South African Property Review April 2019

PROPERTY SOUTH AFRICAN

April 2019

REVIEW

The voice for the industry

PROPERTY REVIEW - LogoTreatment.pdf

Polokwane roundup

Fiscal and infrastructure issues need to be addressed

One-on-one

It’s not so TUHF to get into the property market

Carbon Tax

SAPOA’s perspective

Doing business in SA Trading across borders

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from the CEO

SAPOA disturbed by City of Johannesburg’s adoption of Inclusionary Housing Policy On 21 February, the City of Johannesburg Council approved the Inclusionary Housing Incentives, Regulations and Mechanisms 2019. The mandatory component comes into effect 90 days from the approval (so, on 23 May 2019); it is voluntary until then spatial inequalitythat’s associated with apartheid-era development planning.

Although Mayor Mashaba is quoted as saying that the adoption of the framework follows an extensive public consultation process, concerns of property developers around the mandatory inclusionary housing requirements were also not considered.

O

n 28 February 2018, City Transformation and Spatial Planning (a directorate in the Department of Development Planning at the City of Johannesburg) published a draft policy for public comment titled “Inclusionary Housing Incentives, Regulations and Mechanisms”. The commenting period was open for 60 days; it closed on 30 April 2018.

The objectives of the draft policy are as follows: ● To contribute towards the achievement of a better balance of race and income groups in new residential developments. ● To provide accommodation opportunities for low-income and lowermiddle-income households in areas from which they might otherwise be excluded. ● To improve the supply of affordable housing.

After providing comment and holding several engagements with the City of Johannesburg, SAPOA is disturbed that the Inclusionary Housing: Incentives, Regulations and Mechanisms Framework was passed, which stipulates that 30% of units in new residential developments be available for affordable housing.

According to Executive Mayor Herman Mashaba, this move is an important one in addressing the

Requirements and conditions for inclusionary housing Inclusionary housing is mandatory for any development application under the jurisdiction of the City of Johannesburg Metropolitan Municipality that includes 20 dwelling units or more. Different options (and associated incentives) are given for inclusionary housing, which developers may choose from. In each option, a minimum of 30% of the total units must be for inclusionary housing.

Inclusionary housing requirements are triggered by land development applications.

As such, the framework does not affect existing, approved land use rights. ● When inclusionary housing is applicable, it will be implemented as a condition for development (in land use/development approvals) by the City of Johannesburg. The city may take action against developers/ owners who do not comply with the conditions for inclusionary housing outlined in land use/development approvals, as with any condition of approval. ● This inclusionary housing framework is designed to provide accommodation for rental or ownership. It is intended for dwelling units, not residential buildings (as per the Johannesburg Land Use Scheme 2018).

● All conditions for inclusionary housing will be in place for perpetuity, or until repealed by a council resolution. ● Any development control bonus contemplated in the framework will be over and above the allowable development controls as per the prevailing and relevant spatial policy. As such, development controls as per prevailing spatial policies must be determined first, with bonus controls added to that determination.

Voluntary implementation ● A developer developing below the threshold of 20 units, but who meets the criteria for one of the inclusionary housing options in this framework, may still benefit from the incentives associated with the option chosen.

SAPOA provided substantial comment to the Office of the Speaker on the draft policy two days before it was adopted, but those were also disregarded. In the letter, the potential social challenges remain unaddressed, including the possibility of isolating low-income households, and the existence of negative preconceptions regarding the nature of inclusionary housing hampering its implementation. In addition, important private sector comments on the implementation of the policy were not considered in the revised policy; there remain possible negative aspects, primarily with reference to financial feasibility concerns of the property development sector.

The draft Policy is not well-thoughtout, and members and developers are encouraged to carefully consider their strategies in this market.

Best regards, Neil Gopal, CEO SOUTH AFRICAN PROPERTY REVIEW

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PROPERTY SOUTH AFRICAN

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South African Property Review

PROPERTY SOUTH AFRICAN

April 2019

REVIEW

The voice for the industry

PROPERTY REVIEW - LogoTreatment.pdf

Polokwane roundup

Fiscal and infrastructure issues need to be addressed

1

2016/08/25

11:31 AM

The lead story highlights Polokwane’s plight: an ageing water and sewerage infrastructure, and a lack of funds to develop a future-proof city.

Cover shows the detail of Polokwane’s Olympic Towers

Finance

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The voice for the industry

REVIEW

One-on-one

It’s not so TUHF to get into the property market

Carbon Tax

SAPOA’s perspective

Doing business in SA Trading across borders

April 2019

3

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3 From the CEO 6 From the Editor’s desk 10 Legal update Water-heating systems: legislative amendments 12 Legal update Update on the Carbon Tax Bill 14 Education and training Further increasing the property management pool 15 Education and training Certification ceremony for CCPP Class of 2018 18 Finance Unlocking property ownership for entrepreneurs is key to building a legacy 20 Finance Rental Housing Amendment Act’s impact on landlords and tenants 22 Finance International investment drives half-year performance growth 26 Polokwane roundup Thuma Mina – well, maybe 32 Legal outline Is there a difference between commercial and residential

sectional title?

34 One-on-one finance It’s not so TUHF to get into the property market 38 State of city finances The changing state of city finances: Part 2 48 Doing business in South Africa Trading across borders 57 Howmuch.net What investing US$100 in stocks early on would be worth today 58 Social 60 Off the wall Turning a “tragic” plastic problem into a nation-building solution FOR EDITORIAL ENQUIRIES, email mark@mpdps.com Published by SAPOA, Paddock View, Hunt’s End Office Park, 36 Wierda Road West, Wierda Valley, Sandton PO Box 78544, Sandton 2146 t: +27 (0)11 883 0679 f: +27 (0)11 883 0684 Editor in Chief Neil Gopal Editorial Adviser Jane Padayachee Editor Mark Pettipher Copy Editor Ania Rokita Taylor Public Relations Officer Maud Nale Production Manager Dalene van Niekerk Designers Eugene Jonck, Fanie van Niekerk Sales Pieter Schoeman: pieter@mpdps.com Finance Susan du Toit Contributors Anne Lovell, Ben Shaw, Chantelle Gladwin-Wood/Schindlers Attorneys, Kyle Venter/Schindlers Attorneys, Department of Construction Economics: University of Pretoria, Mahlatse Bojanyane, Maud Nale, Mumtaz Moola, Professor Chris Cloete, Shawn Theunissen, Raul Amoros/howmuch.net Photography Mark Pettipher, Xavier Saer DISCLAIMER: The publisher and editor of this magazine give no warranties, guarantees or assurances and make no representations regarding any goods or services advertised within this edition. Copyright South African Property Owners’ Association (SAPOA).

All rights reserved. No portion of this publication may be reproduced in any form without prior written consent from SAPOA. The publishers are not responsible for any unsolicited material.

Printed by Designed, written and produced for SAPOA by MPDPS (PTY) Ltd e: mark@mpdps.com

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April 2019

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from the Editor’s desk

A growing South Africa As part of keeping SAPOA members informed about trends in the South African commercial property arena, Property Review has embarked on a series of regional roundups.

We thank the Regional Chairpersons and Secretariats for their help – their local knowledge is invaluable to us as we travel around South Africa

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s we sit in our offices, working our way through the daily routine of running a business, attending various meetings, answering e-mails, and generally planning and implementing our company’s strategy, I wonder just how many of us take the time to look at the bigger picture.

At 1 219 912km², according to the UN Demographic Yearbook, South Africa is the 25th-largest country in the world.

The World Bank’s 2017 figures have pegged our population at 56,72-million – also the 25th-largest in the world – and we have 11 official languages.

In a recent interview, TUHF CEO Paul Jackson mentioned a staggering figure: 70% of our population will soon be living in our towns and cities. This got me thinking about what Dr Geci KaruriSebina once told me: that there is a need for cities and towns to be able to increase their tax-paying base.

Clearly the influx of people migrating from the rural areas to our cities will put additional strain on housing, and there is a real danger of informal settlements expanding. There are homes being built on tribal land that are not controlled by the National Home Builders Registration Council or municipal regulations.

There are no rates and tax collections in this scenario.

In every human settlement, business opportunities tend to arise. Informal settlements also give rise to informal trading – again, an unregulated and untaxed area of disadvantage to the government. As we listened to President Cyril Ramaphosa’s State of the Nation Address and Tito Mboweni’s budget address, both called for our nation to move towards “Thuma Mina” – a “me too” economy, where we all pay for our services, and we all aid the fiscus with our tax contributions.

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If adopted by all of us, this positive and optimistic attitude will get South Africa back on its feet. We need our municipalities to collect the electricity fees and pay Eskom’s bills: the billions of rand in unpaid fees, if collected, would mean we’d not have to borrow billions from foreign banks (who will all need paying back).

For this edition of Property Review, I visited Limpopo’s capital Polokwane.

Clearly there are developmental and fiscal issues that need to be addressed, as the city is poised for major growth, both in terms of population as well as property development. The private sector – made up of many of SAPOA’s members – is ready and willing to engage with the municipality. The largest encumbrance to development is the need for the city to expand, repair and improve its bulk infrastructure – this has started.

Not mentioned in the article, though, is that while I was waiting at Polokwane’s airport to return to Johannesburg, I started talking to a delegation from the National Treasury – members of the Government Technical Advisory Centre, who had spent time with the mayor and

members of her team, discussing the water problem. They didn’t give much away – but there is hope on the horizon.

Helping South Africa grow takes all kinds of investment and entrepreneurial activity. Because this edition focuses on finance, following up on the article we ran in the May 2017 edition, we speak to TUHF to find out what the company is doing to aid inner city regeneration.

TUHF’s model is to encourage previously disadvantaged individuals to seek out smaller projects in the inner cities, and to redevelop, convert and repurpose buildings. The objective is to create more affordable housing closer to places of work, and in so doing stimulate multi-sector economic development.

The carbon tax is being debated, as Parliament’s Standing Committee on Finance approved the Carbon Tax Bill in February. SAPOA’s Legal Adviser Mumtaz Moola gives us an update.

Part of development is the regulation of schemes. We talk to Lucia Erasmus about sectional titles, and outline what it means to develop sectional title office, residential and retail schemes.

We have also come to the end of our “Doing business in South Africa” series – and in keeping with the finance theme, the last extract focuses on trading across our borders.

Our “Off the wall” feature this month is a very practical one: we look at how recycled plastic can be used in the construction industry.

In preparation for the May edition of Property Review, I’m off to KZN to speak to some of SAPOA’s leading players in the region as well as Durban’s investment and development arms.

Enjoy the read.

Mark Pettipher, Editor and Publisher

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legal update

Water-heating systems: legislative amendments Are we in hot water? The image that immediately springs to mind is that of a lobster being so slowly boiled alive that it doesn’t realise what’s happening. Amid the neverending Eskom debacle of spiralling tariffs, load shedding and tales of corruption, our legislature has seen fit to bestow upon us even more onerous legal requirements relating to geysers and other hot-water systems.

This article documents government’s latest scheme to try curb energy loss and promote sustainable living (and the practical and financial consequences of same).

While the obvious need to help our struggling power giant Eskom meet the country’s current demand (or at least alleviate it in some way) is dire, so too is the financial pressure on the purse strings that comes with legislative implementation of new technology.

By Chantelle Gladwin-Wood, Partner and Kyle Venter, Candidate Attorney/Schindlers Attorneys

The idea behind the new regulations The National Regulator for Compulsory Specifications (NRCS) published amended standards during 2018 that changed the requirements for the installation of new, and the replacement of existing, domestic geysers and other domestic hot-water systems. In terms of these standards, all parties involved in the production or manufacturing of heating systems are required to ensure that their respective products are more energyefficient and fall within the so-called “Class B” or “B Energy” bracket.

The new geysers in Class B are said to have thicker insulation between the inner cylinder and the outer casing, which subsequently prevents heat loss and reduces energy consumption (and hopefully the electricity bill too). In essence, it seeks to achieve the same outcome as a thermal geyser blanket would achieve but on a much larger scale.

The new regulations also require that compliance certificates be issued when these newer geysers are installed.

If the installation is non-compliant with the regulations, a certificate of noncompliance will be issued, which will explain what the non-compliant aspects of the installation are so that they can be remedied.

Enforcement against manufacturers/importers The proposed changes will now require businesses that manufacture geysers to apply for what is referred to as “letters of authority” (LOAs). Only once an LOA has been obtained can a manufacturer or importer lawfully trade in these newer geysers.

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To ensure effective implementation and regulation, the NRCS has devised a plan called “VC Enforcement”, which includes steps such as spot inspections, various stakeholder engagements, more (or better) consumer awareness, and surprise raids at business premises. This is notwithstanding the fact that, should a manufacturer fail to adhere to prescribed specifications, this could warrant the NCRS imposing a hefty sanction by either confiscating the product, destroying it and/or imposing a penalty it deems fit under the circumstances.

Enforcement against homeowners The problem that homeowners might face (apart from the apparent size difference in geysers, which might become an issue in sectional title schemes because the new geysers are bigger than their older and less energy-efficient counterparts and might not fit into the ceiling or ducted space provided for them) is the risk of a repudiation by their household insurance should they find themselves with a burst geyser or any other damages from a burst geyser in the situation where their geyser installation is non-compliant with the relevant standards.

Seeing that the law does not require the immediate replacement of all existing geysers but only that those newly installed for the first time, or those replaced after the regulations came into effect, be Class B, a homeowner with an existing but non-compliant geyser will not suffer any harm as a result of these new regulations.

But what happens if your installation is non-compliant with the relevant legislation and there is a claim? Will it be repudiated?

This issue will not affect geysers installed before the commencement of the regulations in question because the law requires that they be replaced as and when necessary. So if you claim because your old geyser (installed before August 2018) burst and it was non-compliant, this cannot affect your claim.

However, if your geyser was installed since August 2018 and it bursts, if it was non-compliant, the insurers might repudiate the claim on the basis of the fact that non-compliance with the prescribed standards rendered the risk profile different and vitiated the cover.

Some proponents are of the view that, much in the same way as not having a valid licence disk for your vehicle does not increase your risk of having an accident, having a piece of paper that says you are compliant does not necessarily make you so or alter your risk profile in relation to the risks insured. Others disagree, for obvious reasons. If you are uncertain, check with your insurer and/or a plumber who issues compliance certificates.

Another important thing to remember is that, to the extent that an insurer can show that the burst geyser/other form of damage arose form a lack of maintenance or repairs, the damage will ordinarily not be covered by insurance.

Conclusion It is always best to err on the side of caution. Check with your insurer whether your geyser installation is covered by your household contents / homeowner’s insurance – and if so, check the requirements of your insurer for your geyser specifically, to ensure that you don’t face the repudiation of your claim when an emergency occurs.

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legal update

Update on the Carbon Tax Bill

By Mumtaz Moola

T

he South African property sector is facing significant challenges, which include above-inflation increases in electricity prices as well as rates and taxes, so the imposition of a carbon tax is expected to contribute significantly to administered cost pressures. It is understood that, for most property owners, the impact of the carbon tax is not expected to be a direct impact but more of an indirect impact. The impact of a carbon tax on the property industry is expected to be largely in the form of increasing electricity prices and increased fuel price. As the national utility Eskom will be directly liable to pay carbon tax on their direct emissions, it is expected that this cost would be passed on to its consumers. In addition, the impact on property owners would depend on how the electricity costs are managed in lease agreements with tenants, in which the cost will be passed on to tenants.

The Carbon Tax Bill highlights an interesting conundrum.

Carbon taxes are in line with best practice and certainly place the focus on electricity generation. But the reality is that carbon taxes will, for most property owners, translate into an increased cost of electricity over time The increase in the fuel price, over which there is little control, will need to be taken into account by SAPOA members. In addition, it is expected that there would be a cost impact on other building materials – for example, the cement industry would be directly liable to pay carbon tax on direct emissions; therefore it is expected that the cost would be passed on to consumers.

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The design structure of the carbon tax would not allow for the property industry to benefit from any tax-free allowances, and there is limited scope for reducing the impact of the carbon tax on the industry. The industry has been investing in sustainable technologies in order to reduce its electricity consumption, but in many instances this may not be fully under the control of property owners. In addition, investment in sustainable technologies is often without returns.

Additional tax liabilities would make it even more challenging to improve on sustainable technologies in the property industry.

SAPOA has raised its concerns with regards to the timing of the imposition of a carbon tax and the impact this will have on the industry, which could see significant cost increases in an industry with already high administered costs. SAPOA’s overall recommendation to the National Treasury was to delay the implementation of the carbon tax until after 2020 so that all the mandatory reporting and carbon budget processes are finalised and implemented for a few years.

Parliament’s Standing Committee on Finance approved the Carbon Tax Bill on 5 February 2019.

The next steps would appear to be the following: ●● The Carbon Tax Bill is debated and voted on at a sitting of the National Assembly. ●● If there is a majority of votes in favour, the Carbon Tax Bill is passed, and is then referred to the NCOP for consideration. ●● The NCOP can accept or reject the Carbon Tax Bill or propose amendments to it. ●● If the NCOP passes the Carbon Tax Bill without amendments, it goes to the President for his assent and signature, and the

Carbon Tax Bill then becomes law. The Carbon Tax Act will appear in the Government Gazette and will come into effect on 1 June 2019 or on a date determined by the President. ●● If the NCOP proposes amendments to or rejects the Carbon Tax Bill, it must go back to the National Assembly for reconsideration.

The National Assembly can pass the Carbon Tax Bill with or without the NCOP amendments, or it can reject the Carbon Tax Bill.

The impact of a carbon tax on the property industry is expected to be largely in the form of increasing electricity prices and increased fuel price The Carbon Tax Bill highlights an interesting conundrum. Carbon taxes are in line with best practice and certainly place the focus on electricity generation. But the reality is that carbon taxes will, for most property owners, translate into an increased cost of electricity over time.

This comes at a time when property owners have no control over the manner in which the national utility generates its electricity, and have limited alternatives to buying Eskom generated electricity.

The cost ultimately recovered from the property owner for electricity-based carbon will first be taxed to Eskom as the main source of carbon. At a time when Eskom has well-publicised cost challenges, focusing on the workaround seems to be a very big concession. If this happens, and Eskom can generate some of its electricity with no or low carbon tax, it will ignore the elephant in the room and add an administrative burden on the industry with limited value in return.

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education

Further increasing the property management pool

By Maud Nale Photography Xavier Saer

The Property Management Class of 2018

S

APOA and the University of the Witwatersrand (Wits) have honoured the Property Management Class of 2018 at a certification ceremony for the SAPOA Property Management course, which took place on 21 February in Johannesburg.

The course is the result of an ongoing collaborative effort between SAPOA and Wits.

According to SAPOA President Ipeleng Mkhari, one of the organisation’s main objectives is to provide professionally designed programmes that introduce prospective students to a career in the property industry.

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“One of the key value forces at SAPOA is to contribute to the advancement of our members’ interests in the commercial property arena,” said Mkhari. “Being a professional association, our education efforts are aimed at increasing the knowledge and skills required for success in the property industry among current and prospective employees, ensuring that the content of our programmes, workshops and other educational interventions is aligned with industry needs, and raising the employability and competency of the practitioners and professionals in the industry.”

Professor David Root of the School of Construction and Economics Management at Wits expressed his gratitude to SAPOA and the entire training team for their hard work.

“We wanted to provide courses that resulted in our graduates being a source of innovation, new ideas, new products and services, as well as new reporting standards and formats in the industry,” he said. “Our working relationship with SAPOA has continued to grow from strength to strength, and we look forward to further collaborative work throughout the year.”

education

CertiďŹ cation ceremony for CCPP Class of 2018

By Professor Chris Cloete, Department of Construction Economics: University of Pretoria

FRONT ROW, FROM LEFT NJ Moreman, MP Chabalala, T Phiri, R Mosalo, L Maluleke, I Mahlaule, Professor C Cloete (course leader), N Diba, S Sinakhomo, C Mothupi, M Maasdorp and E van Wyngaardt SECOND ROW, FROM LEFT L Mudau, T Mashamba, MF Chipu, N Dlela, K Nakana,

A Ntimane, Q Lombard, I Motlokoa, S Pervez, P Dastile, N Bunge and C Abrahams THIRD ROW, FROM LEFT M Msimang, C Crowie, T Mgemane, L Moalahi, M Maluleke, F Senyolo, S Swanevelder, P Whielers, H Motshana, L Nxumalo BACK ROW, FROM LEFT J du Toit, D Letsie, A Maila, N Hlekane, C Harris, M Mokgohloa, M Motsoeneng, K Thekisho, N Hlengwa

T

he Certification Ceremony for the 2018 Certificate for Commercial Property Practitioner (CCPP) took place on 25 April 2019 as part of a joint venture between SAPOA and the University of Pretoria.

