Appendix 3: Commonwealth Property Principles
1. As a general rule,
Government should own property where the long-term yield rate exceeds the
social opportunity cost of capital or where it is otherwise in the public
interest to do so.
Over the medium term, rates
of return of 14–15 per cent (nominal) would seem the appropriate figure for
decisions about retention or divestment of existing property holdings, taking
into account past achievement of those rates of return.
The full social opportunity
cost of capital should apply to any new property development. While this will
vary over time, the existing rate is much higher than the medium term property
hurdle rate previously used.
Given the competitive nature
of the property market, it would be unusual for the long–term yield rate for
office and other commercial accommodation requirements to exceed the social
opportunity cost of capital (ie generally, government could make better use of
its scarce capital than property investment).
2. Public interest
considerations which may influence the decision as to whether government should
own property include circumstances where:
- the property has:
- symbolic significance—eg Parliament House,
the High Court;
- security requirements;
- strategic significance to future government
use—eg land required for future airport use;
- highly specialised uses that would
significantly inhibit commercial provision;
- significant heritage and environmental
requirements;
- significant public usage;
- characteristics such that the nature of the
use or development of the property would give a potential lessor excessive
future negotiation power (eg. where government needs to make a large investment
in specialised fit out);
- there exists clear
evidence of market failure. This could include properties such as:
- small regional offices in isolated locations
where there would be no other tenants should the property become vacant or
where private investors would demand excessive rates of return to recover their
investment over the life of the lease; and
- those in markets where there is a
predominance of government ownership. (An example is unique areas of the ACT
property market, in particular the Parliamentary Triangle, where there is no
competitive market.
3. The onus
should rest with the proposing agency to clearly demonstrate the
characteristics of the property that warrant government ownership:
- where market failure is claimed, the
market circumstances for the property should be adequately tested, including
consideration of offering lease terms or conditions that might allow private
investors or developers to convert a 'government guarantee' of rental income
into the capital necessary to provide the accommodation and earn a market
return; and
- where market failure is established,
the relevant Minister should take the proposal to Cabinet in the Budget
context.
4. To
encourage efficient, effective and transparent decision-making and
accountability:
- the costs of property use (whether
owned or leased, domestic or overseas) should be fully reported by the using
agency or program;
- property costs should be measured
(and wherever practical, charged) on the basis of competitive neutrality -
ie. costs to government should be measured on the same basis as the private
sector; and
- property costs should recognise the
costs of holding unused land in reserve for possible future use, except for
certain land with environmental, heritage or cultural significance and where
disposal is not an option.
5. When
seeking the provision of accommodation to meet government needs, a pro-active
approach should be taken to inform the market well in advance of the project so
that the market has time to develop solutions to meet those needs.
6. Where
ownership is decided upon, the property should be managed so as to retain the
maximum long-term economic advantage to the taxpayer. Financial and/or
organisational arrangements should be made to ensure the effective maintenance
and refurbishment of the facility are to agreed standards. Failure to do so
risks exposure to high property vacancy rates, additional costs and failure to
meet legal obligations under Occupational Health and Safety legislation.
7. For
agencies occupying property owned by another part of the government, occupancy
agreements (as a substitute for private sector leases) should be formalised
between the property owner and the occupying agency. Conditions and rentals
should be market-based. All agreements between arms of government should
be binding, and transferable on sale of properties. Where such properties are
identified for sale, the occupancy agreements should be placed in a form that
facilitates completion of the sale.
8. Property
management services provided within government bodies should be fully
market tested, including the option of in-house bids consistent
with the principles established in the Competitive Neutrality Principle.
9. Where
property is being provided on an internal market basis, there should be a clear
separation of responsibility between the area responsible for maximising the
performance of government owned property and any area responsible for tenant
advocacy.
Navigation: Previous Page | Contents | Next Page