MAIN IMAGE: Estienne de Klerk, chairman of South African Real Estate Investment Trust Association (SAREIT).
Expropriation without compensation (EWC), real estate investor funds and pension funds all tie together. Estienne de Klerk, chairman of the South African Real Estate Investment Trust Association (SAREIT) explains why EWC will not benefit those government intends to help.
In February SAREIT together with the South African Property Owners’ Association (SAPOA) made a submission to the parliamentary ad hoc committee about the proposed amendment to the Constitution’s ‘property clause’, Section 25.
SAREIT represents all South Africa’s listed property companies (REITs) on the JSE while SAPOA is the representative body and official voice of commercial and industrial property in South Africa.
The commercial property industry carries a value of around R1.3 trillion compared to residential property which is currently valued at around R3.9 trillion according to the Property Sector Charter Council (PSCC). The total estimated value of SA’s property industry, excluding agriculture, is around R8 trillion.
Listed property represents almost everybody
De Klerk begins by saying that what is important for them is how listed property will be impacted should the proposed Constitutional amendment be approved to make expropriation without compensation possible.
“The listed property sector is the ground swell of commercial real estate in the country and is also the most liquid and tradeable way to own real estate in South Africa. It represents pretty much every man in the street because the bulk of the investors into this sector are the pension funds. Every person in our country that has a job, and even some of those that don’t, contributes in some way, shape or form to annuities or retirement funds – with 100% certainty some of that money will be in the listed REIT sector,” he says.
There are a number of reasons why the REITs and property owners feel that the implementation of expropriation without compensation could have a detrimental impact on the country’s already struggling economy – adding further limitations to much-needed growth.
Property could have wider definition than just land
The first issue they have is that the word property as described in the Act is not defined very well which means it could be interpreted to refer to everything that a person owns. “To my mind it doesn’t just impact land and property – it could be pretty much anything that is owned, tangible or intangible,” he says.
Investors hesitant to invest
Secondly, investors feel that the principle to expropriate something for no compensation isn’t a good principle. “Certainly, in the eyes of the world it would create quite a bit of difficulty for us as a country,” says De Klerk.
De Klerk explains that investment in commercial property, as is also the case with residential property, requires confidence and a lot of capital – however, when there is uncertainty in terms of ownership and the right and title to the land that the property is on, then it will undermine confidence.
De Klerk says they deal frequently with foreign capital and in recent times foreign investors have been skittish. “This degree of policy uncertainty from government increases investor uncertainty and is really having a detrimental effect on the domestic property sector at large.”
Also read: Why EWC remains a concern
These kinds of uncertainties translate into less investors being keen to invest in the sector. As a result, you have more sellers than buyers – a situation that the South African luxury property market is well aware off.
Also read: Weighing up property investment in Cape Town
Financial sector loses debt security
The implementation of EWC could also have a detrimental impact on the banks and other financial lending institutions that provide funding for the real estate sector. The banks use ownership of real estate as security for debt.
Also read: Banks caught amid EWC disaster
When this option falls away, De Klerk says it will have as an immediate impact that investors will be retracting from investing in new developments. “You will not see further development in the real estate sector,” he says.
Local municipalities could collapse
De Klerk says another key consideration to look at is the impact on local municipalities, many of whom are already having issues with financial viability. According to the MSCI over the last ten years municipal rates and taxes have increased by 559% while there has in many cases been a deterioration of service delivery. Private companies in many municipalities have had to step in as service providers because local government was failing.
De Klerk says EWC could eventually lead to the collapse of some local municipalities should land and property owners refuse to pay rates and taxes because their property has been earmarked for expropriation without compensation. He points out that property valuation underlies the determination of the rates and taxes owed on a property, but if it was expropriated for zero rand, how does a municipality determine the levy?
Land redistribution failed elsewhere
Venezuela, Zimbabwe, Vietnam and Peru are all countries where similar plans were implemented to effect land redistribution and the economies of all these countries suffered as a result of that. “So, we are not making this up,” says De Klerk.
Conclusion
Taking all the above into consideration, De Klerk says it is clear that expropriation will not benefit those that government intends to help, but that they will suffer because of it. Many of these people have money in pension funds.
“If you are hurting the economy because you are causing uncertainty, then all the national savings, whether in retirement savings or otherwise, will definitely be impacted.”
“We do worry,” he says, for although in reality they can’t see the government expropriating people’s houses or commercial properties for nil compensation, “if legislation gives the government the right to do so, then just that right is enough to erode confidence with investors and will lead to a weak property market going forward and a decrease in new developments”.
“If you are in a country where you want to create economic activity and where you are trying to see capital investment in the country, then this is not the way to do it,” says De Klerk.
The real estate sector contributes substantially to South Africa’s GDP and it has a massive impact indirectly in terms of providing places of employment if you think of shopping centres, offices and industrial property etc.
De Klerk says therefore he thinks this legislation still has a long way to go in terms of public debate and that, although this issue is duly noted, government at present has more pressing issues to deal with in terms of the economy, job creation and quality of education.
“The reality is if you damage the economy in the process, then everybody loses the fight and it is to the detriment of the whole country,” he ends.