More than a hundred participants registered for the programme in 2018. Seventy-five of them were from the Department of Public Works (DPW).

This popular course was offered for the first time in 1996. To date, it has been successfully completed by 785 participants.

The top three students for 2018, all from the DPW, received their certificates with distinction. Top honours were awarded to Thantaswa Mgemane; Petrus Whielers took second prize and Ntwanano Hlekane was third.

The guest speaker for the celebratory evening was John Loos, who is a property sector strategist at FNB Commercial Property Finance.

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finance

Unlocking property ownership for entrepreneurs is key to building a legacy Building a war chest for business and growing a strong personal balance sheet to create a legacy of generational wealth is a challenge that all entrepreneurs and businesspeople face. Investing in property is an effective way of achieving this – but where do you start?

To The Point, the entrepreneurship network hosted monthly by Property Point (a Growthpoint Properties initiative), shared some insights from four industry experts in order to equip entrepreneurs with the ability to own equity, whether in bricks and mortar or in listed property shares

By Shawn Theunissen

George Muchanya, Head of Corporate Finance at Growthpoint Properties

George Muchanya, Head of Corporate Finance at Growthpoint Properties, has 27 years of property experience in the areas of engineering, management and consulting.

“The questions I am most often asked are ‘Should I be investing in property at all?’ and, if so, ‘Should I invest in bricksand-mortar property or listed property shares?’” he says.

“Property is a long-term play – that’s the only way to look at it. You cannot invest your money and expect returns on day one. So, if you’re a long-term investor, property is a good fit.

“Asset classes typically include offices, shopping centres, industrial property, warehouses, retirement villages, hospitals, and so on. Listed property is a proxy to access in these properties. Most people don’t have the capital to buy a building on their own. However, for R1 000 you can buy shares on the stock market. Buying shares in listed property gives everyone, even if they only have a small amount to invest, the opportunity to own property – and it helps you start saving, and earning returns in modest amounts.

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“A key factor of investing in listed property is liquidity. Property shares have greater liquidity than fixed property investments; selling and buying them is quick, easy and hassle-free. When you invest in listed property shares, the risk is lower, because you aren’t investing in a single property but rather in a diverse multi-property portfolio.

“With shares, you don’t have to worry about maintaining an actual property and finding tenants – the professional management teams of listed property companies are responsible for this. Also, most listed property companies pay regular dividends to their shareholders every six months.

“On the other hand, physical property is less volatile than listed property over the short term (the value of shares on the stock market can change daily). Fixed property also has sentimental value because you can see it – and it makes us feel good to see what you own.”

Ipeleng Mkhari, CEO of Motseng Investment Holdings

Ipeleng Mkhari, Chief Executive Officer of Motseng Investment Holdings, has been an

entrepreneur for more than two decades.

She is the current President of SAPOA. “Operating in the commercial property sector can be quite intimidating. When you enter this industry, any asset that you probably want to buy would be a large asset with a big price tag – but one of the things we have learnt in the course of Motseng’s journey is that buying properties is not something that you do on day one.

“This is a long-term journey. At Motseng, we used the model of selfcreating and basing our growth on an annuity income for 10 years, continually building it up. Once we’d built a small balance sheet, we could start acquiring.

“The value of wealth creation lies in building your personal balance sheet – and that personal balance sheet does lie in property. You can start by investing in listed property shares or South African real estate investment trusts (REITs), or buying a property asset – one apartment or one building – and then building on that. There are a number of ways to do this, but it does take time.

“One of the real benefits of investing in property shares is the liquidity. For instance, a stokvel that saves money every month could invest in a particular listed property stock out of the 30-plus listed on the JSE, and the beauty is they would receive dividends every six months. This they could then reinvest in the stock they already own or diversify into other REITs. That in itself could be sufficient to enable the stokvel to build up enough to buy a small plot of land or a physical property asset.”

finance

Sandi Mbutuma, Managing Director at Azzaro Quantity Surveyors

Sandi Mbutuma, Managing Director at Azzaro Quantity Surveyors, is the former Chairperson of the Women’s Property Network. She serves on the board of the Property Sector Charter Council.

“One of the most important factors is to identify the asset classes and understand them first. For example, residential property is very popular with people who want to enter the market.

If you have a primary long-term liability with the banks, you can build up a credit profile, which will allow you to access

a secondary bond. This will enable you to enter the buy-to-let market.

“Fractional property ownership, be it owning one room in a hotel or shares in listed property, has proven to be successful and resilient.

“When people enter the sphere of property investment, it is generally not by buying a block of flats, but rather by starting with one apartment at a time.

In an office development, perhaps they would start by owning a 150m² sectional title office.

“Property has been stable and resilient over the long term. The optimistic view is that there will be positive movement in future.”

Dr Sedise Moseneke, Executive Director at Vukile Property Fund, is also non-executive Chairman of Encha Property Services.

“People tend to make decisions about buying property on an emotional level – but when you’re an investment-propertyowning entity, you have to take emotion

Dr Sedise Moseneke, Executive Director at Vukile Property Fund

out of the equation. Your decisions have to be commercially based.

“At Vukile, we won’t go into making an investment decision without doing two things. One: we kick the tyres, so to speak. We get out there to see the property, touch the ground it is on, and learn about the people in the area. Two: we won’t touch a property unless we do a proper study of the area and location.

Only once you have done the study and touched the soil do you get a good picture of a property.”

Re-rating on the cards for SA REIT sector South Africa’s real estate investment trust (REIT) sector is heading for a re-rating.

The question is whether the sector will rally this year – or next

By Anne Lovell

T

he FTSE/JSE SA Listed Property Index (SAPY) is out of 2019’s starting blocks with its strongest January performance in more than a decade, outperforming all other asset classes. At the end of January, SAPY was up 9,17%, well ahead of the FTSE/JSE All Share Index at 2,69%, bonds at 1,7%, and cash at 0,6%.

Wynand Smit, real estate analyst at Anchor Stockbrokers, explains that most SA REITs de-rated during 2018. “Should growth expectations start to improve during 2019, the valuations of SA REITs are compelling,” he says.

A re-rate in the sector would be a big gain for it in 2019, according to Mvula Seroto of Catalyst Fund Managers.

“However, this will only be possible if the economic outlook improves, and there are positive results from the 2019 general elections and a reprieve from credit rating agency downgrades.”

“Being quite conservative in our relative rating and growth expectations, we arrive at a 2019 total return expectation of about 12% for the FTSE/JSE All Property Index,” says Mohamed Kalla, Director and Portfolio Manager at Sesfikile Capital. “The main driver is the attractive – on a relative and absolute basis – initial forward yield; it does not factor in a significant re-rating relative to bonds in 2019. However, our forecasts point to more stable 2020 growth, which should result in better rerating potential a year from now.”

Stanlib analyst and Portfolio Manager Ahmed Motara believes it’s too early to call for a material REIT sector rally in 2019: South African elections, Edcon concerns and possibly lower retail rentals are all issues to be absorbed by the sector this year. Motara anticipates income return to dominate the total return picture in the REIT sector, with 2020 expected to

see higher total returns as capital return becomes more evident.

According to Capricorn Fund Managers SA’s Howard Penny, who expects 2019 to be a better year overall for SA REIT returns after a disappointing 2018, the jury is out as to whether the sector could re-rate on a relative valuation level this year. “Given worries surrounding rising global interest rates, perhaps the bounceback may have to wait for 2020,” he says.

“With the cost of equity having increased substantially in South Africa, management teams of local property counters will need to focus on the pure property fundamentals of their organisations,” says Andrea TavernaTurisan, SA REIT Association Marketing Committee Chairman. “This will ensure increased robustness of the property sector, putting it in a better position to deliver shareholder value over time.”

SOUTH AFRICAN PROPERTY REVIEW

19 17

finance

Rental Housing Amendment Act’s impact on landlords and tenants The Rental Housing Amendment Act (Act No. 35 of 2014) has been on the cards for some time.

Once it is in place, landlords and tenants will have six months to comply with the new legislation.

Currently, no date has been set for implementation – but many experts believe it is imminent

By Ben Shaw

“W

ith serious repercussions that will be seen as offences, landlords need to pay careful attention”, says HouseME Chief Executive Officer Ben Shaw. HouseME is a digital property disruptor that is reshaping the South African rental space. “The Rental Housing Amendment Act creates stricter rules for landlords that could lead to fines or even imprisonment if found guilty of contravening specific parts of the Act,” Shaw says. “A renewed focus on lease documentation, deposit repayment, utilities management, tenant premises access, and ensuring the maintenance/ habitability of the premises has been put forward strongly.”

All lease agreements will now have to be done in writing. “It is required that landlords invest the tenant’s deposit in an interest-bearing account, where the interest may not be less than the rate applicable to a savings account with that financial institution.” Tenants have the right to request written proof of this.

If a property is not deemed to be in a “habitable” state, a landlord can face jail time. This means that it is important for landlords to maintain their property if they have tenants. Tenants have a right to basic services such as water and electricity, 20 18

SOUTH AFRICAN PROPERTY REVIEW

and they have a right to a building structure that has been maintained.

“According to the Act, ‘habitability’ refers to a building’s safety and suitability for living,” Shaw says.

The Act states that a landlord may not seize possessions of a tenant, or visitors or family of the tenant, except in terms of a law of general application and after having first obtained a court ruling, Shaw adds. “In advertising a dwelling for the

purpose of leasing it or in negotiating a lease with a prospective tenant, or during the term of a lease, a landlord may not unfairly discriminate against such prospective tenant or tenants on grounds including race, gender, sex, marital status, sexual orientation, disability or religion,” he says. If a landlord doesn’t comply with the above, they will be found guilty of an offence in terms of the Act.

Positive dividend growth continues Emira Property Fund reported a 3,1% year-on-year increase in distributions for its half-year ended 31 December 2018, improving its distribution growth, delivering on its market guidance, and continuing its upward dividend growth trajectory

By Anne Lovell

I

ts consistent set of interim results delivers on Emira’s market guidance.

The performance is driven by progress from its stated strategies of optimising portfolio metrics, and improving the defensiveness of its income streams by rebalancing its portfolio of assets out of offices, recycling under-performing

capital into yield-accretive investment in the US and diversifying into residential property locally.

Chief Executive Officer of Emira Property Fund Geoff Jennett notes that the diversified REIT’s international and residential strategies, which are well progressed, are helping Emira to

finance counter the effects of challenging local conditions and an uncertain political economy that is impeding growth.

“Shifting a fund is easier said than done, but we have successfully repositioned Emira,” he says. “We have set strategies and stuck to them. This sharp focus has delivered good results, and has helped to push our dividend growth higher, despite the persistently tough local trading conditions throughout the period.”

Emira’s emphasis on improved portfolio metrics included aggressive vacancy management and leasing, which reduced portfolio vacancies from 4,5% in the prior half-year to 3,7%.

Office vacancies improved significantly from 9,4% at 31 December 2017 to 5,6% a year later.

It also achieved a high tenant retention rate of 88%, up from the 75% recorded 12 months earlier. New letting and contractual escalations saw Emira’s stable portfolio notch up like-for-like net income growth of 3,8%.

Emira also maintained and improved its portfolio (enhancing its quality and attractiveness as a result) with R62,4million of major projects during the six months, excluding its The Bolton residential conversion.

Completing the rebalancing of its portfolio out of lower-grade offices, Emira has disposed of a R1,8-billion 25-office-asset portfolio to Inani Prop Holdings. Inani, a 98% black-owned business and Level 1 B-BBEE entity, is 51% owned by Zungu Investment Company and 29% owned by Boyno Trade and Invest, a subsidiary of One Property Holdings. Emira owns the remaining 20%.

After Competition Commission approval was received in December 2018, the first 11 assets worth R701,8million were transferred to Inani on 4 January 2019. The remaining transfers should take place before Emira’s June 2019 year-end.

“This strategic transaction reduces Emira’s office exposure from 35,7% to a low 25% of total assets,” says Jennett. “It has meaningfully changed our portfolio, leaving us with a very manageable

Geoff Jennett, CEO of Emira Property Fund

20 office buildings, which are all P- and A-grade.”

Emira closed the year with 104 directly held South African properties worth R12,7-billion. Its gross cost-toincome ratio increased slightly from 36,4% to 37,3%, because of higher rates charges that were not recoverable.

Enyuka, Emira’s rural retail property venture with One Property Holdings, which holds R1,1-billion of lower-LSM shopping centre assets, contributed R37,5million to Emira’s distributable income.

“While Emira holds the minority share in each US asset, it is important to remember that we are actually active investors with a veto vote on all significant asset management decisions in every instance,” points out Jennett. Emira only co-invests with successful hands-on specialists in their respective fields.

Emira increased its international exposure to 10,8% of its balance sheet, with its steadily growing US investment now representing five percent – or US$50,5-million – of its total assets.

Income from its co-investment in the equity of a portfolio of groceryanchored dominant value-orientated convenience retail centres in robust markets in the US totalled R30,1-million.

The portfolio now consists of six assets. The most recent asset to transfer (in December 2018) is Truman’s Marketplace shopping centre in Grandview, Missouri. Emira invested a total of US$6,1-million for 49,5% equity interest in Truman’s Marketplace at an expected initial equity yield of 11,1% per annum.

“While Emira holds the minority share in each US asset, it is important to remember that we are actually active investors with a veto vote on all significant asset management decisions in every instance,” points out Jennett. Emira only co-invests with successful hands-on specialists in their respective fields.

Distributions from Growthpoint Properties Australia (GOZ) were down eight percent after Emira sold GOZ units during the period in addition to those it sold in June 2018 to take advantage of the A-REIT’s record-high share prices. The distribution per unit from the underlying GOZ units, however, increased by 3,6%. Emira’s remaining investment of 3,3% of total GOZ units in issue is valued at R918,1million, which represents a 161,5% increase on its initial investment.

Emira began its first foray into residential property investment in FY18 with the residential conversion of the former Sasol offices in Rosebank in a co-investment arrangement with the Feenstra Group. The Bolton apartments will be valued at an estimated R207million when completed in May 2019.

Building on its asset diversification, Emira increased its exposure to the residential rental sector during the half-year by taking a 34,9% stake in JSE/AltX-listed Transcend Residential Property Fund.

Emira has access to funding via debt capital markets at competitive rates.

Emira’s gearing ratio was slightly above its 40% upper gearing benchmark; however, this will reduce rapidly. When the first tranche of office disposals transferred to Inani on 4 January 2019, it returned to sub-40% levels and is set to be around 37% before the end of the current financial year.

SOUTH AFRICAN PROPERTY REVIEW

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finance

International investment drives half-year performance growth Growthpoint Properties recently announced 5,9% growth in distributable income to R3,1-billion with revenue from the group increasing by 4,3% for its half-year to 31 December 2018, representing dividend growth of 4,5% per share for investors Supplied by Mahlatse Bojanyane

Norbert Sasse, Group CEO of Growthpoint Properties

T

he solid set of results delivers on Growthpoint’s market guidance, and places it on track to achieve its forecast of about 4,5% growth in dividend per share for FY19, subject to no further deterioration in its South African client base. Growthpoint’s assets grew by 4,3% during the half-year to R138,7-billion.

Former SAPOA President Norbert Sasse, Group Chief Executive Officer of Growthpoint Properties, attributes this performance to the strong contributions from its newer strategies, specifically internationalisation. About 31,3% of Growthpoint’s assets are now offshore; they contribute 22,5% of its earnings before interest and tax (EBIT). Sasse confirms that Growthpoint is making good progress towards meeting its stated objective of 30% offshore exposure in asset value and EBIT. A strategic review to increase this target is under way.

“Growthpoint’s various investments in Australia and Central Eastern Europe (CEE) contributed most of our growth,” Sasse comments. “There was no growth from our South African operations because of economic erosion and weakening property fundamentals, as well as asset disposals. We disposed of R2,8-billion of non-core assets in South Africa and put the proceeds to better use 22 20

SOUTH AFRICAN PROPERTY REVIEW

in other areas of the business.”

Growthpoint is the largest South African primary listed REIT. It creates value for its stakeholders with innovative and sustainable property solutions that provide space to thrive. Its size and diversity on three continents and across property sectors make Growthpoint strongly defensive, and its 15-year track record of uninterrupted dividend growth is underpinned by earnings from highquality physical property assets.

Growthpoint owns and manages a diversified portfolio of 559 property assets (including 447 properties in South Africa worth R77,2-billlion and its 50% interest in the properties at the V&A Waterfront in Cape Town, valued at R9,2billion). Growthpoint owns 59 properties in Australia, worth R38,4-billion, through its 66% share in ASX-listed Growthpoint Properties Australia (GOZ). It also owns 52 properties in Romania and Poland, valued at €2,5-billion, through its 28,96% share in LSE AIM-listed Globalworth Investment Holdings (GWI) and its 21,6% share in Warsaw-listed Globalworth Poland Real Estate (GPRE).

Currently the 21st largest company in the FTSE/JSE Top 40 Index, Growthpoint is a top 10 constituent of the FTSE EPRA/ NAREIT Emerging Index. It is also in the FTSE4Good Emerging Index and FTSE/ JSE Responsible Investment Index.

Growthpoint’s balance sheet is well capitalised. It has conservative gearing with a consolidated loan-to-value ratio of 35,9%. It is also prudently leveraged with 85,6% of debt fixed at a weighted average interest rate of 6,8% including AUD and EUR cross-current interest rate swaps and European debt. Its foreign debt and distributions are well hedged and dividends more than cover interest charges.

During the period Growthpoint issued corporate bonds for three, five and seven years, and upheld its Moody’s national scale rating of AAA.za. About 44% of its funding comes from debt capital markets.

Growthpoint’s investment in CEE made up 2,4% of its 5,9% distributable income growth. GWI’s dividend was up 22,7% in euro for FY18, and GPRE paid Growthpoint its first dividend of R59-million. Both delivered on their significant investment activity. In Poland, GPRE made €538million worth of new investments during 2018. GWI continued its development activity in Romania, completing the ±40 000m² Renault Bucharest Connected as well as about 92 000m² for Globalworth Campus Tower One and Two, with Tower Three due for completion at the end of 2019. It also began developments of 26 400m² of new offices at Globalworth Square and a 17 700m² logistics project at Timisoara Airport Park.

“There are good opportunities to grow by acquisition in Poland and through development in Romania,” says Sasse.

“Both portfolios show excellent metrics with high occupancy and good demand.

We are in a strong position to take advantage of opportunities in the region.”

GOZ had a remarkable year in 2018 with its share price reaching record highs, and an uninterrupted growth trajectory.

GOZ’s dividend grew at 3,6% for the halfyear; it has confirmed that it expects the same for the full-year. GOZ accounted for 2,9% of Growthpoint’s increase in distributable income. Its gearing remains at a conservative 35% and its key portfolio metrics are excellent, with vacancies at a low 1,5%. Healthy property fundamentals in its market underpinned GOZ’s new investment drive of AUS$341-million. It completed a successful equity raise for

INVITE FELLOW PROPERTY JOURNALISTS TO PARTICIPATE AND SUBMIT THEIR

2019 ENTRIES!

ENTRIES CLOSE: 22 MARCH 2019

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SOUTH AFRICAN PROPERTY REVIEW

finance AUS$135-million to acquire Skyring Terrace in late 2018. Growthpoint invested a further R908m into GOZ in the period.

Income from Growthpoint’s third-party trading and development was R49-million and contributed 1,5% to the growth in distributable income. The trading and development division is currently busy with a R2,7-billion development pipeline for Growthpoint’s portfolio in South Africa and R900-million of third-party development. The goal is to generate consistent, recurring income from thirdparty development fees and trading profit capped at very conservative levels.

Growthpoint’s new funds management business consists of Growthpoint Investec African Properties (GIAP) and Growthpoint Healthcare Property Holdings (GHPH), and is on track to reach its target of R15billion in assets in the next five years. The US$212-million raised on GIAP’s first close is expected to be fully invested by 30 June 2019. GHPH, which has a R2,6-billion portfolio of five assets, has raised R700million of third-party funds and has a strong pipeline of both acquisition and greenfield development opportunities.

The V&A Waterfront contributed 1,2% to Growthpoint’s growth in distributable income, performing strongly relative to the rest of the South African portfolio.

