Real Estate - Property Matters by Afra Raymond
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CAPITAL CONCERNS
Part VII

Published Thursday 25th October, 2007

Economic and Financial Planning

Last week we reflected on the generally low level of economic and financial literacy in our country. Given our aspirations, it is imperative that those shortcomings are urgently addressed.

To put all this into context, we need to cultivate the habit of making reasoned decisions after studying the options and implications. Despite recent high levels of national income, we need to understand that those are largely windfall earnings and therefore we are enjoying a period of temporary advantage. If we fail to place the moment in proper context there is a real danger that we miss the opportunities. Indeed, it is probable that we will create significant liabilities for future generations.

Another contextual note, the controversial New Piarco Terminal is said to have cost some $1.6 billion. The current wave of State office buildings in the capital is costing at least $5.0 billion.

The issue being addressed this week is the national long-term consequences of “illiterate” leaders who either don’t know or don’t care. There is a huge, wasteful and corrosive boom in office construction in our capital. We detailed earlier in the series that some 2.3 million sq ft of State offices are now under construction.

At a break-even rent of $25 a sq ft, that equates to an annual bill for these new offices of at least $700 million. Please note that this does not include maintenance.

As set out in the sidebar, we can see that the public statements on this matter by the Minister of Planning & Development and the Prime Minister are misleading, to say the least. They emphasise the minor consequences of the State’s office building programme and are silent on the deeper long-term implications. That could only occur in a country with low levels of economic and financial literacy.

No leader in a serious country would even consider making such a series of statements, other than as part of general political humour. We are not serious and the continuance of this attitude makes us all into a laughing stock.

For those who might think that this criticism is directed only at the party in power, please note that the Opposition is just as clueless, as shown by their silence on the subject. There are no signs that they would have done any differently. We also need to pause and consider the wider professional responsibility in society beyond the politicians and civil servants.

What are we saying here?

I prefer not to start with the cynical notion that our Prime Minister knows about this and does not care. Let us instead assume that he is being poorly advised since that might be more meaningful an avenue to pursue. To what extent were these issues studied before the projects were started? Was a comprehensive feasibility study done? If it was, we surely deserve to have that published without further delay. If not, one can only ask why, since there are people in the relevant positions of responsibility who fully well know what is required.

We conclude by returning to two earlier themes.

Firstly, the transient nature of our national wealth with the imperative that we therefore do our very best with it. It is our responsibility to make investments with today’s windfall that will generate foreign exchange and employment into the future.

It seems that, as far as our capital is concerned, we are now obliged to pay huge annual sums to lenders for these buildings. The curious reader will be asking whether in fact our political leaders knew all this or were they tricked? Which leads us to the second point.

Even taking the “good faith” assumption that the Prime Minister relied on his advisers and having proper respect for that office, we can say that he now knows.

So what next?

Can we take actions now to rescue this situation or at least prevent a recurrence. Do we have the capacity to learn from our mistakes and start becoming a learning, listening, reflective and mature society? That would be real development.

Afra Raymond is a director of Raymond & Pierre Limited. Feedback can be directed to afra@raymondandpierre.com.

Afra Raymond - Property Matters

To put all this into context, we need to cultivate the habit of making reasoned decisions after studying the options and implications. Despite recent high levels of national income, we need to understand that those are largely windfall earnings and therefore we are enjoying a period of temporary advantage. If we fail to place the moment in proper context there is a real danger that we miss the opportunities. Indeed, it is probable that we will create significant liabilities for future generations.

What officials say

The Minister of Planning & Development and the Prime Minister have both declared that the State’s large-scale construction of new office buildings in our capital is justified by an economic rationale.

The latest such example is the Prime Minister’s speech at the opening of the UTT Campus for Maritime Studies in Chaguaramas on September 19.

“There are those who say that all that the Government of T&T is doing is building tall buildings in Port-of-Spain. That is hardly what we have been doing primarily.

“We have been in fact building very, tall buildings, if you prefer, changing the skyline of urban T&T and saving on horizontal space.

“But every such building has a specific, justified purpose. They are not mere buildings, but facilities. Some are intended to house government’s employees so that they can operate in a satisfactory work environment.

“As a government, we are also attempting to reduce recurring expenditure incurred on rent. We are also advancing, qualitatively and quantitatively, the national stock of properties. Construction also provides employment and training.”

The link for that speech is
http://www.opm.gov.tt/news/index.php?pid=2001&nid=sp070919

It is true that someone moving out of a rented office into an owner-occupied one will be paying no further rent. But that is about all, since the owner-occupied property has a cost of occupation. In the case of a newly-constructed building, that is the break-even rent as outlined earlier in the series.

Let us be clear that even if the land and buildings were inherited at absolutely no cost, there is a cost to occupying it. By occupying it you are not earning any rent. The concept is one of opportunity cost and that ought to be part of any sensible economic and financial planning; public or private.

The average rent for State offices in the capital is about $8 per sq ft and the break-even rents for the new buildings are easily in excess of $25 a sq ft, not counting maintenance. The truth is therefore that this initiative has at least tripled the State’s recurrent expenditure on occupying offices in our capital.

It is extremely misleading to say that these new offices will save us rent. That statement and its constant repetition without mentioning the other costs is a tautology ie a completely true statement which adds nothing to our understanding of the issue.