 67,824 Fox Street
SANDTON 142/143 Fourth Education R 133.13 R 153.56 R 59,936 Street, PARKMORE, SANDTON
ALBERTON Ekurhuleni: Nevada Human Settlements R 93.88 R 121.70 R 30,349 Building
Randfontein 50 Park Street, Economic Development R 80.00 R 159.17 R 20,108 Randfontein
(blank) Ekurhuleni SA Human Settlements R 93.88 R 117.30 R 18,736 Perm Building
PRETORIA Yorkor Park Education R 80.00 R 82.47 R 10,780 Building, 89 Watermeyer St, Val De Grace, Pretoria
10 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Town Building Address Client Dept Avg. Adj. Avg expenditure Benchmark Cost m2 above benchmark
Germiston Corner Victoria & Economic Development R 93.88 R 135.82 R 7,045 Odendaal Street, Germiston
Vereeniging SL&M Building, Cnr Education R 80.00 R 81.66 R 6,645 Joubert & Kruger St, Vereeniging
Soweto 2424 Mahalefele Economic Development R 80.00 R 122.67 R 3,456 Street, Dube, Soweto
Meyerton Meyerton No. 1 Human Settlements R 80.00 R 144.21 R 65,882 Loch Steer
The potential saving peak at over R100m in the year that most of these leases expires.
Table 9: Potential Savings (best case scenario)
FY FY FY FY FY FY 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24
Base-line R 468.1m R 509.1m R 553.7m R 602.2m R 655.1m R 712.7m
Revert to Market R 450m R 465.5m R 445.7m R 426.3m R 390m R 415.7m
Potential Savings R 18.1m R 43.6m R 108m R 175.9m R 265.2m R 297m
In the scenario where the leases cannot be negotiated down to market, but rather to a premium to market rate, the potential savings are just under R70m in the years when the leases are expiring.
Table 10: Potential Savings (premium to market)
FY FY FY FY FY FY 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24
Base-line R 529m R 575,2m R 625,5m R 680,4m R 740,m R 805,m
Revert to Market R 520,2m R 543,5m R 553,2m R 589,2m R 576,7m R 617,4m
11 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Potential Savings R 8,8m R 31,8m R 72,3m R 91,2m R 163,4m R 187,6m
12 Government Technical Advisory Centre (GTAC) Comparative Review on Provincial Government Office Rental Accommodation / Gauteng
Appendix A
Lease Register
13