However, it is not immune to the macroeconomic environment; its retail rentals are under pressure and turnover rentals are down. The Cape Town water crisis impacted hotel occupancy and turnover, but the precinct’s hotels still outperformed those in the city. The water crisis is now under control but the V&A Waterfront is still building its own desalination plant to take it off the water grid.

Growthpoint, with its partner the PIC on behalf of the GEPF, continues to invest in the V&A’s development roll-out. The precinct remains in high demand for new corporate offices. Development of an 8 000m² office for Deloitte is under way at Portswood Ridge, and Investec Bank has selected the V&A Waterfront’s Canal Precinct as its preferred site for a 10 000m² office. Woolworths’s 4 000m² extension, currently under way at the Victoria Wharf mall, will make it the brand’s flagship store in Cape Town.

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On the back of South Africa’s depressed macro-economy and worsening property fundamentals, which put pressure on occupancy, rental and costs, Growthpoint’s local portfolio contributed –2,1% to distributable income growth, which includes group costs and treasury. Arrears, however, remained stable across retail, office and industrial). Future escalations on renewal were maintained above seven percent, but overall vacancies moved from 5,4% to 6,5%.

Growthpoint’s new funds management business is on track to reach its target of R15-billion in assets in the next five years Trading densities in Growthpoint’s SA retail portfolio increased 1,5%, and core vacancies increased slightly from 2,2% to 2,4% over the period. Its renewal success rate increased to 85% from 82%; however, renewal growth was –3,3%. Importantly, Growthpoint is investing more than R500-million to upgrade all its core retail centres to keep them dominant, defensive and relevant.

“Growthpoint is participating in the restructuring of Edcon Ltd, but this should have no material impact on rental income,” says Sasse. “We are providing an upfront equity injection of R110-million in return for an equity stake in the Edcon business. Growthpoint has reduced its exposure to Edcon in recent years to 110 000m² in its retail portfolio. This should decrease by a further 18 000m² or more in the next two years.”

Low economic growth, weak demand, oversupply in the sector and property disposals (notably the Investec Sandton building) nudged South African office vacancies from 8,6% to 10,2% during the period. Despite the general trend of reduced and consolidated space, Growthpoint’s office renewal success rate increased from 54,5% to 62,6%. However, renewal growth was –8,9%.

Industrial is the only local property sector that achieved positive renewal growth at a rate of 1,5%, pleasingly up from –3,3% at the start of the period.

Vacancies in this portfolio, however, increased from four percent to 5,7%, linked to general economic conditions.

“Low levels of certainty and sagging business confidence make leasing challenging and expensive,” says Sasse.

“Nonetheless, Growthpoint is focused on retaining clients and filling space as a priority. Our dedicated team managed to lease more than 670 000m² of space in the half-year.”

Workshop17, which is 50% co-owned

by Growthpoint, added two new coworking spaces at Workshop17 Tabakhuis in Paarl and Workshop17 Firestation in Rosebank. This takes its locations to four, including 138 West in Sandton and the V&A Waterfront. Three more are planned, with one at Growthpoint’s 32 on Kloof development in Gardens, Cape Town, set to open in mid-2019.

A recognised leader in environmental sustainability, Growthpoint now has 102 Green Star buildings rated by the Green Building Council South Africa, spanning more than one-million square metres. In the half-year, it saved 5 674t CO2e via energy produced by solar, or R9,7-million. It also made R12-million in water investments.

Growthpoint’s initiative Property Point won Accelerator of the Year at the 2018 South African Business Incubation Conference awards by the Small Enterprise Development Agency in partnership with the Department of Small Business Development. In addition, Shawn Theunissen, Head of Property Point and Growthpoint’s Corporate Social Responsibility, was named 2018 Aspen Network of Development Entrepreneurs Global Member of the Year in New York.

“We have delivered a robust set of half-year results with key strategic gains achieved in an incredibly tough operating environment,” says Sasse.

“While we expect property fundamentals in South Africa to deteriorate even further, our international investments are in strong and supportive property markets. We will continue to enhance the diversity and defensiveness of Growthpoint’s overall portfolio with international investment and new income streams, creating value for all our stakeholders.”

The objective of the Award is to honour and celebrate the exceptional contributions made by an individual who has significantly contributed to the property sector in South Africa.

The Esteemed title will be awarded every 3 years to an individual based on their following criteria: >>

>> >> >> >> >>

THE NUMBER OF YEARS ACTIVEL Y INVOL VED WITHIN THE INDUSTRY THEIR IMPACT WITHIN THE INDUSTRY CONTRIBUTION TO LEGISLATION SERVED THEIR PEERS DRIVE TRANSFORMATION ALIGN TO THE PILLARS OF SAPOA

Nominees and winners will be announced at the 2019 SAPOA Annual Convention & Property Exhibition taking place from 18-20 June 2019 at the Cape Town ICC.

CLOSING DATE FOR ENTRIES: 08th APRIL 2019 WEBSITE LINK: http://www.sapoa.org.za/convention/awards/lifetime-achievement-awards 60

SOUTH AFRICAN PROPERTY REVIEW

Polokwane roundup

Head office of the Auditor General of Polokwane

Polokwane - on the edge?

Having been told of the malaise currently besetting Polokwane, it was time to go and get a first-hand overview of what is happening in Limpopo’s administrative capital – and how it is affecting the commercial property sector

By Mark Pettipher

P

ossibly the most expensive flight in South Africa, Airlink’s Johannesburg to Polokwane got me up in the morning at 5am for a 6.35am take-off. There is a saying that first impressions set the tone for a visit, a meeting or an opinion, and the Airlink Embraer touched down on a runway that seemingly hasn’t seen any attempt to clear the wayward grass from its surface for years. We bumped our way to the Polokwane International Airport terminal (missing its capital “P”), disembarked and walked across the tarmac to the building.

Missing and broken tiles and an atmosphere of being unloved greeted us as we navigated our way through the Gateway Airports Authority Limited arrivals and departures building to search for the car-hire offices. The flight had been full, and I wasn’t the only one wondering around direction-less.

We eventually found the offices; paperwork done and keys collected, we headed off to our various appointments.

Over the next two days I had meetings with SAPOA’s Regional Chairman Paul Altenroxel; independent town planner and adviser to SAPOA Jaco du Plessis; one of Polokwane’s leading architects Schalk van der Merwe of Prism Architects; and Pieter Lombaard, Chief Executive Officer of the Moolman Group (coowners of the Mall of the North, a supersized regional centre); and a telecon with Lucky Tharaga, Chief Executive Officer of construction, engineering and transportation company HLTC. 26 24

SOUTH AFRICAN PROPERTY REVIEW

“There is a lot of development potential in Polokwane, and it’s all within the city’s Spatial Development Framework,” said Altenroxel, opening the conversation. “But we have serious challenges to overcome first.”

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To put the serious challenges statement into context, we look at a report issued by the South African Cities Network in June 2017 – “Polokwane Municipality: A secondary city with a 20:30 vision”.

“The Spatial Development Framework (SDF) was prepared with public consultation, and workshops were held with stakeholders. Internal departments were also consulted and their respective relevant plans were incorporated. For example, the Water Services Plan, the Transport Master Plan and environmental plans were all referred to in the SDF. However, it was apparent that they had neither extensively participated nor internalised the SDF into their planning processes. The departments obviously still operate fairly independently. It would be fair to say that there is a growing awareness among all stakeholders of the importance of the SDF since the introduction of SPLUMA and SPLUMA processes. Indications are that a future SDF will assume a more central role in the planning done by other departments in the municipality – especially technical services, economic development and finance.

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Polokwane roundup “The 2010 SDF (the plan was passed in 2012) does not include an implementation plan, which therefore makes it difficult to assess implementation against dates or project implementation time frames. In addition, projects mentioned in the previous SDF (2007) and in the consecutive State of Polokwane addresses by the Executive Mayor refer to the same projects year after year, which points to implementation in the municipality being slow.

“Polokwane is a municipality with many challenges, and not all of them are necessarily spatial. However, at the spatial level, Polokwane is dichotomous because of the two different land and development regimes present within its boundaries – traditional land and land administered by the municipality.”

The municipality does not have a say in the issuing of Permission to Occupy certificates insofar as they relate to residential occupation of planned sites. The municipality does, however, have a say with regards to the informal/illegal allocation of residential sites on traditional land.

There is a procedure to follow: the Traditional Authority informs the municipality of the need for a certain number of sites. The municipality, with the assistance of the Limpopo COGHSTA, will appoint consultants (town planners and land surveyors) to conduct “site demarcations”.

A formal planning process is followed, from lodging an application to the Polokwane Municipality to surveying and drafting of general plans for the new village or extension to an existing village. This is how it’s supposed to be done.

The Polokwane Municipality is not fulfilling its Constitutional responsibility in this regard, and is incorrectly telling the public that it has no control over state/traditional land in terms of town planning. This is, however, a national problem – and it is politically sensitive, so municipalities choose to ignore such informal development.

“While the municipality has been proactive in consulting and involving traditional leaders in aspects of planning and development – especially around spatial planning through the SPLUMA consultation processes – the inability to manage the increasing residential densification of traditional land closer to Polokwane is resulting in unplanned spatial development processes that are serving to transform the spatial landscape of Polokwane. This land is accessible to the city, and discussions with officials indicate that residents do not have to pay formal rates and taxes or service charges if they settle on such land.

“Conversely, in the former black (R293) towns, in Seshego and Mankweng, and in Polokwane City, the municipality is able to plan, to zone land, to decide applications for development, and to issue rates and services bills. This means that it can have more influence over the spatial nature of development.

“It has therefore been relatively successful in directing development along key corridors, especially in the area between Seshego and Polokwane. It has directed the infilling and consolidation of the Mankweng node. However, it has not been very successful in achieving spatial integration of residential areas, so most growth in this respect has either been through peripheral, gated townhouse developments for the middleto-upper income groups, while the inner-city densification of

residential development has been achieved through uncontrolled and unplanned population and building densification, as poorer people and students have crowded into existing buildings to be closer to the opportunities provided by city living.

“Before any strong claims of spatial transformation can be made, more explicit spatial interventions are needed in Polokwane around integrated residential development where the poor can be provided with affordable and accessible shelter.”

The report’s conclusions Polokwane Municipality’s spatial structure has by and large been determined by its historical colonial and apartheid origins. It is a municipality that, while having to provide for a large, essentially dispersed rural community, also has to contend with increasing urban development in its relatively small urban centres, and with ever-increasing densification of the traditional areas in close proximity to the urban centres and along some of its development corridors. The current spatial form of the municipality is that of a single, prime urban node, two smaller urban centres and a dispersed rural settlement. However, its location at the nexus of several important regional and international road corridors (together with its capital status) is also bound to influence its future spatial form.

It has an SDF that addresses the fundamental issues and directs development towards achieving a more compact, integrated form through concentrating development on corridors and selected nodes. The theoretical spatial concepts are all adequately articulated in the SDF. However, buy-in in respect of and wide commitment to this SDF are lacking, and it has not to date succeeded in achieving its stated objectives. This is largely because implementation of the plan has been weak. The municipality appears to have neither the capacity nor the ability to undertake effective implementation. While it is possible to suggest that some wider economic issues may recently have slowed development, there are also other factors inherent to the municipality that have contributed to a lack of implementation.

It has a very small capital budget with which to catalyse development in the right areas. It is hamstrung by poor infrastructure maintenance, and there is a lack of forward planning. The result is that there is little linkage between, on the one hand, the good intentions contained in the adequate spatial plans and, on the other, the “on-the-ground” implementation of these intentions.

Private-developer dominance, an inability to regulate residential growth in traditional areas, a lack of integrated planning and of political decision-making – all of these have together conspired to create the apparent disjuncture between plans and the spatial location of new development.

Opportunities for spatial transformation are ever-present in the municipality – the presence of corridors, the lack of a strong decentralisation trend that makes the CBD an attractive option for denser, mixed-class residential development, the availability of (municipal-owned) vacant infill land, and strong growth in the tertiary sector are all factors on which to capitalise to target SOUTH AFRICAN PROPERTY REVIEW

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Polokwane roundup spatial interventions by using a clear, well-supported SDF that is linked to a longer-term city development strategy, a capital expenditure framework and an implementation plan.

A will waiting in the wings “There is a will for private-public partnerships to get involved with Polokwane’s property development,” said Altenroxel.

“However, there is a need for open dialogue to be initiated.

For the past four years, we as SAPOA have been offering to help create a strategic forum, whereby – as property owners, developers and service providers – we are willing to meet with the municipality on a regular basis, to offer ways of streamlining processes and aid in the understanding of best governance practices. This has fallen on deaf ears.

“The greatest potential that we have in Polokwane is humanrelated. There is a massive rural population that is being urbanised; it is mostly middle-class. We need to cross the bridge of tolerance of unauthorised land use, and develop land in a way that properly creates wealth for individuals and delivers wealth generation for the masses. What is the draw to a town or city? Health, education and services. The recent State of the Province Address has recognised the need for further education and good schools, increasing the capacity within existing universities, developing teacher training and nursing colleges as well as opening the medical university that has been talked about for the past 10 years.”

INTEG RATED

Polokwane demographics

VISION

2030=SMAR

2017/18 DEVEL

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To capitalise on the understanding that has been politically announced in the SOPA, one needs to understand the region’s economic potential. Polokwane has always been a regional hub; servicing a greater agricultural and rural community, it is Limpopo’s provincial capital. According to Stats South Africa (2016 figures), the province is home to about 5,8-million people, making it South Africa’s fifth-largest province in terms of population size. It trails behind Gauteng (13,4-million), KwaZulu-Natal (11,1-million), the Eastern Cape (seven-million) and the Western Cape (6,3-million).

Polokwane’s Integrated Development Plan 2017/2018 has pegged the municipal areas (rural and urban) population at 702 190 (Community Survey 2016). The number of households in Polokwane is estimated at 214 464 (2016). Significantly, the

Peter Mokaba Stadium

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number of households has grown faster than the population and reflects a steady increase.

(The total population of the Polokwane municipal area was 812 000 in 2017, with total households at 238 000, according to IHS Global Insight 2018. This figure includes the rural Aganang area that was included in the Polokwane municipal area two years ago. The projected annual growth for Polokwane is 1,33%, from 812 000 in 2017 to 868 000 in 2022. What this means is that approximately 7 300 new households (5 000 from 2016 to 2017) are formed each year, all of which must have access to accommodation and to the resources of the municipality. The household size of 3,5 persons per household is lower than in the Limpopo Province (3,8) and also the Capricorn District (3,7) (Polokwane Municipality 2014, p70), which is probably the result of the relatively higher urban population that tends to have smaller households.

Polokwane is experiencing in-migration In a study by the Feinstein International Centre in conjunction with the University of the Witwatersrand (2012), it was found that 95% of the migration into Polokwane was internal.

While almost half of the internal migrants come from South Africa – although they were born outside of Polokwane – the other half were born in Polokwane. High numbers of the latter migrants (71%) migrated from the rural areas of Polokwane to the city (Polokwane Municipality 2014, p70).

Because the N1 highway that connects Zimbabwe and Johannesburg passes through Polokwane, it attracts migrants from South Africa’s northern neighbours. Most (95%) of the international migrants are from Zimbabwe; the remaining five percent are from Mozambique, Botswana, Swaziland and Malawi.

Slowdown in property development “There has been a slowdown in property development since a moratorium on residential densification and township establishment was put in place in 2013,” said Du Plessis when we met. “The past five years’ stoppage has meant that we cannot plan, establish and develop townships. The moratorium was put in place because of the city’s biggest problem: we do not have sufficient bulk water supply and bulk sewerage treatment capacity, and there is no short-term solution to this problem.

Polokwane roundup “There is a plan for the renewal of the water infrastructure, and we believe that a start has been made by the newly appointed City Manager Dikgape Makobe – who has created a Project Management Unit to work on the water crisis – with the replacement of existing asbestos pipes and the re-evaluation of the city’s borehole supply. The municipality’s short-term solution to develop groundwater resources to address the bulk water issue will take 24 months to implement.”

The city needs 100ML of water a day, of which 88% comes from the Ebenezer, Dap Naude and Seshego dams and the Olifantspoort Water Scheme, about 120km and 70km away respectively, leaving about 12% to come from boreholes.

“There is sufficient bulk water, but Polokwane simply cannot get at it,” said Du Plessis. “For example, Lepelle Northern Water (LNW) is licensed to extract 90ML of water per day from the Olifantspoort Scheme, but the purification works can only handle 62ML per day. The upgrading of the Scheme will cost R11-billion. As a result of old and inadequate bulk infrastructure – and with the power outages we are experiencing – certain areas in our city go for days without water because the pumping stations are not operational.

“With an increase in demand for housing, the city’s sewerage network is also unable to cope. It also needs to be upgraded.

We’re told a new sewerage system will only be commissioned in 2021/2022. The existing Polokwane Sewerage Works is in the process of being upgraded. The first phase will be completed

by June 2019 and the second phase by end of December 2019, which should alleviate the problem until the Regional WWTW becomes operational in 2021/2022.

“Of greater concern is that the city and LNW (which supplies 68% of the city’s bulk water) do not have sufficient funds, and no funding is coming from the national Department of Water and Sanitation.

“There was a meeting in January between the Executive Mayor, LNW and the Minister of Water and Sanitation, where the Mayor pleaded for financial assistance. It is estimated that the city needs R450-million just to optimise the existing borehole fields and to develop additional groundwater sources around the city. LNW requires R14-billion to upgrade the Ebenezer and Olifantspoort schemes.

“I cannot emphasise it enough: there can be no development in Polokwane without the water and sewerage infrastructure

being made right. At one point when the moratorium was put in place, we couldn’t even submit plans. Now, with a lifting of the moratorium in sight (in about 18 months), we are able to follow through with plan submissions.

“But it has been taking up to two years to see any progress, only to find that the plans hit a bottleneck.”

Planning and approval stagnation Schalk van der Merwe, a long-standing SAPOA member and well-known architect at D3 Prism Architects, lamented what appears to be the lack of buy-in from the municipality into the development of new projects. To get plans approved – be it at town planning, fire department or others – remains a challenge, and normal plan approval procedures appear not to yield the necessary results.

D3 Prism Architects is well known in Polokwane and has been proudly associated with the Peter Mokaba Stadium for the 2010 FIFA World Cup, Silver Star Casino, Meropa Casino Polokwane, Standard Bank Square Polokwane, various hospital and healthcare facility developments, the Univen 2025 master plan and various campus projects, the head office of the Auditor General of Polokwane, several corporate buildings, the Polokwane High Court and various motor cities.

Contradicting viewpoints are often noted by the various departments. This non-cohesive approach, which is seldom communicated in writing, points towards a lack of accountability.

“If we can clear the issues that we are facing within the municipality, we can all capitalise on the opportunities that will arise in terms of local employment,” said Van der Merwe. “The development and continuation of the building of the city’s infrastructure, including the ceased ring road, can only benefit the citizens of Polokwane.

“There has been a lot of talk. Many IDPs and SDFs are put forward, but nothing seems to be implemented with the necessary level of urgency. This is, of course, not unique to Polokwane – but Polokwane’s plight highlights the fact that the city is crying out for good governance and greater, more inclusive cooperation.

“There is a pressing need to have healthy dialogue and to encourage investment into the city through private-public partnerships – something the city’s Executive Mayor claims on the Polokwane city website.”

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Polokwane roundup Concerns over unauthorised land use I saw first-hand the building of houses, informal crèches and nightclubs alongside the national road. Every person I interviewed raised similar concerns about safety, and about the municipality not being able to collect income from these properties.

Clearly there is cash to build expensive homes, but rates and taxes are not going into the city’s coffers.

I also spoke to Lucky Tharaga of HLTC. With the rollout of the upgrade in the city’s infrastructure, there have been tenders put out. Tharaga told me that he had put in 30 or so bids, but nothing was coming his way. “It appears that a limited number of construction service providers are rendering their services with the municipality,” he said.

“In terms of developing property within the city, even though some prime land has been identified by the city to be developed, there appears to be no clear policy as to how a company can go about getting access to it. Even if you get to speak to a clerk in planning, they either don’t know about the land, or they only have part of the information.

It’s also almost impossible to get an appointment with a planning manager.”

Drawing from his experience of developing a recently completed gated townhouse project, Tharaga said that should you be fortunate enough to get hold of land that has already had previous approvals passed, you could complete your project fairly quickly.

Public-private partnership, achieved through dialogue While it’s difficult to put a positive slant on Polokwane, there’s an optimistic side to this story, and much opportunity for development if only those on the ground can get past the distrust. The city has one of the highest employment rates in South Africa, largely due to it being an administrative centre and a provincial capital.

