Delta Property Fund hopes to have turned a corner
Government landlord needs tenants to agree to long-term leases in order to forecast its rentals more accurately and to get finance from banks at better rates
State-focused landlord Delta Property Fund, which has been paralysed for more than a year by the government's reluctance to commit to new long-term leases, may have turned a corner after signing rental agreements with two major tenants, Eskom and the SA Revenue Service (SARS).
Over the past few years government tenants have tended to opt for short-term rental agreements, which disadvantage landlords as they cannot forecast earnings properly or provide funders with accurate lease profiles.
The company's share price climbed around 4% on Monday after the announcement, as it began to claw back the near 60% it has shed so far in 2019. It closed 5.49% higher at R1.92 on Monday, but down 57% for the year.
Delta CEO Sandile Nomvete said he wanted to sort out its leasing backlog after next week’s national election so that the group could forecast its dividends accurately and negotiate better funding deals with banks. He said he would provide more details about the progress Delta has made with its leasing after it releases its financial results in June.
Delta chief operating officer Otis Tshabalala said earlier in 2019 that over the past three years the department of public works has been slow to respond to a new leasing framework, first proposed in 2016, which contained longer-term leases at relatively lower rentals.
As a result, Delta tended to pay relatively high interest rates on the debt it raised, compared with its peers in the listed property sector, because it was unable to provide clear lease profiles to banks.
Delta’s dividend growth has also been negatively affected. The group draws about 80% of its revenue from state tenants.
The new leases from Eskom and SARS have a total gross lettable area of 21,259m².
The properties were 5 Simba Road in Sunninghill, a 5,253m² property occupied by Eskom, renewed at R85/m² for a three-year lease period; and SARS Bellville in Cape Town, a 16,006m² property renewed at R100/m² for a five-year lease period.
Bridge Fund Managers chief investment officer Ian Anderson said recently the state was shooting itself in the foot by not agreeing to the lease frameworks that Delta and other landlords had proposed over the past three years.
The public works department had cost itself and taxpayers R3bn since 2016 because it was so tardy in signing new leases, which would have been at lower rentals and with longer terms, he said.
The new leases, which include about 2,500 rental agreements, would have been at lower rentals and would have saved the government about R1bn a year.