John Morgan
 
THE inelegantly titled “Progress Report of the Panel of Experts on the Development of Policy on the Regulation of Ownership of Land in SA by Foreigners”, published on February 17, shocked many informed observers by calling for an immediate moratorium on land acquisitions in SA by foreigners.

Agricultural and Land Affairs Minister Thoko Didiza rejected the recommendation but this does not imply that no such restrictions will be introduced following the final report of the panel, scheduled for April.

The main reasons put forward by the panel for the recommendation of the moratorium seem to be:

• "Widespread concern" about the general ownership and purchase of South African assets by foreigners.
• The significant percentage of urban land already owned by foreigners with permanent residence.
• The need to gain time to establish more accurately the extent of foreign land ownership, there being no data on holdings by nonresidents and a significant number of “defective” records which do not include information on nationality or residence.
• The need for immediate action to prevent “land grabbing” in anticipation of restrictions.

A detailed examination of the report reveals that there is little or no empirical evidence to support most of these reasons.

The “widespread concern” seems to emanate from uninformed parties who made representations to the panel without backing up their concerns with any reliable evidence.

The conclusion in the report of the panel that “foreign individuals with permanent residence have acquired a significant percentage of urban land in SA, being approximately 1%” contrasts with the conclusion that the same class of investors owning about 0,5% of rural land is “insignificant”.

The report makes no attempt to explain why 1% is significant but 0,5% is not. The property market is not any different from markets for other assets or goods, in that a market share of only 1% is generally accepted as being insignificant and unlikely to have any effect on pricing.

In fact, in terms of value, the foreign ownership of all erven is only 0,74%. Of course, the 11,5% by value of urban property covered by “defective records” may include a large number of non-South Africans and thus push up the 1% — but this is speculation.

In any event, it is not the existing ownership that matters in connection with possible influences on the pricing of properties but new acquisitions. Here the panel at least had the benefit of empirical evidence of purchases in Western Cape from 1999 to 2004 and could obtain accurate information for the whole country from the South African Revenue Service. (As from last year the nationality and residency of all buyers has had to be notified to SARS.)

In Western Cape, which all parties assume has the highest percentage of foreign buyers, these accounted for an average of 6,3% of transactions (by value) in the period 1999-2004. This increased from 4,9% in 1999 to a peak of 8,3% in 2002 and has been gradually falling since. As one might expect, this closely mirrors the weakening and strengthening of the rand against European currencies.

By all accounts, the most recent period when the rand was strong, together with substantial increases in residential prices, has reduced foreign interest quite severely — but even at a level of about 6% of the market, foreign acquisitions can hardly have had an influence on prices.

In fact, the high price inflation of the past three years has now found its come-uppance in slow markets and many worried sellers and estate agents would welcome a few “land grabbers” to improve things.

The statistics for Western Cape show that between 1999 and 2004 the average price paid by foreign buyers was almost R1,5m, compared with an average for all properties of R938000. This confirms the impression that foreigners are primarily interested in the top end of the market and are unlikely to influence prices of properties of interest to first-time buyers or the emerging black middle class.

The real reasons for the sharp increases in the price levels of residential properties from 2002 seem primarily to have been: growing confidence in the economic outlook; substantially lower interest rates; reductions in taxes; and a general “feel good” effect. That these increases had nothing to do with foreign buyers is shown by the fact that, even in areas where there have been few or no purchases by foreigners, prices have not escalated any less. The report seems intent on proving that foreign ownership is a problem, even where the facts do not support this hypothesis.

Another example of this thinking is the comments on golf estates. It is stated that although the 34 golf estates in the country have been developed by South Africans, “they have been marketed abroad... therefore houses on these estates are owned by foreigners”.

The implication that all houses on golf estates are foreign-owned can easily be disproved.

The report recites in some detail various ideas for land reform put forward at the hearings of the panel but it does not comment on these.

The ideas included one suggesting that land should be available to foreigners in leasehold tenure only, solely in partnership with South Africans; another suggested higher taxation of foreign-owned land; and one recommended that undeveloped land should be subject to a land fee, which would “ensure that more improvements are made and that land prices across SA are reduced because speculation with land would be discouraged”.

It seems strange that the panel gave no indication of its conclusions on these ideas. This should set off alarm bells and encourage energetic rejection by interested parties before it is too late — the adoption of any of these measures is certain to bring all foreign investment in residential properties to an abrupt end, to the detriment of the economy.

What does not seem to have been discussed by the panel in any detail is the fact that tourism is one of the essential elements of the South African economy.

At the top end of the market, which produces most direct and indirect income for the country, are tourists from Europe.

The alternative locations for many such tourists for second homes include southern Europe, Florida and Barbados. These countries have one thing in common: no restrictions on the acquisition of residential properties by foreigners.

The panel visited none of these countries but instead went to Canada, Chile, Brazil, Indonesia, Singapore, England and Scotland.

From the little empirical evidence that was produced for the panel, there was nothing that would justify restrictions on purchases of residential properties by foreigners.

In today’s global markets any restrictions of the kind recommended by the panel will do untold harm to the push for direct investment in SA.

Investors are bound to ask themselves, “if acquisitions of property are to be restricted in this way today, what will follow tomorrow?”

The report of the panel mentioned that the majority of those who made representations were against a moratorium on land acquisitions by foreigners.

The panel ignored these opinions and we have only the minister to thank that the recommendation was rejected. This does not augur well for the recommendations of the final report.

Dr Morgan holds a PhD in real estate economy and has 40 years’ experience as an adviser on real estate investment.