One company that’s succeeding is the Moolman Group.

While it too has had to slow its development plans due the moratorium, the Mall of the North and the group’s Baobab Gardens development are proving to be success stories.

Baobab Gardens is a new commercial precinct adjacent to Munnik Avenue in the Polokwane suburb of Bendor. The location of the site is in the busiest and fastest-expanding part of town, close to the Mall of the North. Munnik Avenue also becomes the R81 main road leading to Tzaneen, putting Baobab Gardens on a strategically important route.

Moolman Group CEO Pieter Lombaard was more positive about Polokwane. “The Moolman Group is one of the biggest investors in the city,” he said. “Since we opened the Mall of the North, we have seen positive growth. Being a regional mall well-positioned on the N1 and R81, we attract regional traffic. The mall and its surrounding land are a catalyst for development.

“We have joined forces with Networth Properties to create a 50/50 partnership known as Polokwane Eastern Boulevard (Pty) Ltd (PEB).

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Baobab Gardens development

The joint venture has entered into a long-term lease with the City of Polokwane for the property on which Baobab Gardens is being developed.

“The Baobab site is approximately 15,4 hectares comprising 21 stands ranging in size from 6 000m² to 16 000m². Some of the properties were made available ‘for sale’, so that owners are able to develop themselves. The remainder of the stands will be developed by PEB. A number of uses are permitted on the site, including motor dealerships and motor-related products and services, as well as big box retail, offices, fast food and hotels.

“A total of R43-million was spent on bulk services, roads and other necessary infrastructure. The first erven were sold to Italtile/CTM and Jaguar Land Rover, who have completed the construction of their buildings and have been trading since October 2017.

“In terms of development, Polokwane is a typical country town. It’s easier to go to the peripheries to develop – hence the positioning of the mall and Baobab Gardens. Polokwane is growing eastward, and as part of the group’s policy we have divested of a number of properties in the CBD. “The trend in South Africa is that CBDs seem to be in decline; there is also no longer the high-street shopping experience of previous decades. We have tended to consolidate or expand our shopping centres as a result.

“As a developer in Polokwane, we recognise that the biggest threat to the city is the water delivery crisis. But we are also seeing that the city is spending money and starting to rectify the infrastructure issues. They are also developing the BRT routes, and roads are being built and repaired to accommodate the network. In the residential areas, we enjoy a reasonable service delivery and the city’s streets are relatively clean.”

In order to assist the property industry, SAPOA has appointed a team of consultants to investigate the water crisis and the impact of illegal land use.

To get a more complete and rounded overview of this article, I would welcome a meeting with the Polokwane Municipality to be able to give them an opportunity to express their views.

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legal outline

Is there a difference between commercial and residential sectional title?

We’re often asked what the difference is between the two sectors when it comes to sectional title. We turned to Cliffe Dekker Hofmeyer’s Lucia Erasmus for clarification

By Mark Pettipher your contribution and share in that land are determined by your participation quota. In residential schemes, your participation quota must be based on size; a developer opening a sectional title register for a commercial or retail scheme can, at his discretion, attach different participation quotas to such units.

Lucia Erasmus

P

rior to 1971, there wasn’t a Sectional Titles Act, which meant people could not own part of a building. According to South African law, if you owned the land, you owned the top structure, meaning that the building acceded to the land and the land-owner was the owner of the building. No-one could own a flat. That is why there was a tremendous housing shortage at the time.

Although the 1971 Sectional Titles Act was promulgated with the intention of alleviating the shortage of residential accommodation, nothing prevented a developer from developing a commercial or mixed-use scheme, where there was a retail component at the bottom and residential units at the top. Separate ownership of the retail component and the residential units was made possible.

The previous and current Sectional Titles Act covers residential, office and retail development; there is nothing in the act that prohibits commercial use.

The Management Rules now have a definition of a primary section, which refers to the use of a section for offices, retail and residential purposes.

If you own a unit, you have exclusive use and ownership; you are also a coowner of the common property, which is basically the land. When it comes to levies, 32 30

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Is there a body corporate on a sectional title commercial scheme?

A body corporate is a creature of statute, created in the Sectional Title ‘Schemes Management Act (STSM Act). It comes into existence when the first unit is transferred to someone other than the developer, irrespective of whether it is a commercial or residential scheme.

What happens if a scheme isn’t fully sold or occupied?

If a developer creates a scheme (residential or commercial) but does not get full occupancy, the developer is liable for the levies, rates and taxes on the unsold units until the scheme is fully sold.

If a community scheme is created as freehold erven and there is an owner’s association, one often finds a clause in the scheme’s governance documentation that no levies are payable on vacant (undeveloped) land. This cannot be done in sectional title schemes; as such, a developer of a sectional title scheme is very restricted.

In most cases, the risk will be alleviated by developers selling off-plan as a way to get a critical mass before construction begins and the final transfer of units.

Prior to the commencement of the STSM Act and the establishment of the Community Schemes Ombud Service (CSOS) in terms of the Community Schemes Ombud Service Act (CSOS Act), the Deeds Office was burdened with the

management of disputes. It was the custodian of all governance documents as far as sectional titles were concerned.

The Sectional Titles Act falls under the Department of Land Affairs, which was not able to cope with the management part of the previous Sectional Titles Act. Consequently, the management was taken away; CSOS was formed to take custody and responsibility of the governance documentation and to provide a dispute resolution service for all community schemes. The CSOS falls under the Department of Human Settlements.

Whether a scheme is residential or commercial, the body corporate must lodge governance documents with CSOS.

Levies, rates and taxes The body corporate is responsible for the collection of all levies. It is not responsible for the collection of each unit’s rates and taxes – those are the responsibility of each individual unit owner. However, if a unit doesn’t pay for its services, i.e. water and electricity, it still becomes a problem for the body corporate. The body corporate must take action by giving 14 days’ notice to the defaulter, as non-payment will inevitably affect the scheme’s financials. Thereafter, the body corporate may refer the matter to the CSOS – or go the costly way and engage lawyers.

Rates and taxes are based on the market value of the property. Properties are grouped into different categories and rated according to their valuations. For a residential unit or a freehold property, in terms of the City of Johannesburg’s current tariffs there is a basic rate of R0,00734c to the rand; if it’s commercial sectional title, the rate is slightly higher at 0,019097c to the rand. The first R350 000 of the property valuation is disregarded.

legal outline What the act means to you, whether you own a sectional title unit or a property in an estate/complex (governed by a home-owners’ association) 1 Registration of the complex

6 Assistance in recovering arrears levies

Bodies corporate and home-owners’ associations need to register the the scheme with the CSOS. They also need to ensure that all governance documents, such as management and conduct rules, the memorandum of incorporation and constitution, are filed with the CSOS. In addition, they need to provide their domicilium address to the CSOS, details of trustees or board of directors, details of managing agents and details of authorised representatives of the scheme.

Bodies corporate can now request assistance from the regional Ombud where trustees are struggling to recover payments from sectional title owners.

2 Assistance with conduct rules The CSOS must approve all body corporate management rules and conduct that have been substituted, added or changed.

7 Additional levy to fund the Ombud’s offices In order to properly serve the sectional title community and other community schemes, the CSOS will be funded with an additional levy that each owner will have to pay. The regulated amount is the lesser of R40 or two percent of levies in excess of R500.

8 Limited proxies

3 Annual audited financials

No more multiple proxies per person: this new legislation limits the number of proxies held by a single body corporate member to two.

All schemes need to file their audited financials with the CSOS, together with a schedule of the levies payable per unit.

9 Quorums and voting at general meetings

The following rule changes apply only to sectional title units:

4 Reserve fund Bodies corporate are required by law to establish a reserve fund to cover the cost of future maintenance and repairs to common property. The amount for the reserve fund may not be less than the amounts prescribed by the Minister of Human Settlements. The starting point is the amount of money in the reserve fund at the end of the previous financial year.

If the amount is more than 100% of the total contributions to the administrative fund for the previous financial year, no minimum contribution is required. If the amount is less than 25%, the contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund. If the amount in the reserve fund is more than 25% but less than 100%, the budgeted contribution to the reserve fund must be at least the budgeted amount to be spent from the administrative fund on repairs and maintenance of common property in the financial year being budgeted for.

5 Decisions requiring special resolutions Bodies corporate will need a special resolution to make decisions such as purchase, transfer, sale or letting of units.

In cases where a special or unanimous resolution can’t be reached, the chief Ombud can be approached to provide relief.

Parts of the Sectional Titles Act of 1986 are still in force, but two new acts were promulgated on 7 October 2016 – the STSM Act and the CSOS Act. The Sectional Titles Act now deals with registration and survey matters, whilst the STSM Act deals with the operational requirements around the management of sectional title schemes.

If a sectional title scheme consists of more than four primary sections, a quorum is constituted by the attendance of members entitled to vote holding one-third of the total votes in value. The developer’s vote is excluded when determining whether a quorum is present. A special resolution requires 75% of the votes calculated in value and number of members represented at a general meeting, while a unanimous resolution requires 80% of the votes calculated in value and number of members represented at a general meeting.

10 Insurance All bodies corporate now need to review their all-risk insurance policy every three years. Moreover, sectional title owners may now take out insurance for damages arising from risks not covered by the body corporate’s policy.

11 New complexes If the developer amends the prescribed management and conduct rules, such rules must be approved by the CSOS prior to the opening of the sectional title register. The CSOS will issue a certificate of approval, which must be submitted to the Deeds Office when the sectional title register is opened.

New complexes must register with the Ombud within 30 days of the body corporate coming into existence. There is a prescribed form containing all the information required.

The CSOS Act has allowed the establishment of the CSOS, which will assist with certain disputes that may arise. The CSOS will also act in a compliance capacity for other communal complexes, such as security estates (where a home-owners’ association manages the complex), retirement villages and share-block schemes.

Lucia Erasmus

Director – Real Estate Cliffe Dekker Hofmeyr Inc t: +27 (0)11 562 1082 e: lucia.erasmus@cdhlegal.com w: www.cliffedekkerhofmeyr.com

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one-on-one finance

It’s not so TUHF to get into the property market With much talk about inner-city rejuvenation and the need for job creation as well as entrepreneurial development in the property sector, we talk to TUHF CEO Paul Jackson about the company’s 16-year journey of financing redevelopment

By Mark Pettipher

T

TUHF CEO Paul Jackson

Paul Jackson has been involved in development finance since 1987, and has been TUHF’s Chief Executive Officer since its inception in 2003. Prior to his appointment at TUHF, he held positions as senior operations manager at the Johannesburg Housing Company, general manager for the Transitional National Development Trust (TNDT) and divisional manager for southern Africa at the Development Bank of Southern Africa. While he was at the TNDT, the company was awarded first prize for corporate governance by the JSE/Deloitte & Touche, with a special acknowledgement for excellent achievement. Jackson has held board directorships at the Mvula Trust, Alexander Social Housing Company, Brickfields Housing Company, Johannesburg Social Housing Company, the Centre for Affordable Housing Finance and member of the Diversity board.

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UHF is an on-lending financial services provider, providing access to finance for entrepreneurs and small and medium enterprises (SMEs) to purchase and subsequently convert or refurbish buildings in the inner cities of South Africa into affordable residential units for rental.

In its 16 years of existence, TUHF has financed more than R4-billion in inner city residential rental property, and currently has a loan book of more than 34 000 residential units. Entrepreneurs are screened using TUHF’s well-developed character-based assessment method, which takes into account entrepreneurs’ ability to find, develop and manage properties to enable them to build thriving property enterprises.

TUHF prides itself on its hands-on approach and specialised knowledge of the complexities of inner cities, which allows the company to take on the risk of financing the purchase, construction and management of affordable rental housing by private entrepreneurs in areas marred by urban decline. It also assists with the capacity building and up-skilling of SMEs through training interventions such as the TUHF Programme for Property Entrepreneurs training sessions, which are facilitated and accredited by the University of Cape Town. These classes leverage the knowledge of industry experts to educate entrepreneurs on constructionrelated topics and provide them with the practical skills they need and can utilise in managing and growing their property businesses.

How it all started “About 16 years ago (THUF’s birthday is in June), I was walking around downtown Johannesburg and discovered a huge

energy and a vibrancy,” says Jackson.

“I observed huge potential. Downtown wasn’t being financed, and there was an influx of people to the city, looking for work.

“We have identified a niche for ourselves. Inner cities offer a vast amount of potential with great market value in both the freehold and sectional title markets – and they are becoming more attractive in terms of work, live and play. Furthermore, the cost of getting to work in the inner cities is becoming ever higher. More and more people are thinking of the benefits of time saving and quality time spent with family, and what the offset is against the cost of having a home in the city.

“We also understand that by the end of 2020, 70% of South Africans will be living in an urban environment. That means our towns and cities will need to be more attractive and offer better accommodation. This puts tremendous strain on our cities – so why not look at what is already in place? Cities already have infrastructure, services and access to a multi-sector economy. Technology is playing an ever-increasing role in people’s lives – and it’s the cities that are the backbone of connectivity.

“People migrate towards towns and cities because they’re looking for better opportunities, better access to education and government institutions, and better health facilities.

“Because we are a specialised financial services provider but not a bank, we are able to provide access to finance that entrepreneurs need for the purchase, refurbishment or conversion of innercity properties to multi-unit residential or mixed-use projects in South Africa’s inner cities.

THE SAPOA ANNUAL CONVENTION & PROPERTY EXHIBITION 2019

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18 June 2019 Atlantic Beach Golf Course

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Four-ball alliance, better 2 scores to count

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Prize Giving:

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SOUTH AFRICAN PROPERTY REVIEW

one-on-one finance “The buildings we finance range from semi-detached houses to buildings with any number of units. This might involve upgrading or refurbishing an existing residential building, converting an existing office or light industrial warehouse into residential use or even constructing an entire new building.

“Look at what we’re offering: our 16year history shows that we have longevity, stability and sustainability when it comes to financing. I must emphasise that we are a commercial company – we have shareholders, and we are interested in returns and offering quality credit. At the same time, we always follow best lending practices.

“In addition, we are a character-based lending organisation. This means we look at the kind of person you are before we consider the project. Ideally, we look for entrepreneurs who live and/or work in the cities, have an intimate knowledge of the market and are hard-working and down-to-earth. Furthermore, our funding decision is based on the viability of the project, not on how much you earn or have in your bank account. Sixtyfive percent of TUHF’s customers are previously disadvantaged individuals.”

Urban regeneration “The inner cities of South Africa – particularly Johannesburg – have been comprehensively redlined since the mid1980s. By introducing a reliable source of liquidity into our market niche, we have seen the property market respond positively. We take into account economic growth and examine the aggregation of the local economy and local economic developments. Add this to sector growth and mining and manufacturing, and we get the economy.

“With this in mind, central to urban regeneration is the concept of local economic development. We also need to understand that there is a massive urban sprawl problem. Building on the concept of efficient cities and on the principles outlined in Kevin Campbell’s book Massive Small, we understand the need for social and economic integration as well as a certain amount of density to get that economic growth.

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“The dawn of ‘demolish and rebuild’ is upon us. We will see the taking down of buildings along the corridors of transport, and their replacement with four- to sixstorey walk-ups.

“We would rather advocate 10 000 smaller, 20-unit projects than five or 10 mega projects per year. We also believe there should be a much stronger focus on the power of the ordinary South African, and the pursuit of a greater number of smaller projects that make use of existing infrastructure.

“We work with CIDs and city programmes, and we encourage people who have discovered opportunities to

repurpose inner city buildings. In so doing, we are able to contribute to the fiscal the huge increase in downtown property values, which adds to payment and collection of rates and taxes, increases a municipality’s tax base and helps to make services more available and affordable.

“We will double our efforts to have a R5-billion book servicing every major city in our country. We believe that our city trends will follow the rest of the world’s, and that our cities will become important investment centres, providing the opportunities that South Africans are looking for.”

Inner-city property development scheme succeeds in creating 2 411 new permanent jobs and 5 126 short-term jobs across South Africa The Jobs Fund (JF), a R9-billion facility set up by government in 2011 to co-finance public, private and non-government projects for the purposes of job creation, partnered with TUHF Limited (TUHF) in a move to ignite development in inner cities across South Africa by encouraging entrepreneurs to transform old buildings into residential homes.

The JF partnered with TUHF in February 2015 via a R157,5-million grant, which was subsequently matched by R1,06-billion raised through a domestic mediumterm note programme. By March 2018, the partnership had succeeded in creating 2 411 new permanent jobs and 5 126 new short-term jobs in inner cities across the country.

“This partnership has succeeded in addressing two key development challenges faced by South Africa: access to finance for budding property entrepreneurs and decent, affordable accommodation close to places of economic opportunity,” said Najwah Allie-Edries, head of the Pretoria-based JF. “It has also addressed a third challenge – unemployment – by creating a number of jobs in areas that are facing a constant influx of new job-seekers.

“One of our main objectives in providing the grant was to enable TUHF to secure additional sources of funding from capital markets, which in turn boosted its ability to finance a greater number of entrepreneurs. We far exceeded our objective: not only have we showcased the ability to change market behaviour by encouraging investment in redlined inner-city properties, but we have also highlighted the powerful role that on-lending can play in the development space.”

A post-project analysis showed that the majority of the beneficiaries interviewed revealed they had either limited or no access to capital prior to TUHF’s intervention. Thanks to the JF-TUHF partnership, the beneficiaries were able to employ approximately three staff members for each medium-to-large building they had refurbished. A TUHF Beneficiary Focus Group Discussion also revealed that, in a group of five participants, approximately 100 additional jobs were being sustained.

“On-lending presents an opportunity to facilitate the flow of much-needed funds from the large pool of capital available to SMEs, who are expected to be significant contributors to job creation,” said Allie-Edries. “On-lenders, who are niche market intermediaries, use their expertise to leverage funds and make these available to entrepreneurs who cannot access commercial funding.”

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SCHNETLER'S INC P.O. Box 433, Century City, 7446, Western Cape t: +27(0)21 552 4844 f: +27(0)21 552 4549

STRAUSS SCHER INCORPORATED P.O. Box 786473, Sandton, 2146, Gauteng t: +27(0)11 883 9798 f: +27(0)11 883 6661 www.straussscherattorneys.co.za VZLR INC 1st Floor/ Block 3, Monument Office Park, 71 Steenbok Avenue, Monument Park, Pretoria, 0105 Gauteng t: +27(0)13 752 2065 t: +27(0)12 435 9444 www.vzlr.co.za

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ARC ARCHITECTURAL (PTY) LTD CONSULTANTS PRETORIA P.O. Box 13399, Hatfield, 0028, Gauteng t: +27(0)12 362 7350 f: +27(0)12 362 7349 www.arc.co.za

AA PAPAGEORGIOU ARCHITECT & ASSOC INCORPORATED P.O. Box 11288, Randhart, 1457, Gauteng t: +27(0)11 907 2015 f: +27(0)11 907 2020 ACG ARCHITECTS CC P.O. Box 70, Woodstock, Saltriver, Cape Town, 7915, Western Cape t: +27(0)21 448 6615 f: +27(0)21 448 6621 a www.acgarchitects.co.z

PRETORIA: Johan de Bruin Cell: +27 82 820 6669 Tel: +27 11 283 1500 E-Mail: mlcjhb@mlc.co.za

ACTIVATE ARCHITECTURE (PTY) LTD P.O. Box 321, Saxonwold, 2132, Gauteng t: +27(0)11 788 8095 f: +27(0)11 788 8097 www.activate.co.za

CAPE TOWN: Graham Haldane Cell: +27 82 880 7377 Tel: +27 21 673 5800 E-Mail: info@mlcct.co.za

& ADENDORFF ARCHITECTS INTERIORS CC P.O. Box 40301, Walmer, Port Elizabeth, 6065, Eastern Cape t: +27(0)41 581 4765 f: +27(0)86 618 2183 www.adendorffarchitects.co.za LTD AEVITAS GROUP (PTY) 16 Holt Street, Parkmore, Johannessburg, 2196, Gauteng t: +27(0)82 496 6983 a www.aevitasgroup.co.z

WHITE & CASE LLP P.O. Box 784440, Sandton, 2146, Gauteng t: +27(0)11 341 4000 www.whitecase.com

SHANDU ATTORNEYS INCORPARTED Ground Floor, Building 3, Commerce Square, 39 Rivonia Road, Sandhurst, Sandton, 2196, Gauteng t: +27(0)10 035 2142 www.shanduattorneys.co.za

AMA ARCHITECTS (PTY) P.O. Box 1299, Gallo Manor, 2052, Gauteng t: +27(0)11 807 7505 f: +27(0)11 807 7509 www.amagroup.co.za

ARCA ARCHITECTS & DESIGNERS P.O. Box 12975, Hatfield, 0028, Gauteng t: +27(0)12 346 4061 f: +27(0)86 689 9235 .za www.arca-architects.co

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SHEPSTONE & WYLIE ATTORNEYS P.O. Box 7452, Roggebaai, 8001, Western Cape t: +27(0)12 362 8872/4688 f: +27(0)12 362 8709 www.wylie.co.za

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ARCHITECTURAL DESIGN ASSOCIATES P.O. Box 87076, Houghton, 2041, Gauteng t: +27(0)11 880 0600 f: +27(0)11 880 0603 www.ada.co.za CHANGE ARCHITECTURE FOR A 22 Davy Road, Industria North, Johannesburg, 1719, Gauteng t: +27(0)11 477 8738 www.a4ac.co.za ARP ARCHITECTS & INTERIORS 74 Shortmarket St, Cape Town City Centre, Cape Town, 8001, Western Cape t: +27(0)21 423 5884 eriors. www.arp-architects-int

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BOTSWANA: Len Holder Cell: +267 7 120 3743 Tel: +267 395 1310 E-Mail: mlc@mlcqs.co.bw MAURITIUS: Yusuf Nabeemeeah Cell: +230 5 497 9997 Tel: +230 452 9106 E-Mail: admin@mlcmauritius.com DUBAI: Paul Miller Cell: +971 50 558 2057 Tel: +971 4 341 8843 E-Mail: information@mlcqs.com

MAKHOBA VOLBRECHT ASSOCIATES P.O. Box 38100, Eshowe, 3894, KwaZulu-Natal t: +27(0)35 474 4545 f: +27(0)35 474 2443 MANZI QUANTITY SURVEYORS P.O. Box 474, Cape Town, 8000, Western Cape t: +27(0)21 418 1809 f: +27(0)86 677 3885 MASEGELA QUANTITY SURVEYORS P.O. Box 435, Thornhill Plaza, 0882, Limpopo t: +27(0)15 223 6808 f: +27(0)15 223 3994

MULTI QUANTITY SURVEYORS (PTY) LTD

Unit AG01, Block A, Grosvenor Square, Park Lane, Century City, Cape Town, The Western Cape, 7441 Suite 407, 4th Floor, The Point, 76 Regent Rd, Sea Point, Cape Town, The Western Cape, 8005

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w w w. m u l t i q s. co MMPA QUANTITY SURVEYORS .za PROJECT MANAGERS (PTY) & LTD P.O. Box 19325, Tecoma, 5214, Eastern Cape NONKU NTSHONA & ASSOCIATES t: +27(0)43 721 0077 P.O. Box 669, Rivonia, 2128, f: +27(0)43 721 0082 Gauteng www.mmpaqs.co.za t: +27(0)11 803 2291 f: +27(0)11 234 2078 MBATHA WALTERS & SIMPSON www.nnaqs.co.za P.O. Box 211, Gallo Manor, 2052, Gauteng NORVAL WENTZEL STEINBERG t: +27(0)11 802 1525 QS P.O. Box 55048, Northlands, f: +27(0)11 802 3626 2116, Gauteng www.mbathawaltersand KEEVE SPRONG CC T/A simpson.com t: +27(0)11 804 6122 LENHLE QUANTITY SURVEYORS QUANTICOST f: +27(0)11 804 4038 MLC QUANTITY SURVEYORS (PTY) LTD 10 Fourways Golf Park, SA www.nws.co.za (PTY) LTD Postnet Suite 585, 1016 Roos Street, Sandton, P.O. Box 41111, Craighall Private Bag X43, Park, P.O. Box 71312, Bryanston, 2068, O'MAHONY PEEL ROWNEY 2024, Sunninghill, 2021, Gauteng CONSULTING QUANTITY Gauteng 2157, t: +27(0)11 705 2505 SURVEYORS t: +27(0)11 283 1500 Gauteng f: +27(0)11 705 2508 P.O. Box 41199, Craighall, f: +27(0)11 788 9015 t: +27(0)11 023 9900 2024, Gauteng www.mlc.co.za KGA QUANTITY SURVEYORS t: +27(0)11 325 0610 LESEDI QUANTITY SURVEYORS P.O. Box 84602, f: +27(0)11 325 0743 MULTI QUANTITY SURVEYORS P.O. Box 712, Mondeor, Greenside, 2034, www.opr.co.za (PTY) LTD 2110, Gauteng P.O. Box 471, Century City, Gauteng t: +27(0)11 486 0853 PENTAD QUANTITY SURVEYORS Cape Town, 7446, t: +27(0)11 025 4817 f: +27(0)86 551 9468 (PTY) LTD T/A RIDER LEVETT Western Cape f: +27(0)86 510 3425 BUCKNALL ZA (PTY) LTD t: +27(0)87 740 5270 www.lemay.co.za KOOR DINDAR MOTHEI P.O. Box 67922, Bryanston, f: +27(0)86 596 7554 QUANTITY SURVEYING 2090, Gauteng www.multiqs.co.za LETCHMIAH DAYA MANDINDI P.O. Box 42044, Fordsburg, T/A t: +27(0)11 548 4000 LDM HOLDINGS (PTY) Johannesburg, 2033, LTD f: +27(0)11 465 1439 NARKER POUGNET KRIEL P.O. Box 19233, Gauteng T/A www.rlb.com ETHIQS QUANTITY SURVEYORS Dormerton, 4015, t: +27(0)11 689 5400 Private Bag X115, KwaZulu-Natal f: +27(0)11 689 5401 PLM QUANTITY SURVEYORS Bryanston, 2021, t: +27(0)31 207 1340 www.kdm.co.za AND VALUERS CC Gauteng f: +27(0)31 209 9441 20 Bonza Bay Rd, Beacon t: +27(0)11 463 1100 www.ldm.co.za LAKHANYA QUANTITY East London, 5205, EasternBay, f: +27(0)11 463 3728 SURVEYORS Cape t: +27(0)437482710 MAHLATI QUANTITY SURVEYORS P.O. Box 13532, www.plmqs.co.za NDIDALI QUANTITY SURVEYORS (PTY) LTD Humewood, Port Elizabeth, 6013, Voortrekker Street, P.O. Box 12456, Eastern Cape PULANA BAXTER & ASSOCIATES Polokwane Central, Mill Street, 8010, t: +27(0)41 373 6659 CC P.O. Box 19694, Tecoma, Polokwane, 0699, Western Cape f: +27(0)41 373 9351 East London, 5214, Eastern Cape Limpopo t: +27(0)21 4619 5656 www.lakhanyaqs.co.za t: +27(0)43 721 0984 t: +27(0)15 297 0103 f: +27(0)21 461 5644 f: +27(0)43 721 0984 www.ndidaliqs.co.za SAPOA Proper t y Register www.pba.co.za 2017 - 2018 DURBAN: Romano Valenti Cell: +27 82 553 1927 Tel: +27 31 940 7783 E-Mail: mlc@mlckzn.co.za

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state of city finances

The changing state of city finances: Part 2 City revenues appear to be quite resilient, growing at an average annual rate of about eight percent and with collection rates of about 95% – although most cities have increased their provisions for debt impairment. The rapid increase in bulk tariffs is squeezing out the surplus that cities have historically used to cross-subsidise other services, while cities are underspending on both repairs and maintenance and their capital budgets. Only with the 2017/2018 financial statements and audit reports will it be possible to assess the impact of the new administrations elected in the 2016 local government elections We extend our thanks to the South African Cities Network for the following extracts. Click on the cover image above to download the entire report.

SACN. 2018. State of City Finances Report 2018. Johannesburg: SACN ISBN: 978-0-6399215-2-5. © 2018 by the South African Cities Network.

The State of South African Cities Report is made available under a Creative Commons Attribution – Non-Commercial – Share-Alike 4.0 International Licence. To view a copy of this licence, visit creativecommons.org/licenses/by-nc-sa/4.0.

Employee-related costs Employee-related costs are mainly driven by the number of staff, the management of overtime, salary levels and salary increases. The first three lie within the direct control of cities; salary increases for local government employees are determined in the South African Local Government Bargaining Council. During the period of review, the council entered into a three-year Salary and Wage Collective Agreement covering 1 July 2015 to 30 June 2018. The agreement is summarised below (SALGBC, 2016; 2017).

From 2013/2014 to 2016/2017, total employee costs grew at an average annual rate of 7,5% for the nine cities, with Cape Town and Ekurhuleni growing at 3,8% and

3,7% respectively, and Nelson Mandela Bay, Mangaung and Buffalo City growing at 20%, 13% and 11% respectively. For nearly all cities, the growth in employee costs does not correlate well with the growth in the number of employees over the three years. For instance, Msunduzi increased its employee costs by 10,3% annually and its number of employees by one percent, whereas Johannesburg increased its employee costs by 7,5%

Table 4: City employee costs (2013/2014-2019/2020)

* Head count number of permanent and contract employees Source: National Treasury Local Government Database (2018) – Table A4 and Table SA24, various years

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annually but decreased its number of employees by four percent. This suggests that either Johannesburg gave existing staff significant salary increases over and above the normal cost of living increases, or dramatically increased spending on overtime. Similarly, Nelson Mandela Bay kept its number of employees more or less constant, but the average annual increase in employee costs was over 20%.

The 2017/2018 MTEF figures indicate the new administration in Nelson Mandela Bay is aiming to cap employee costs at an annual growth of three percent, which implies reducing employee numbers.

For the period 2013/2014 to 2016/2017, total operating expenditure across all cities grew by an average of 8,1%, while spending on employee-related costs grew by 7,5% (Table 4). In 2016/2017 to 2019/2020, the trend is reversed, with total operating expenditure across all cities budgeted to grow by an average of 7,7%, and employee costs by 10,5%. As Table 5 shows, with the exception of Nelson Mandela Bay, all cities have budgeted for the proportion of operating expenditure spent on employee-related costs to increase by between 0,4% (Mangaung)

state of city finances and 5,2% (Msunduzi). This faster growth is projected to cause the employee costs share of total expenditure to increase by two percent, which in 2019/2020 means R4,7-billion less available to allocate to other types of spending. Cities need to balance employee-related costs and other categories of expenditure that ensure effective service delivery, and not to allow employee-related costs to squeeze out other expenditures.

these costs’ share of total operating expenditure to grow by 5,2%, 3,7%, 2,7% and 1,4% respectively.

Repairs and maintenance The level of spending on repairs and maintenance is a good indicator of a city’s efforts to protect its infrastructure and ensure sustainability of services. Table 6 shows city spending on repairs and maintenance as a percentage of Property,

Table 5: City employee costs as a proportion of total operating expenditure

Source: National Treasury Local Government Database (2018) – Table A4, various years

Between 2013/2014 and 2016/2017, Cape Town and Ekurhuleni reduced the proportion of total operating expenditure spent on employee-related costs by 3,7% and three percent respectively, which in 2016/2017 translated into R1,2-billion and R898-million more being available for other types of expenditure. By contrast, Nelson Mandela Bay and Mangaung saw the employee-related costs share of total operating expenditure grow by 9,7% and 5,7% respectively, which in 2016/2017 meant R892-million and R352-million respectively was shifted from other items to employee costs. These changes reflect the extrapolation of the growth trends in employee costs reflected in Table 4.

In the period 2016/2017 to 2019/2020, Nelson Mandela Bay is the only city that has budgeted for a decrease in the share of employee-related costs, from 33% to 31%. Despite this, the city is still far from the 24% in 2013/2014. After reducing the proportion spent on employee costs in the previous period, Msunduzi, Johannesburg, Cape Town and Ekurhuleni are expecting

Plant and Equipment (PPE), which are the tangible (illiquid) assets of the city integral to service delivery and the running of the city. According to National Treasury, this is an appropriate indicator of spending on repairs and maintenance, as it measures spending against the value of assets that need to be maintained. National Treasury has set a national norm that municipalities should budget for: to spend at least eight

percent of the value of PPE on repairs and maintenance (National Treasury, 2016).

Between 2013/2014 and 2016/2017, Cape Town was the only city to spend more than eight percent of PPE on repairs and maintenance. The 2017/2018 MTEF numbers indicate this is likely to remain the case. This confirms the city’s consistent budgeting process and ability to “protect” the repairs and maintenance budget from other budget pressures – showing the priority it places on this expenditure.

In 2016/2017, Johannesburg budgeted R4,8-billion (seven percent of PPE) for repairs and maintenance, but its actual expenditure was R1,9-billion (2,8%). In its Adjustment Operating Budget for 2017/ 2018 (tabled on 22 February 2018), the main reason given for this R2,9-billion under-performance is the need to bring “expenditure in line with revenue performance”. In other words, the city’s failure to collect budgeted revenues in 2016/2017 resulted in lower repairs and maintenance expenditure. This highlights the vulnerability of spending on repairs and maintenance: it is the “easiest” place in the budget to cut spending, despite the costly medium- to long-term consequences of such cuts. Over the 2017/2018 MTEF, Johannesburg budgeted to spend about six percent of PPE on maintenance (still below the eight percent benchmark).

Table 6 shows that Tshwane and Ekurhuleni did not provide information on spending on repairs and maintenance in their 2017/2018 budget documentation.

The failure to do so is a breach of their financial management and governance

Table 6: Repairs and maintenance as a percentage of PPE (2013/2014-2019/2020)

Source: National Treasury Local Government Database (2018) – Table A9, various years Note: The figures for Msunduzi for the period 2013/2014 to 2015/2016 are very high because of erroneous PPE numbers, which were corrected from 2016/2017 onwards.

SOUTH AFRICAN PROPERTY REVIEW

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state of city finances obligations, as municipalities are required to reflect their spending/budgets for repairs and maintenance and the renewal of existing assets on Table A9 Asset Management in their budget documents.

Over the MTEF period, six of the nine cities have not budgeted to spend more than five percent of PPE on repairs and maintenance, showing a lack of appreciation among the politicians and managers in these cities of the importance of repairs and maintenance spending. As National Treasury noted as far back as 201, “This is because the impact of not spending on this item is not visible or obvious in the short term. It is also less politically sensitive than cutting the capital expenditure programme or reducing the entertainment budget” (National Treasury, 2011:19). However, the medium- to long-term consequences of under-spending on repairs and maintenance are serious. It results in deteriorating reliability and quality of services; expensive crisis maintenance (rather than planned maintenance); higher future costs of maintenance and refurbishment; shorter lifespan of assets necessitating earlier replacement; and reduced revenues because of the failure to sell water, electricity and other services.

City capital expenditure Spending on capital is a key tool in improving service delivery to residents and transforming the urban environment.

Between 2013/2014 and 2016/2017, the cities budgeted R138-billion for capital and spent R122-billion (or 89% of budget).

This is a reasonable performance. Over the 2017/2018 MTEF, cities have budgeted R120-billion for capital, which is 67% of the total capital budget for local government, and 13% of total public sector infrastructure budget for the period. This highlights the important role cities play in the country’s overall effort to deliver infrastructure.

As Table 7 shows, over the 2017/2018 MTEF, capital budgets are projected to grow at an annual average rate of 9,1%, whereas between 2013/2014 and 2016/ 2017, actual capital expenditure grew at an annual average rate of 5,4%. Msunduzi is the only city that plans to cut back on capital spending over the MTEF, while Cape Town and Mangaung are planning to grow capital spending at more modest rates. Buffalo City has set itself the very ambitious target of growing capital spending at an average annual rate of 23%. An important development is the announcement in February 2018 by national government of R13,9-billion cuts to the baselines of local government conditional grants to fund priorities in higher education (National Treasury, 2018b). These cuts will place downward pressure on capital spending by cities.

Table 7 also shows the over/underspending of the capital budget, which is calculated by subtracting actual capital expenditure from the amounts budgeted for in the cities’ original budgets for the relevant years.

While aggregate spending has been relatively good, between 2013/2014 and 2016/2017, the cities’ ability to spend their

capital budget declined from an average of 94% to 84%. Of greater concern is that Tshwane, Nelson Mandela Bay and Johannesburg spent less on capital in 2016/2017 than they did in 2013/2014.

This weakening of delivery performance may have in part informed national government’s decision to cut allocations for city infrastructure grants, as there is no point budgeting for allocations that are going to be returned unspent to the national fiscus.

National Treasury (2017a:21) notes that municipalities’ ability to implement their capital budgets might be negatively affected by weak multi-year budgeting, limited planning, poor project preparation and project management, supply chain management (SCM) inefficiencies, poor asset management and poor contract management. However, factors leading to underspending of capital budgets vary from city to city and project to project, as illustrated by the following examples: ● Between 2013/2014 and 2016/2017, eThekwini and Msunduzi both spent on average 81% of their capital budget, but their actual capital expenditure grew by nine percent and 22% respectively. This impressive growth demonstrates that these municipalities have been expanding infrastructure delivery capacity, and that the level of under-spending can be largely attributed to consistently preparing overly ambitious capital budgets. The same can be said of Ekurhuleni, which spent on average 88% of its capital budget and grew

Table 7: City capital expenditure performance (2013/2014-2019/2020)

Source: National Treasury Local Government Database (2018) – Table A5, various years

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state of city finances actual capital spending by 22% between 2013/2014 and 2016/2017. ● Johannesburg (CoJ, 2017:57) notes that 21 projects of Johannesburg Water were delayed by excessive rain, lack of capital funding, liquidation of service providers and protests by local communities. The fact that the city lists lack of capital funding as a challenge for underspending indicates that the 2016/2017 budget was not properly funded, or that the city was not able to execute its plans to raise the necessary debt finance. ● Nelson Mandela Bay (NMB, 2017: 51) notes that underspending of its capital budget was due to certain projects being delayed by protracted SCM processes, unavailability of certain stock/asset types and having to return substandard materials to suppliers.

R3,1-million remained unspent in respect of the rolled-over Public Transport Infrastructure Grant, which was returned to the national revenue fund, as grant funds cannot be rolled over for a second financial year (ibid:53).

These examples highlight that implementing multi-billion-rand capital budgets is fraught with challenges. Cities therefore need to ensure they have excellent project managers and systems in place to plan and manage projects so they remain on track. However, there also needs to be a greater understanding that delivery delays are sometimes caused by factors beyond the control of managers, such as excessive rain.

Areas of capital spending The nine cities spent R42-billion or 35% of total capital spending on infrastructure for the trading services (electricity, water, waste water management and waste management). A further breakdown is provided in Table 9. Spending on economic and environmental services was R41billion or 33% of total spending, of which R36-billion was for road transport. Cities spent R23-billion on infrastructure for community and public safety (including spending on housing), and sport and recreation facilities and infrastructure for the delivery of community/social services.

Table 8: City aggregate capital expenditure by main category (2013/2014-2016/2017)

Source: National Treasury Local Government Database (2018) – Table A5, various years

According to Table 8, Mangaung spent only R230-million on infrastructure for trading services, and Table 9 shows that since 2013/2014 the city has not invested in any infrastructure for electricity and water services. However, cross-checking these figures with other information, and according to Mangaung’s report to National Treasury’s Local Government Database 2018 (Table A5 and A9), between 2013/2014 and 2016/2017 the city spent R842-million on electricity infrastructure, R736-million on water infrastructure and R1,1-billion on waste water management infrastructure. So it would appear that the city has reported consistent numbers on total capital spending over the period, but it has not allocated the spending to the different categories of infrastructure consistently in its different reporting documents. This highlights the importance of cities putting in place robust financial management reporting systems.

Between 2013/2014 and 2016/2017, eThekwini’s spending on housing increased from R64-million to R1,2-billion,

as a result of the city delivering housing on behalf of the province. The city is not funding this expenditure but receives a transfer from the province (EMM, 2016: 20). Over the same period, Cape Town’s spending on housing declined – it is the only city whose spending on housing is declining. The city has come under fire lately for not providing enough low-cost housing in its jurisdiction. It should be noted that housing is a provincial function, so getting a true picture of spending on housing requires analysis of the provincial budgets as well.

Funding capital expenditure Cities typically fund their capital budgets from four sources: internally generated funds, borrowing, transfers from national and provincial government, and donations.

Figure 5 overleaf shows how the funding of city capital budgets has changed between 2013/2014 and 2016/2017.

A positive development is that Nelson Mandela Bay, Mangaung, Buffalo City and Msunduzi have significantly increased their use of internally generated and borrowed SOUTH AFRICAN PROPERTY REVIEW

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state of city finances Table 9: City aggregate capital expenditure by key subcategories (2013/2014-2016/2017)

Source: National Treasury Local Government Database (2018) – Table A5, various years

Figure 5: Capital funding breakdown (2013/2014 and 2016/2017)

funds to finance their capital expenditure (although the 2013/2014 borrowing data for Mangaung and Msunduzi may be incomplete). This means that these cities have been able to generate surpluses on their operating budgets for funding capital expenditure. As these sources of finance have grown, the cities’ reliance on transfers from national and provincial government to finance capital expenditure has declined.

Between 2013/2014 and 2016/2017, Johannesburg and Cape Town increased their use of borrowing to fund capital expenditure, while eThekwini, Tshwane and Ekurhuleni reduced theirs. In 2016/ 2017, internally generated funds were only one percent of Tshwane’s capital funding – not a healthy situation and indicative of poor operational budgeting.

In contrast, eThekwini increased its use of internally generated funds from R660million in 2013/2014 to R2,3-billion in 2016/2017. eThekwini’s funding from transfers has also increased, as a result of transfers from the KwaZulu-Natal provincial government for the provision of housing on behalf of the province.

The National Treasury has announced regulatory changes to help municipalities make better use of development charges.

Proposed amendments to the Municipal Fiscal Powers and Functions Act of 2007 will clarify the rules for levying development charges. The aim is to enable municipalities to use development charges to require that developers pay the full costs of the additional infrastructure needed to supply them with municipal services (National Treasury, 2018b:14).

City borrowing

Source: National Treasury Local Government Database (2018) – Table A5, various years

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In recent years, South Africa has been affected by political turmoil that has resulted in the downgrade of the national government’s sovereign debt by ratings agencies. This is having a ripple effect on the credit ratings of cities, as any sub-sovereign entity within a country cannot have a higher rating than the sovereign. For example, on 17 June 2017, Moody’s downgraded Cape Town, Ekurhuleni, Johannesburg, Tshwane, Mangaung and Nelson Mandela Bay, noting that these actions

state of city finances “follow the weakening of the South African government’s credit profile, as captured by Moody’s similar rating action on the sovereign rating on 9 June 2017”. This means an increased cost of borrowing for cities as a direct consequence of poor economic and fiscal management by national government.

On the positive side, the National Treasury has announced that it will be updating the policy framework on municipal borrowing (ibid:53). The changes include removing provisions that only allowed municipalities to borrow against future grant transfers for three years. In the future, municipalities will be able to borrow against all their future revenues, subject to the requirements of the MFMA. This development will favour cities in particular, and it will be interesting to see how cities take advantage of this in years to come.

Between 2013/2014 and 2016/2017, long-term liabilities across the nine cities grew at an annual average rate of nine percent, reaching a total of R54,6-billion.

This growth is in line with the growth in city own revenues, indicating sound management of borrowing. Mangaung shows the largest growth in borrowing, which is largely due to starting from a low base, reaching about R839-million in 2016/2017 (MMM, 2017:183). The funds from this borrowing were mainly used for infrastructure, including water reticulation, reservoirs, and road and storm-water projects.

Figure 6: City borrowing (non-current liabilities) (2013/2014-2019/2020)

Figure 7: Cities’ consumer debtors (2013/2014-2019/2020)

Consumer debtors Consumer debtors show the amounts owed to the municipality by businesses, institutions and residents. A high debtor figure may indicate that the city’s systems for collecting debt are ineffective, or that ratepayers are unwilling to pay due to the persistence of (or growth in) the non-payment culture, or are unable to pay as a result of increasing poverty and unemployment. It could also result from a city failing to write-off bad debts that are clearly uncollectable.

In 2016/2017, unpaid electricity and water accounts made up 74% of Johannesburg’s outstanding debtors.

The city notes that the sharp rise in consumer debtors (13%) from the previous year is the result of prevailing economic conditions (CoJ, 2017:139). In other words, consumers are finding it increasingly difficult to cope with rising costs.

From 2015/2016 to 2016/2017, Ekurhuleni’s debt came down by nine percent, and this trend will continue into the 2017/2018 MTEF, which projects debtors declining by six percent per year from 2016/2017 to 2019/2020.

Buffalo City is also projecting that outstanding debtors will decline over the 2017/2018 MTEF.

Cities’ cash management A good measure of cities’ ability to meet their financial commitments is the number of months of cash coverage they have. This is determined by dividing the monthly cash expenditure requirement into the total cash and cash equivalents available. According to the National Treasury, a prudent level of cash coverage is equivalent to one month of average operating expenditure for metropolitan municipalities and three months for other municipalities. It should be noted that year-end figures are used in this analysis.

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state of city finances Audit outcomes Table 10 shows the audit opinions for the nine cities since 2010/2011. In 2016/2017, Cape Town moved down from a clean to an unqualified audit outcome, and Johannesburg, eThekwini, Tshwane and Ekurhuleni maintained their unqualified audit outcomes, with all having findings related to legislative compliance.

In 2016/2017, Buffalo City achieved an unqualified audit for the first time since 2010/2011, while Mangaung moved down to qualified after three years of unqualified audits, and Nelson Mandela Bay continued to receive a qualified audit.

The deterioration in audit outcomes for Msunduzi is cause for concern.

An unqualified audit simply means that the annual financial statements prepared by the municipality fairly represent the financial position and transactions of the municipality, which is why a municipality can receive an unqualified audit but still have high/irregular expenditure and fruitless/wasteful expenditure. Provided the municipality reports accurately and transparently on all transactions, it will receive an unqualified audit opinion from the Auditor-General. Therefore, it is important to look beyond the audit and examine the number and scale of incidents of irregular, unauthorised and fruitless and wasteful expenditure.

The total unauthorised expenditure for cities was R3,4-billion in 2015/2016 and decreased to R2,8-billion in 2016/2017, largely due to improved budget controls and monitoring in Tshwane (AGSA, 2018: 58). But irregular expenditure increased from R3-billion in 2015/2016 to R12,6billion in 2016/2017 largely because of irregular expenditure by Nelson Mandela Bay (R8,2-billion), Tshwane (R1,8-billion) and Johannesburg (R705-million). The Auditor General pointed out that much of this irregular expenditure was not incurred in 2016/2017 but was related to “legacy contracts” from previous financial years (ibid:4, 58) and, in the case of these three cities, from previous administrations.

Although it is important to be concerned about this type of expenditure, it is also important to keep in context the magnitude of these items in relation to overall city budgets. In 2016/2017, fruitless 44 38

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Table 10: City audit opinions (2010/2011-2016/2017)

Source: Audit reports on the National Treasury website – mfma.treasury.gov.za/Documents/Forms/allterms.aspx Note: Definitions of these audit opinions are found at agsa.co.za/AuditInformation/AuditTerminology.aspx

Table 11: Details of city audit outcomes (2015/2016 and 2016/2017)

Source: AGSA (2016; 2017); Auditor General’s General Reports for 2015/2016 and 2016/2017; individual audit reports

and wasteful expenditure amounted to less than 0,1% of the total combined operating budget, unauthorised expenditure constituted 1,4% of the combined operating budget and irregular expenditure was 6,6% (but covering several years). Nevertheless, cities need to work on reducing this type of expenditure down to zero.

Unauthorised expenditure This is expenditure incurred outside the budget approved by the council or not in accordance with the conditions of a grant. ● Tshwane overspent by R620-million, of which 27% was related to non-cash items. The expenditure can mainly be attributed to employee-related costs, debt impairment, depreciation, finance charges, bulk purchases, contracted services, transfers and grants, and losses on the disposal of property, plant and equipment.

● Johannesburg overspent by R502-million, of which 22% was related to non-cash items. ● Nelson Mandela Bay overspent

by R432-million, all of which was related to non-cash items.

The three cities incurred unauthorised expenditure in these areas for the past three years (five in the case of Tshwane).

However, most of the overspending is on non-cash items and (for Tshwane) finance charges and bulk purchases, which indicates that the overspending is very likely the result of poor budgeting – i.e. not enough funds available for certain expenditure categories. Another reason for overspending could be poor expenditure management, which results in the under-spending of budgets.

Nevertheless, if properly managed through duly approved adjustment budgets, most unauthorised expenditure

state of city finances can be avoided. Continued unauthorised expenditure among the metros is of concern and points to possible political interference in the implementation of budgets, poor systems for managing budget implementation and poor management of adjustment budget processes. Municipal managers and chief financial officers need to be held accountable in this regard.

Irregular expenditure This is expenditure that was not incurred in the manner prescribed by legislation.

Irregular expenditure does not necessarily imply that money has been wasted or that fraud had been committed, but it is an indicator that council should investigate further to establish whether there was corruption or not. In most of these cases, the cities are likely to have still received some value for the expenditure.

In 2016/17, the Auditor General found that all of the cities, except for Buffalo City, had irregular expenditure of between R6,4-million (for Mangaung) and R8,2billion (for Nelson Mandela Bay). ● In Johannesburg, 100% of the irregular expenditure was related to non-compliance with legislation on contracts. ● In Nelson Mandela Bay the irregular expenditure was related to noncompliance with procurement process requirements for water infrastructure, road infrastructure and housing. ● Most of the irregular expenditure (83%) in Tshwane was related to procurement without following competitive bidding or quotation processes, in particular the smart prepaid meter contract and the Wi-Fi contract. A bus rapid transit tender was also awarded to a contractor not qualified to deliver the service. ● Buffalo City’s irregular expenditure related mostly to the upgrading of internal roads.

These incidents indicate serious disregard for the very basics of good administration, specifically compliance with the MFMA’s SCM processes. These processes are wellknown, and all municipalities have the requisite systems in place to manage them.

The politicians and officials who deliberately ignore the processes need to be held accountable, be personally liable for repaying the irregular expenditure and should be prosecuted for financial misconduct in terms of the MFMA. Ongoing vigilance is needed over the management of city finances by municipal councils, the executives and managers of municipalities, the media and the residents of cities.

Fruitless and wasteful expenditure This is expenditure made in vain that could have been avoided had reasonable care been taken. Such expenditure often covers interest, payment of inflated prices and the cost of litigation that could have been avoided. In 2016/2017, the two cities with the most fruitless and wasteful expenditure were Tshwane and Nelson Mandela Bay. ● For Tshwane, this expenditure was mostly related to standing time, interest and a re-application for a licence at the Temba water purification plant. ● In Nelson Mandela Bay, the majority of the fruitless and wasteful expenditure related to payments to rectify faulty work and for damages awarded in court.

Most cities have adequate processes in place to detect and quantify fruitless and wasteful expenditure, as required by legislation. This is encouraging, as fruitless and wasteful expenditure means that the city suffers an actual loss. Nevertheless, cities need to investigate such instances thoroughly, with a view to recovering the money from the responsible officials as required by the MFMA.

Conclusion National government’s mismanagement of the economy has resulted in tepid economic growth and rising unemployment, which directly affects residents and businesses, and their ability to pay municipal bills. As the national fiscal position continues to deteriorate and the economy remains stagnant, cities will need to rely more on their own revenue sources than on national transfers.

Between 2013/2014 and 2016/2017, direct transfers from national and provincial government to the nine cities increased by 12% on average per year, but is expected to decline to nine percent. In 2018/2019, national government is projected to spend more on debt-interest payments than on transfers to local government.

City revenues appear to be resilient, growing at an average annual rate of about eight percent, and most of the cities are consistently collecting within five percent of their originally budgeted revenue. Most of the nine cities have increased their provisions for debt impairment, indicating an expected deterioration in their ability to collect revenue. The exception is Ekurhuleni, whose debtor levels dropped by nine percent between 2015/2016 and 2016/2017, and are projected to drop by six percent per year to 2019/2020.

Own revenues make up more than 80% of total income in six cities, and between 75% (Buffalo City) and 79% (Mangaung and Msunduzi) of total income in three cities. The main sources of own revenues are property rates and service charges.

Although revenues from service charges are the largest source of city revenue, more than half of this income was paid to Eskom or the water boards in 2016/2017.

Of concern are the rapid increases in bulk tariffs, which are squeezing out the surpluses that cities have historically used to cross-subsidise other services.

Bulk purchases of electricity and water continue to be the largest expenditure item, although the pressure has subsided compared to 2009/2010-2013/2014, when bulk purchases increased by 14% across the nine cities. Employee-related costs have grown at an average annual rate of 7,5% since 2013/2014. Of concern is the low level of expenditure on protecting city infrastructure: only Cape Town spends more than the national norm of eight percent of PPE on repairs/maintenance, while six of the nine cities have not budgeted to spend more than five. This highlights the vulnerability of spending on repairs and maintenance, which is not visible and so is often the “easiest” place to cut spending in the short term, despite the serious medium- and long-term consequences of insufficient spending.

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state of city finances Another area of concern is the underspending of city capital budgets. Although aggregate spending across the period was relatively good, cities spent on average 84% of their capital budgets in 2016/ 2017, compared to 94% in 2013/2014.

The capital expenditure of Tshwane, Johannesburg and Nelson Mandela Bay was lower in 2016/2017 than in 2013/ 2014. Many factors contribute to the under-spending by cities of their capital budgets, including limited planning, weak multi-year budgeting and poor contract and project management. These are common challenges when implementing multi-billion-rand capital budgets. About two-thirds of the city capital spending goes on infrastructure for services, such as electricity, water and waste management, and on economic and environmental services (which includes road transport).

To fund capital budgets, cities typically use internally generated funds, borrowing and transfers from national and provincial governments. A positive development since 2013/2014 is that Nelson Mandela Bay, Mangaung, Buffalo City and Msunduzi have significantly increased their use of internally generated and borrowed funds to finance capital expenditure, reducing their reliance on national transfers. Between 2013/2014 and 2016/2017, long-term liabilities across the nine cities grew at an annual average rate of nine percent (in line with the growth in city own revenues), indicating sound borrowing management.

Funds from borrowing were mainly used for infrastructure. But ratings agencies’ downgrade of national government’s sovereign debt has resulted in borrowing becoming more expensive for cities, making it more difficult for cities to debtfinance the expansion of services.

In 2016/2017, none of the cities obtained a clean audit, and six cities received an unqualified audit due to issues with legislative compliance. If a municipality reported accurately and transparently on all transactions, it receives an unqualified audit opinion, even if there was unauthorised, wasteful or irregular expenditure. Reducing such expenditure to zero is important, but keeping in context the magnitude is also important. Fruitless and wasteful 40 46

SOUTH AFRICAN PROPERTY REVIEW

expenditure amounted to less than 0,1% of the total combined operating budgets, unauthorised constituted 1,4% of the combined operating budget and irregular expenditure was 6,6% (but covered several years).

With the changes in city administrations in Johannesburg, Tshwane and Nelson Mandela Bay following the 2016 elections, all new administrations have taken active steps to investigate suspect contracts entered into by previous administrations.

While containing a measure of political gamesmanship, these investigations have led directly to high levels of irregular expenditure linked to “legacy contracts” being recorded in the 2016/2017 audit findings. The Auditor General also noted

Tshwane’s improved budget controls and monitoring in 2016/2017. The new administration in Nelson Mandela Bay is also taking steps to bring the growth in employment costs under control.

The 2017/2018 budgets reported on in this review were the first passed by the administrations installed by the 2016 elections. The 2017/2018 annual financial statements and audit reports will provide an assessment of these administrations’ first “full year” of being at the helm. It is going to be interesting to assess if the heightened electoral competition at local government level results in better management of all cities’ finances, given the very real prospect of being punished by voters for not doing so.

References AGSA (Auditor General of South Africa). 2018. MFMA 2016/2017 Consolidated General Report on Local Government Audit Outcomes. Pretoria: AGSA. Barberton CRM, Abdoll CM and Gould C. 2016. What is at stake for new councils in South Africa. Pretoria: Institute for Security Studies.

COCT (City of Cape Town). 2017. 2018/2019-2020/2021 Budget. Cape Town: City of Cape Town.

CoJ (City of Johannesburg). 2016. Draft Medium Term Budget 2016/2017–2018/ 2019. Johannesburg: CoJ. CoJ. 2017. Annual Report 2016/2017. Johannesburg: CoJ EMM (eThekwini Metropolitan Municipality). 2016. Medium Term Revenue and Expenditure Framework 2016/2017-2018/2019. eThekwini: EMM. MMM (Mangaung Metropolitan Municipality). 2017. Annual Report 2015/2016, p. 183 National Treasury, 2011. The State of Local Government Finances and Financial Management as at 30 June 2011. Pretoria: National Treasury.

National Treasury. 2016. The State of Local Government Finances and Financial Management as at 30 June 2016. Pretoria: National Treasury.

National Treasury, 2017a. The State of Local Government Finances and Financial Management as at 30 June 2017.

National Treasury. 2017b. Medium Term Budget Policy Statement, October 2017.

Pretoria: National Treasury. National Treasury. 2018a. 2018 Budget Review.

Pretoria: National Treasury.

National Treasury. 2018b. W1 Website Annexure to the 2018 Budget Review.

Pretoria: National Treasury. National Treasury. 2018c. Budget 2018 Highlights.

Pretoria: National Treasury.

National Treasury. 2018d. Estimates of National Expenditure 2018. Pretoria: National Treasury, p. 41.

NMB (Nelson Mandela Bay Municipality). 2017. Annual Report 2016/2017.

Nelson Mandela Bay: NMB. SACN (South African Cities Network). 2018. Intermediate Cities as Destinations for Investments. Report of the 47th Infrastructure Dialogue that took place in May 2018. www.infrastructuredialogue.co.za/wp-content/uploads/2018/04/ 20180517-ID_47-Intermediate-Cities_final-report-REVISED.pdf SALGBC (South African Local Government Bargaining Council). 2016. Circular No. 01 dated 23 March 2016. SALGBC. 2017. Circular No. 02 dated 28 March 2017.

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doing business in South Africa

Trading across borders In the last of several extracts from the World Bank Group’s Doing Business in South Africa report, Property Review focuses on business regulations and their enforcement across five Doing Business areas. It goes beyond Johannesburg to benchmark eight other South African urban areas across four regulatory areas.

It also measures the process of trading across borders through four of South Africa’s maritime ports. It contains data current as of 1 May 2018 and includes comparisons with other economies based on data from Doing Business 2018: Reforming to Create Jobs Extracts from www.doingbusiness.org/southafrica

A

s the southernmost point on the African continent, South Africa is a prime geostrategic location for trade.

Not only is it situated on major northsouth and south-south international shipping routes, but its ports also offer sea access to neighbouring landlocked countries, making it a gateway to many parts of Africa and an important player in international maritime transportation.1 Trade is a key element for the South African economy, representing more than 60% of the country’s GDP in 2016.2 The vast majority of the country’s imported and exported goods move by sea.3 South Africa’s trade performance and global competitiveness are thus key for boosting economic growth and creating jobs.

Despite large growth potential, South Africa’s export of goods and services has not risen significantly in recent years, growing at an average annual rate of 2,5% between 2010 and 2016. This is much lower than the average export growth of middle-income economies (4,2%).4 Reviving South Africa’s export growth rate is critical

to economic growth.5 The government of South Africa aims to increase its capacity for exporting diversified and valueadded goods and services to global markets; for this, efficient ports are key.

Research shows that reducing transit times and the unit cost of transport for imports and exports can have a significant impact on a country’s trade flows. A recent report indicates that a 25% improvement in port performance can increase a country’s GDP by two percent. It further identifies ports as facilitators of trade and integrators in the logistics supply chain in Africa.6 Doing Business in South Africa 2018 adopts Doing Business’s new approach to measuring trade processes and applies it to the following four ports: Cape Town, Durban, Ngqura and Port Elizabeth (Box 7.1). It measures the ease of trading across borders based on an import and export case study for each of the four ports.

The export case study assumes that each port exports its product of comparative advantage (largest export value)7 from Johannesburg to its natural

MAIN FINDINGS ● Long port handling times and high border compliance costs are the main obstacles for exporters in South Africa. ● South Africa’s largest and most congested port is Durban, while Port Elizabeth shows the best performance in port handling among the four ports assessed. ● Completing customs procedures for exporting and importing is efficient and fast in South Africa, compared to the rest of the world. ● Although the time to comply with all documentary requirements for exporters in South Africa is lower than the average for sub-Saharan Africa, it is higher than for OECD high-income economies and BRIC economies. ● Customs and port authority initiatives have contributed to South Africa’s movement towards electronic transaction systems, but a single window for trade might further facilitate exports and imports.

1 South Africa’s landlocked neighbouring countries include Botswana, Lesotho, Eswatini, Zambia and Zimbabwe.

2 World Bank Group. World Integrated Trade Solution. See South Africa profile at wits.worldbank.org/countryprofile/en/country/ZAF/startyear/2012/endyear/2016/indicator/ NE-TRD-GNFS-ZS. 3 Mineral products (25,11%), precious metals (16,57%), vehicles aircraft vessels (11,89%) and iron and steel (11,86%) represented a total of 65,4% of South Africa’s exports in 2017.

South Africa’s main export trading partners in 2017 were China, the United States, Germany, Japan and India. SARS Trade Statistics, available at tools.sars.gov.za/tradestatsportal.

The Department of Transport’s Maritime Branch states that in terms of volume, more than 96% of South Africa’s imports and exports are shipped by sea. See the Maritime Branch’s website attransport.gov.za/web/department-of-transport/maritime.

4 Economies such as Ghana and Kenya grew at an average rate of 13,8% and 4,4% respectively during the same period, according to the World Bank’s World Development Indicators.

Annual growth rate of exports of goods and services is based on constant local currency. Exports of goods and services represent the value of all goods and other market services provided to the rest of the world.

5 Comprehensive Maritime Transport Policy (CMTP) for South Africa, available attransport.gov.za/documents/11623/44313/MaritimeTransportPolicyMay2017FINAL.pdf/ 4fc1b8b8-37d3-4ad0-8862-313a6637104c.

6 PricewaterhouseCoopers. April 2018. “Strengthening Africa’s gateways to trade: An analysis of port development in sub-Saharan Africa.”

7 Specific products are excluded: precious metal and gems, mineral fuels, oil products, live animals, residues and waste of food and products, as well as pharmaceuticals.

In these cases, the second-largest product category is considered as needed.

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SOUTH AFRICAN PROPERTY REVIEW

doing business in South Africa DOING BUSINESS IN SOUTH AFRICA 2018

BOX 7.1 What are the four ports’ main features?

The South African port system comprises both multipurpose ports and specialised bulk ports.a All four ports in the case study multipurpose ports,ports’ while main Ngqura was developed predominantly for trans-shipment cargo.

BOX 7.1are What are the four features?

The main differences between ports include size, depth, capacity, infrastructure, proximity to markets and the volumes a or South type ofAfrican cargo or commodities passing both through them. Tariffports s are largely standardised, creating competition and The port system comprises multipurpose and specialized bulk ports.

Allminimal four ports in the case study b areproviding multipurpose ports, while Ngqura was developed predominantly for transshipment cargo. no financial incentive for traders to use one port over another.

Durban is the largest port in the The main differences among ports incountry and the region. In 2017/2018, ZIMBABWE Ports clude size, depth, capacity, infrastrucits two piers handled 2,8 million 20Mineral bulk ture, proximity to markets and the Makwarela Break bulk Giyani foot equivalent (TEUs) – nearly BOTSWANA volumes or type ofunits cargo or commodiAgricultural bulk Polokwane 60% of the four ports combined.

Roll-on/roll-off ties passing through them. Tariffs are Lebowakgomo Containers The port benefits from its proximity largely standardized, creating miniNational Capital KwaMhlanga to Johannesburg and better road no Mbombela mal competition and providing Cities KaMatsamo PRETORIA Mahikeng Soweto Province Boundaries connections to neighbouring financial incentive for traderscountries. to use Johannesburg ESWATINI International Boundaries b agricultural At Cape port, one port overTown another. cargo (edible fruit and nuts; peel NAMIBIA Durban is the largest port in the Ulundi Phuthaditjhaba of citrus fruit or melons) dominates Kimberley country and the region. In 2017/18 Bloemfontein exports to the Netherlands (24%), its two piers handled some 2.8 milLESOTHO Durban the United Kingdom (19%) and the lion twenty-foot equivalent units United Arab Emirates (6%).c As the (TEUs)—nearly 60% of the four ports westernmost thebenefits ports measured, combined.

The of port from its Umtata Cape Town’s main challenge is strong proximity to Johannesburg and betIBRD 43906 | in summer.

Loading terwinds, road especially connections to neighboring AUGUST 2018 Saldanha Zwelitsha and unloading equipment stops if countries.

Ngqura the wind reaches a certain strength, Cape Town Port Elizabeth Atcausing Cape Town port, agricultural cargo delays. (edible nuts; peel of citrus Thefruit portand of Ngqura, the deepest fruit or melons) dominates exports container terminal in southern Africa, Source: Transnet National Ports Authority (TNPA). to the Netherlands (24%), the United began operating in 2009 and is the newest commercial port. Developed to serve as a trans-shipment hub, it attracts larger Kingdom (19%) and the United Arab Emirates (6%).c As the westernmost of the ports measured, Cape Town’s main challenge is vessels and has grown quickly. The port handled nearly 500 000 trans-shipments in the past year, 46% of the total handled strong winds, especially during the summer. Loading and unloading equipment automatically stops if the wind reaches a certain in all four ports combined. strength, causing delays.

Port Elizabeth, located midway between Durban and Cape Town ports, is equipped with a manganese facility and a car The port ofHowever, Ngqura, the container Southern Africa, began operating in 2009 anddeclined is the newest terminal. withdeepest the creation of theterminal Ngqura in port only 20km away, its container volumes have by 20%commerover cial port.

Developed to serve as a transshipment hub, it attracts larger vessels and has grown quickly.

The port handled nearly the past three years, especially for trans-shipments.

500,000 transshipments in the past year, 46% of the total handled in all four ports combined.

MOZAMBIQUE

80

This map was produced by the Cartography Unit of the World Bank Group. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of the World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

a. Multipurpose ports are those that handle a wide variety of cargo (containerised and non-containerised). Specialised bulk ports are ports that specialise Port Elizabeth, located midway between Durban and Cape Town ports, is equipped with a manganese facility and a car terminal. in handlingwith cargothe thatcreation is unpackedoforthe carried in unitised form.

However, Ngqura port only 20 kilometers away, its container volumes have declined by 20% over the b.

Centre for Competition, Regulation and Economic Development.

2014. “Review of regulation in the Ports Sector.” Available at tips.org.za/files/ past three years, especially for transshipments. ccred-edd-recbp_regulation_in_the_ports_sector_-_farr_levin.pdf. c. South African Revenue Service data on trade flows for the most recent four-year period were used to identify Cape Town’s main trading partners

a. Multipurpose ports are those that the handle a wide variety cargo (containerized and non-containerized). ports are ports that specialize in – the economies to which it exports largest value (price of times quantity) of HS 08 (edible fruit and nuts; peel Specialized of citrus fruitbulk or melons). handling cargo that is unpacked or carried in unitized form. b. Centre for Competition, Regulation and Economic Development. 2014. “Review of regulation in the Ports Sector.” Available at http://www.tips.org.za /files/ccred-edd-recbp_regulation_in_the_ports_sector_-_farr_levin.pdf. c.export South African Revenue data on trade the most recent four-year period were used to identify main trading partners—the theCape last Town’s decade.

Two of the main players partner (theService economy that flows is for import partner to Johannesburg (Table economies to which it exports the largest value (price times quantity) of HS 08 (edible fruit and nuts; peel of citrus fruit or melons).

the largest purchaser of the product).8 In the import case study, it is assumed that each port imports a standardised shipment 15agometric tonsits of legislation four of years to replace containerised auto parts (HS 8708, outdated customs legislative frameunder the Harmonised System work. However, that legislation—the classification from Customs its natural Customs Controlcode) Act, 2014,

7.1 and Figure 7.1).

How does maritime trade work in South Africa? the Revised Kyoto Convention and the

are Transnet, a state-owned enterprise founded in 1990; and the South African Revenue Service (SARS), which was established ancountry, autonomous agency Throughoutasthe customs clearthrough the South African Revenue Service ance is done electronically. Clearing Act of 1997.

The export Nationaland Ports Act, the agents upload import decprimary piece of legislation regulating larations to the SARS electronic data

South Africa’s sea commerce depends on World Customs Organization’s SAFE a myriad of players that have worked Framework of Standards to secure towards improving processes and facilitate globaltrade trade.

It will over also accommodate the rapid growth in the Duty Act, 2014 and Customs and Excise interchange (EDI). SARS’ operating 8 For each of the 190 economies covered

by Doing Business, it is assumed a shipment is located in a warehouseand in the largest businessand city of the the exporting economy use of that information technology Amendment Act, 2014—has yet to take system clearing agent’s system and travels to a warehouse in the largest business city of the importing economy. Johannesburg is the largest business city in South Africa. ensure the efficiency, transparency and effect. The new customs legislation is are directly connected through EDI. SARS predictability of customs procedures intended to ensure compliance with receives the customs declaration (SAD SOUTH AFRICAN PROPERTY REVIEW 49 37 for trade.10 international requirements, including 500), reviews it and sends a message

doing business in South Africa

ports in South Africa, went into effect on 26 November 2006.9 The customs legislative framework is established in the Customs and Excise Act of 1964.

SARS customs authorities have been working in recent years to update, simplify and modernise customs procedures.

Spurred by the need to keep pace with changes in international trade and meet the demands of an increasingly globalised world, South Africa passed legislation four years ago to replace its outdated customs legislative framework. But that legislation – the Customs Control Act of 2014, Customs Duty Act of 2014 and Customs and Excise Amendment Act of 2014 – has yet to take effect. The new customs legislation is intended to ensure compliance with international requirements, including the Revised Kyoto Convention and the World Customs Organization’s SAFE Framework of Standards to secure and facilitate global trade. It will also accommodate the rapid growth in the use of information technology and ensure the efficiency, transparency and predictability of customs procedures for trade.10 Throughout the country, customs clearance is done electronically. Clearing agents upload export and import declarations to the SARS electronic data interchange (EDI). SARS’ operating system and the clearing agent’s system are directly connected through EDI. SARS receives the customs declaration (SAD 500), reviews it and sends a message through the EDI system, asking the agent to answer additional queries or provide further supporting documentation, or

simply informing the agent that the cargo will be released by the customs authorities.

Among the documents required for export and import are the customs declaration, bill of lading, cargo dues order, certificate of origin, commercial invoice, packing list and SOLAS certificate (Safety of Life at Sea). Once all documents have been processed with the respective South African government agencies, chambers of commerce and shipping line, the trader loads all relevant information into the TPT terminal operating system and the shipment can be moved to the terminal gate.

While this clearing process is common for most South African exports, it is different for agricultural products. These goods are typically perishable, and a delay in obtaining all required documentation may lead to loss of cargo. SARS allows exporters of these goods to submit supporting documents up to 14 days after the vessel’s departure from port.

Prior to the vessel’s departure, the Perishable Products Export Control Board (PPECB) carries out product quality inspections on regulated perishable products destined for export under the Agricultural Products Standards Act. It also performs a second inspection during container loading to ensure compliance with cold chain protocols under the Perishable Products Export Control Act. Once the PPECB confirms that the shipment complies with export standards and requirements as well as with cold chain management protocols for perishable goods, it will issue an

export certificate. In addition, the Department of Agriculture, Forestry and Fisheries issues a phytosanitary certificate to confirm that the shipment meets the importing country’s requirements for plant products.11 In the case of imports into South Africa, a pre-clearance procedure allows clearing agents to clear customs before the vessel arrives in port. The preclearance process can begin as soon as an agent receives notification from the shipping line that the cargo is on board the vessel and on its way.

Initiatives for facilitating trade in South Africa Various government initiatives have moved South Africa towards paperless transaction systems designed to make trade processes more efficient. With its introduction of the EDI system, SARS instituted electronic communication with traders, customs clearing agents and shipping lines.

Customs receives the majority of declarations electronically and enables traders to submit supporting documents by the same means. Customs authorities request supporting documentation for approximately five percent of exports and less than 15% of imports. This low rate of intervention is a result of SARS’s implementation of a risk engine in its software that determines the level of risk in any shipment, indicating which shipments should be inspected and allowing most traders to get their goods cleared more quickly. It is part of SARS’s customs modernisation initiative, which is moving from the traditional “intervention for intervention’s sake” towards an “intervention by exception” approach, or intervention based on identified risk.12 As is common around the world, customs interventions on imports in South Africa are higher than on exports.

9 For more about the legal framework for ports, see the Transnet National Ports Authority website at transnetnationalportsauthority.net/Legal%20Risk%20and%20Compliance/ NationalPortAct/Pages/Port-Legal-Framework.aspx.

10 For more about customs legislation, see the SARS website at sars.gov.za/ClientSegments/Customs-Excise/AboutCustoms/Pages/New-Customs-Legislationupdate.aspx.

11 Directorate International Trade, Department of Agriculture, Forestry and Fisheries. January 2014. Step-by-step export manual for exporters of South African processed fruits, vegetables and nuts.

12 Widdowson, David. 2007. “The Changing Role of Customs: Evolution or Revolution?” World Customs Journal 1 (1):31-37. Available at customscentre.com/wp-content/uploads/ 2012/09/the_changing_role_of_customs_evolution_or_revolution.pdf.

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doing business in South Africa

In 2017 SARS launched the Customs Preferred Trader Programme, granting accreditation to 28 customs clients. While still in its infancy, this initiative aims to facilitate the relationship between SARS customs authorities and clients, reduce physical/documentary checks, prioritise requests for tariff/valuation determination and implement non-intrusive inspection techniques when goods are stopped or held for inspection. Each client is assigned a customs relationship manager, whose role is to help address clients’ queries and resolve compliance issues. Despite the improvements implemented by SARS, there is still room for the different players in South African trade to coordinate their activities and streamline processes to avoid repeated requests for information and inspections.

To improve efficiency and transparency, Transnet Port Terminals (TPT) has introduced a centralised terminal operating system, the Navis SPARCS N4, which consolidates supervision of port operations and fee payments. TPT now manages all its marine terminals from one integrated operating system with a central database in Durban, tracking the movement of cargo in real time. Transnet has also introduced a truck booking system in Durban, which aims to reduce

traffic on the road leading to the Durban Container Terminal. Durban port plans to have a compulsory truck booking system in place by April 2019. Additionally, South Africa invested in terminal infrastructure, including container handling and gate automation to enhance port efficiency.

How the process compares Despite South Africa’s initiatives to facilitate trade, challenges persist. Compared globally, maritime trade remains relatively cumbersome, time-consuming and costly.

Border compliance13 – which measures the time and cost of fulfilling customs requirements, mandatory inspections and port and terminal handling of cargo – takes 94 hours and costs US$666 on average for exports across the four South African ports measured. This lags considerably behind the 31-hour and US$325 average in OECD high-income economies trading by sea (Table 7.2).

Documentary compliance captures the time and cost associated with the documentary requirements of all government agencies involved in the logistical process of exporting and importing goods. It includes the time and cost for obtaining, preparing, processing, presenting and submitting documents that are required for each shipment or more

than once a year. While documentary compliance for exports takes on average five hours in OECD high-income economies trading by sea, in South Africa it takes 15 times longer (75 hours) on average. In the case of imports, both the time and cost for border compliance are about 80% higher in South Africa than in OECD high-income economies trading by sea.

Documentary compliance in South Africa costs slightly more than the OECD average and takes three times longer.

Border compliance time and documentary compliance time for exports by sea from South Africa are also higher than the average for the BRIC economies (Brazil, the Russian Federation, India and China).14 Border compliance takes 1,5 times longer in South Africa and documentary compliance takes nearly three times longer. South Africa’s border compliance costs for exports are only slightly above the BRIC average, while its documentary compliance costs for exports are less than half. Regarding the data on imports, South Africa performs better than the BRIC economies for all trading across borders indicators.

Border compliance time Across the 190 economies covered by Doing Business, maritime transportation is the most common means of exporting in 115 and importing in 109 economies. In 45 of the 115 economies exporting by sea, border compliance can be achieved in 48 hours or less. These include some of the largest container ports, including Shanghai (China), Singapore, Incheon (Republic of Korea), Jebel Ali (United Arab Emirates), Hamburg (Germany) and Sydney (Australia). As noted above, the average time to comply with these border procedures across the four South African ports is almost three times the average for the high-income OECD economies that trade by sea and 50% longer than the average for the BRIC economies.15

13 Border compliance captures the time and cost associated with compliance with a) the economy’s customs regulations; b) inspections required by agencies other than customs that are mandatory in order for the shipment to cross the economy’s border; and c) the time and cost for handling that takes place at its port. If customs clearance or inspections take place at the port at the same time, the time estimate for border compliance takes this simultaneity into account.

14 All four BRIC economies export by sea but only Brazil, India and China import by sea.

15 The calculation is based on Doing Business data. The OECD high-income economies that trade by sea are Australia, Chile, Finland, Germany, Greece, Iceland, Ireland, Israel, Japan, Latvia, New Zealand, Republic of Korea and the United Kingdom.

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doing business in South Africa Customs unions facilitate trade among member economies by streamlining border compliance. On average, border compliance takes 50 more hours for trade outside an economy’s customs union. Moreover, if the data for land and sea transport are disaggregated, border compliance for the former takes significantly longer between economies trading outside a customs union (59 hours) than between those in a union (14 hours). For exports by sea, belonging to a customs union also reduces border compliance time, but to a lesser degree (72 versus 82 hours).

Regional cooperation enhances efficiency for economies, especially those trading by land. In sub-Saharan Africa, 39 economies – including South Africa – belong to six different customs unions.16 Across sub-Saharan Africa it takes 103 hours on average when exporting to an economy outside a country’s customs union and 40 hours when the trading partners belong to the same union. In contrast, border compliance takes 20 hours for European Union (EU) member countries exporting to non-EU economies and three hours in the case of EU trading partners.

Although South Africa belongs to the Southern African Customs Union (SACU), only a small part of the country’s trade is with other SACU members; its main trading partners include China, the United States and Germany. Enhanced cooperation among SACU members, as among EU members, could reduce overall delays and promote more regional trade.17 An analysis of outcomes shows border compliance time is mostly dependent on efficiency of regulations and their effective implementation by the agencies involved. Efficient border compliance procedures can generally be found across economies, irrespective of geography, port location, import or export product and type of trading partner (within a customs union or not). For example, in Finland, Germany and the United Kingdom – which, like Port Elizabeth and Ngqura in South Africa, export goods classified as HS 84 (nuclear reactors, boilers, machinery and

mechanical appliances, or parts thereof ) to countries outside their customs union – border compliance requirements can be completed in 24 to 36 hours. In South Africa, by contrast, it takes 80 hours from Port Elizabeth and 84 hours from Ngqura.

Both Brazil and Guyana, which export agricultural products by sea to trading partners that are not within the same customs union, outperform Cape Town; the process is almost three days faster in Brazil and two days faster in Guyana.

The time taken to complete border compliance for exports across the four South African ports ranges from 80 hours in Port Elizabeth to 118 hours in Cape Town. Completing this process for imports takes between 54 hours in Port Elizabeth and Ngqura and 87 hours in Durban. This is high compared to OECD high-income economies trading by sea – where the average border compliance time to export is 31 hours and to import, 34 hours – but low compared to economies in subSaharan Africa trading by sea, where the average border compliance time to export is 121 hours and to import, 159 (Table 7.2).

Higher border compliance times in South Africa than in other economies, especially for exports, stem from inefficiencies in port handling. Across the four South African ports measured, the

total average time a shipment remains at the port, beginning with its arrival at the queue to enter the port and ending with its departure from the port, is close to 40% higher than the average for all economies that trade by sea. And that handling time is more than twice as long as the overall average for trading across borders (by land and sea) in all 190 economies measured

by Doing Business. In Cape Town, where agricultural products are the port’s export of comparative advantage, an average of 30 hours is added on to the border compliance process for an inspection required by the Perishable Products Export Control Board.

In the three other ports, which export manufacturing products, a physical inspection by agencies other than customs (such as the International Trade Administration Commission of South Africa or the National Regulator for Compulsory Specifications) is not required for more than 20% of shipments. In the case of imports, border compliance in South African ports takes on average less than half the time as in the BRIC economies that import by sea, primarily due to South Africa’s pre-clearance processing.

The time exporters and importers spend completing customs clearances in South Africa is especially low. Globally, exporters

16 These are the Common Market for Eastern & Southern Africa (COMESA), the West African Economic and Monetary Union (UEMOA, by its French acronym), the Southern African Customs Union (SACU), the Economic and Monetary Community of Central Africa (CEMAC), the East African Community (EAC) and the Economic Community of West African States (ECOWAS).

17 OECD. 2017. OECD Economic Surveys: South Africa 2017. Paris: OECD Publishing. Available at dx.doi.org/10.1787/eco_surveys-zaf-2017-en.

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doing business in South Africa spend 23 hours completing customs procedures and importers spend 37 hours; in South Africa the average time is four hours for exports and six hours for imports.

In contrast, the average time for BRIC economies that trade by sea is 16 hours for exports and 55 hours for imports.

SARS’s modernisation of its customs operations has significantly reduced the time required for this process.

Significant variations in port handling times across ports are also recorded for imports, even when the import product is the same. This is due to differences in the volume of containers handled by each port, the road and sea congestion, and the ports’ operating models. Among the four ports benchmarked, Durban, which handles the highest volume of containers, suffers most from port congestion. Both ship turnaround time and anchorage waiting time in Durban are more than twice the average of the other three ports. Although Durban and Ngqura have an automatic entry system for trucks, the average truck turnaround time is higher in Durban (from 35 minutes at Pier 1 to 72 at Pier 2) than in Ngqura and Cape Town (36 minutes) or Port Elizabeth (22 minutes).18 Port Elizabeth employs a straddle carrier system, which eliminates waiting times for handling equipment and allows consignees to pick up containers as soon as they are unloaded.

In contrast, Ngqura and Pier 1 in Durban use a rubber-tired gantry crane system, which enhances the terminal’s volume capacity but slows down cargo pickup.

Border compliance cost The country’s export and import border compliance costs are higher than the global average and high in comparison with OECD high-income economies. The difference in cost is narrower when compared only to other economies that export by sea.

Compared to BRIC economies trading by sea, South Africa’s border compliance cost is just above the BRIC average for exports and just below the BRIC average for imports.

Still, the average cost for border compliance for exports across South Africa’s four ports

is 19% higher (US$104 more) than for all economies exporting by sea, and more than twice the cost for OECD highincome economies that trade by sea. The main factor behind this gap is the higher costs South Africa’s traders pay to comply with customs clearance procedures, including customs broker fees.

Across the ports measured, variations in cost are mainly driven by the differences in port handling fees, which in turn vary depending on the export product and the type of cargo used (such as break bulk, dry bulk, liquid bulk or containers). In Ngqura and Port Elizabeth exporting a 15-metricton shipment of goods classified as HS 84 (nuclear reactors, boilers, machinery and mechanical appliances, or parts thereof ) costs on average US$451. Meanwhile, in Cape Town, the border compliance cost for exporting agricultural goods classified as HS 08 (edible fruit and nuts; peel of citrus fruit or melons) averages US$503.

The border compliance cost is highest in Durban, costing on average US$1 257 – because HS 87 exports (vehicles other than railway or tramway rolling stock, and parts and accessories thereof ) in South Africa have higher cargo dues and terminal handling charges for a shipment of 15 metric tons. But the cost for border compliance for imports is the same across all ports, since the Doing Business methodology assumes the same goods are imported (auto parts, HS 8708).

To promote South African exports, port handling fees are lower for exports than for imports. These costs include cargo dues levied by Transnet Ports Authority, terminal handling charges imposed by Transnet Port Terminals (standard across ports) and other port service fees charged by the shipping lines. While the same terminal handling charges apply to exporting and importing a 20-foot container, cargo dues are three times higher for imports than for exports.19 Cargo dues are charged to users (exporters, importers and shipping lines) to cover port infrastructure costs. Port handling costs for imports among South African ports are 34% steeper than for OECD highincome economies that import by sea.

Documentary compliance time Traders in South Africa spend 75 hours on average obtaining and preparing all documents (physical and electronic) for exports. The average time to complete this documentary compliance is the same in Durban, Port Elizabeth and Ngqura: 68 hours. In Cape Town, where the top export is an agricultural product, documentary compliance takes more than a day longer (96 hours). The required PPECB export permit and a phytosanitary certificate for agricultural products aim to ensure that the product meets health and food safety requirements. Those two documents are in addition to the documents required in all the other ports. Traders spend more

18 Data provided by Transnet National Ports Authority.

19 According to TNPA Tariff Book 2018-2019, the cargo dues for importing a 20-foot container in local currency are R2 146,78, and for exporting a 20-foot container in local currency R636,03. Based on TPT Tariff Book 2018-2019, terminal handling charges for importing and exporting a 20-foot container in local currency are R1 801.

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doing business in South Africa time in South Africa complying with all documentary requirements than in both OECD high-income economies and BRIC economies. This is principally due to the requirement for them to provide a hard copy of certain documents – such as the certificate of origin, the PPECB export permit and the phytosanitary certificate – and the delays in obtaining the bill of landing.

Documentary compliance cost Lower costs for exports and imports can improve an economy’s international trade transactions and business competitiveness.

In South Africa, documentary compliance costs are substantially lower than the average for economies in sub-Saharan Africa and BRIC economies, and high when compared to OECD high-income economies (Figure 7.4). However, the cost is on a par with OECD high-income economies that export and import by sea. SARS does not charge for a customs declaration, and the automation of documents (through the EDI and Navis systems) has resulted in a reduction in costs for documents across the supply chain.

Overall performance with same export product The benchmarked South African ports are slower on average – in terms of both border and documentary compliance – than other economies that have the same product of comparative advantage (Figure 7.5). In terms of cost, the situation varies. Ngqura and Port Elizabeth are less expensive when it comes to documentary compliance for exports and more expensive for border compliance. Durban is more expensive for border compliance, while Cape Town is less expensive for both these sets of procedures. Exporting 15 metric tons of fruit from Cape Town costs US$503, compared to US$1 034 in Grenada, US$585 in Guinea-Bissau and US$490 in Ghana.

Domestic transport time and cost Port Elizabeth has the shortest transport time (in terms of kilometres per hour) and is the least expensive destination (as measured in US dollars per kilometre) for a shipment from a warehouse in

Johannesburg. Cape Town has the longest transport time because of heavier traffic volumes, while Durban is the most expensive because of higher road tolls.

The times and costs also include those for loading and unloading the shipment at the warehouse.

What can be improved?

1 Further reduce and streamline documentary requirements and increase the use of electronic transaction systems All agencies involved in the supply chain of goods should move towards paperless transaction systems and reduce hard-copy requirements. Streamlining documentary requirements makes supply chains more efficient and reduces the time the shipment waits at the port.

According to the WTO’s February 2017 Trade Facilitation Agreement, member countries should move to reduce hardcopy requirements by accepting a paper or electronic copy of a document of which the government agency holds the original.20 SARS and Transnet have moved towards electronic transaction systems over the years. For example, Transnet expanded the use of automation and an integrated operating system to reduce paperwork and track cargo in real time. SARS’s introduction of the single administrative document

20 See the WTO Agreement on Trade Facilitation at wto.org/english/docs_e/legal_e/tfa-nov14_e.htm.

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(SAD) in 2006, the electronic customs clearance system and a risk-based inspection system have made clearance easier and more convenient for importers, exporters and cross-border traders. Yet South Africa still has too many outdated paper-based procedures, which are costly and more susceptible to fraud. An exporter of agricultural products is required to have a stamped phytosanitary certificate.

Similarly, a paper copy of the certificate of origin is required by the local chamber of commerce and SARS. The documents that take the longest to obtain are the bill of landing, the phytosanitary certificate and the certificate of origin.

Traders in South Africa take 75 hours to complete documentary compliance for exports, more than a third longer than the global average of 55 hours. South Africa could take further action to reduce and streamline the information required of traders by automatically linking all the relevant stakeholders.

In Brazil, documentary compliance to export an agricultural product to China takes just 12 hours. In 2016/2017, Brazil lowered the total time to comply with documentary requirements by implementing SISCOMEX, a digital system that consolidates all documents required for foreign trade in a single place, streamlining procedures and eliminating the need for hard copies.

doing business in South Africa During the same period, Paraguay reduced the time required for border and documentary compliance by introducing a single window for exporting (Ventanilla Única de Exportación). Export customs declarations and the certificate of origin can be obtained online, lowering the time for documentary compliance.

Georgia has also made export and import documentary compliance faster.

In 2015/2016, it introduced an advanced electronic document submission option that reduced the total time for documentary compliance to two hours.

2 Increase the coordination of different agencies with a view to streamlining procedures Coordination among the agencies involved in export and import is essential to trade facilitation. This is recognised in the TFA, which states, “Each member shall ensure that its authorities and agencies responsible for border controls and procedures dealing with the importation, exportation and transit of goods cooperate with one another and coordinate their activities in order to facilitate trade.” In South Africa, there is a lack of coordination between stakeholders involved in the maritime trade value chain, especially government departments. This yields redundancies and inefficiencies.

For example, different government agencies end up inspecting the same consignment several times, at various stages of the logistics chain. Although physical inspections are not required in more than 20% of shipments of the case study products, when cargo is stopped by the automated risk engine for inspection this adds an average of three days to the border compliance process.

If these agencies were more integrated and coordinated, container inspections could be carried out simultaneously. This

could in turn speed up the export and import process and lower the cost.

SARS has created working groups that bring together key stakeholders in the value chain (such as other government entities and clearing and forwarding companies). The groups meet monthly to exchange information, discuss trends and challenges, and advance port and system integration. However, various government agencies are still not linked electronically and continue to act independently.

The process could be more streamlined and faster if inspections by government agencies (SARS, the South African Police Service, the National Regulator for Compulsory Specifications, etc) could be coordinated and performed at the same time. Expanding automation and riskbased case selection to other agencies would enhance coordination and improve trade facilitation. This would be especially relevant for the export of agricultural goods.

At present, the automated risk engine with set parameters used for case selection is implemented only by customs authorities.

3 Introduce an electronic single window for trade South Africa might consider introducing the single window concept to link all government departments electronically.

Electronic platforms are already in wide use in trade; SARS and Transnet exchange information through the EDI system. But the introduction of an electronic single window would allow everyone involved in South African trade to connect directly, avoid duplications, standardise processes and significantly increase efficiency. This happened in Korea, where an electronic single window brought together 69 government agencies as well as private sector operators involved in international trade,21 significantly reducing border compliance

time for exports and imports as well as document requirements.

A successful implementation of the electronic single window requires collaboration across organisations. In Korea, a task force was formed that involved various import- and exportrelated government agencies.22 In fact, several economies have proved that single window systems produce positive economic outcomes and increase trade. Singapore’s TradeNet, the world’s first national single window, was launched in January 1989 and is considered a global good practice. By 2006 TradeNet was handling more than nine-million trade declarations per year with more than 90% of them processed within 10 minutes; by 2016 that figure was up to 99%.23 Owing to this success, many countries have followed Singapore’s model. Eleven economies in sub-Saharan Africa have implemented a single window. Ghana, the first in the region to do this, launched its single window in 2002, using a phased approach to implementation in line with international good practices. According to the Ghana Revenue Authority’s Customs Division, the implementation of the single window system has significantly increased government revenue and improved the productivity of port operations.24 The single window concept can also work on a regional level. In Asia, the ASEAN Single Window aims to facilitate trade and improve compliance by allowing agencies to exchange cargo clearance data among members of the Association of Southeast Asian Nations.25 These economies are at different stages of developing the single window platform.

Brunei, Indonesia, Malaysia, Philippines and Thailand have had such a platform in place since January 201826, while Cambodia, the Lao People’s Democratic Republic, Myanmar and Vietnam are at an earlier

21 Private sector participants included traders, customs brokers, customs services, shipping lines, logistics firms, freight forwarders, insurance firms, trade-related associations and banks. For more details on the Korean experience, see uncitral.org.

22 Yang, So Young. 2011. “Case Study on Single Window Implementation.” Available at wto.org/english/tratop_e/tradfa_e/case_studies_e/single_window_kor_e.doc.

23 See the Singapore Customs Introduction Guide for Newly Registered Traders at customs.gov.sg/-/media/cus/files/business/resources/eguide-for-newly-registered-tradersupdated-as-of-19-apr-2016.pdf.

24 EBO-Ghana. 2018. “Paperless Port Boosts Half-Year Import Revenue.” Available at eurboghana.eu/2018/08/10/paperless-port-boosts-half-year-import-revenue.

25 The ASEAN members states are Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

26 Chia, Yan Min. 2016. “Asean Single Window – A digital platform to simplify customs clearance.” The Business Times. Available at businesstimes.com.sg/asean-business/ asean-single-window-a-digital-platform-to-simplify-customs-clearance.

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doing business in South Africa stage of development.27 In Africa, the TransKalahari Single Window is an ongoing initiative to automate customs processes and exchanges between the customs authorities of Botswana, Namibia and South Africa. This project will first require the harmonisation of international trade procedures among these countries.

4 Promote regional integration through the effective implementation of border cooperation agreements Increasing intra-regional trade within the Southern African Development Community (SADC) is key to unleashing the region’s economic potential. Since SADC established a free trade area in 2008, intra-regional trade has increased only modestly. Intraregional trade represents 10% of trade in the SADC region. Trade volumes are much higher among the ASEAN economies (25% of their total trade) and among those of the EU (40%).28 Landlocked developing countries face the double challenge of access to seaports and development.29 Seven of 15 countries in southern Africa are landlocked, and there are many small, fragmented markets. It is thus crucial for SADC economies to develop a single integrated regional market.

South Africa, the most developed economy in the region, has a commanding geostrategic location, and a significant amount of trade from the region passes through its economy. It could particularly benefit from deeper regional integration and play a leading role in this effort.30 South Africa could identify the documents it uses to trade with other SADC countries, determine those required by law, eliminate those not legally required and harmonise documents where possible. It would be relevant to review the framework for

customs and border agency regulations (regional and national) and adapt it to the TFA and other best practices.

Regional agreements converting a twostop border crossing point into a one-stop border are essential. SADC economies have worked towards border cooperation. In 2011, Malawi improved customs clearance procedures and transport links between Blantyre and Beira in Mozambique. In 2009, Zambia eased trade by implementing a one-stop border post with Zimbabwe, launching web submission of customs declarations and introducing scanners at border posts. Under the WCO-SACU Connect Project (a joint initiative of the World Customs Organization and the Southern African Customs Union), South Africa and Eswatini have undertaken pilot programmes and tests for establishing customs system interconnectivity and data exchange. A similar pilot with Mozambique has been concluded and is awaiting full implementation under the one-stop border post at Ressano Garcia.31 Further expanding/integrating customs unions in Africa and forming partnerships through trade agreements can strengthen regional integration, contribute to the growth of South Africa’s ports and facilitate trade within and beyond the continent.32 Many countries have benefited from doing this, resulting in increased regional trade and improved performance on the trading across borders indicator due to the gains in efficiency from reducing the number of checkpoints for cargo moving across borders. For example, in 2011, Burundi reduced the time to trade across borders by enhancing its use of electronic data interchange systems, introducing a more efficient system for monitoring goods going through transit countries and improving

border coordination with neighbouring transit countries. Uganda has made trading across borders easier by connecting customs stations electronically, linking banks to customs (for payment of duties) and enhancing cooperation at the KenyaUganda border through joint inspections.

In Europe, border cooperation between Norway, Sweden and Finland has saved time and costs both for the authorities and for traders crossing the border.33

5 Upgrade trade logistics infrastructure Ports in South Africa have varying levels of congestion, operational efficiency and infrastructure development. Compared globally, handling speeds are low across the four ports. Durban, the most congested port in South Africa, handles nearly 2.8 million containers34 – the largest volume in sub-Saharan Africa – and a rising volume of containers through this port risks causing further slowdown.

Increasing port capacity by investing in infrastructure and equipment could improve performance and efficiency.35 A high-speed rail link between Johannesburg and Durban could ease congestion on the roads. Infrastructure investment has resulted in significant improvements in trade logistics performance in 11 economies in 2016/ 2017. As part of its National Development Plan 2013-2017, Angola improved handling time and reduced border compliance time by upgrading the port of Luanda.36 India reduced import border compliance time in Mumbai by improving port infrastructure at Nhava Sheva. Singapore, for its part, made exporting and importing easier by improving infrastructure and electronic equipment at the port.

27 See the ASEAN Single Window Trade Facilitation website at asw.asean.org/component/content/category/13-static-pages.

28 OECD. 2017. OECD Economic Surveys: South Africa 2017.

29 Arvis, J.F. et al. 2011. Connecting Landlocked Developing Countries to Markets: Trade Corridors in the 21st Century. Washington, DC: World Bank.

Available at documents.worldbank.org/curated/en/489041468154790373/pdf/608060PUB0Conn10Box358332B01PUBLIC1.pdf.

30 OECD. 2017. OECD Economic Surveys: South Africa 2017.

31 Interview with SARS representatives. 16 May, 2018. Pretoria, South Africa.

32 OECD. 2017. OECD Economic Surveys: South Africa 2017.

33 Communication from Norway on Border Agency Cooperation, available at tfig.unece.org/contents/case-studies.htm.

34 Data provided by Transnet National Ports Authority.

35 Gidago, Usman. 2015. “Consequences of Port Congestion on Logistics and Supply Chain in African Ports.” Developing Country Studies 5(6): 160-168, available at pdfs.semanticscholar.org/ba11/5e33e5123e5a645 e359a265ede2b53c503a8.pdf.

36 World Bank. Doing Business: Trading across Borders: Good Practices. Available at doingbusiness.org/data/exploretopics/trading-across-borders/good-practices.

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howmuch.net

What investing US$100 in stocks early on would be worth today There’s a lot of power in being first. And when it comes to initial public offerings or IPOs, it pays to be one of the earliest investors. But we wanted to understand how much it would pay – so we ran an experiment. Imagine you could go back in time and invest US$100 into a handful of great companies when they first went public. What would your investments be worth today?

By Raul Amoros: howmuch.net/articles/investing-100-at-IPO

O

f all the companies we analysed, Nike is the clear winner. An initial investment of US$100 in 1980 would be worth more than US$6-million today.

Walmart was a better bet than Amazon, topping the online retail giant by more than US$1-million in total investment growth.

The same investment into Google (Alphabet) when it first went public would be worth only US$2 632.

Let’s start with how we crunched the numbers. We wanted to compare apples with apples, so we made a couple of key assumptions.

First, we assumed that our hypothetical investment of US$100 at each IPO would stay with the underlying asset for the long term, but any dividends would be taken out as cash and not reinvested.

Then we determined the present-day value of the investment through the ups and downs of stock splits, mergers and acquisitions.

You can read more about our sources and methodology here. In short, you put US$100 in at the IPO, and let it ride.

The surprising conclusion of our visual is that tech stocks aren’t historically the best IPOs. Nike and Walmart fare much better than Apple and Google (Alphabet).

Want another surprise?

Buying US$100 of Coca-Cola would have been a much better investment than Starbucks. But regardless of how things turned out, the overall story in our visual is the enduring value of great American companies over several decades. Even General Electric, a company that’s suffered its share of setbacks in the past few months, still looks like a great IPO pick.

And although we are not excited about Google’s return compared to other companies, that’s still pretty good.

So it pays to be among the earliest investors – but how do you know what to invest in? All these companies initially started as one among many competitors. Some IPOs skyrocket in value only to plummet in the following years. Other IPOs take a long time to get off the ground.

We don’t know how to pick the winners, but we’re confident that if you bought any of these stocks early on, you’re still happy with your return today.

Correction A previous version of this article compared an investment of US$100 in BTC vs IPOs. To avoid confusion, we are now only comparing investments into IPOs.

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Gauteng Meet the Media SAPOA President Ipeleng Mkhari and CEO Neil Gopal hosted a media lunch at the Maslow Hotel in Johannesburg

FROM LEFT Glynis Kearney (SA Home Owner), Adele Rhodes (Tiso TV), SAPOA CEO Neil Gopal, Julia Hinton (Property24), Alistair Anderson (Business Day), Ortneil Kutama (SA Commercial Prop News), SAPOA President Ipeleng Mkhari, Ray Mahlaka (freelance property writer for Moneyweb and the Daily Maverick), South African Property Review Editor and Publisher Mark Pettipher, Antoinette Slabbert (Rapport) and Tasneem Bulbulia (Engineering News)

Ipeleng Mkhari

FROM LEFT Alistair Anderson, Ortneil Kutama, SAPOA PRO Maud Nale, Joan Muller (Financial Mail) and Neil Gopal

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ccording to Chief Executive Officer Neil Gopal, “At SAPOA, we recognise that the media are critical partners in SAPOA’s success. As such, regular meetings with the media are incredibly important – in order for us to get to know key members on a first-name basis. A direct line of contact makes it easy to discuss issues and leverage the relationship to secure press coverage.”

The lunch session was attended by representatives from Moneyweb, Business Day, SA Commercial Prop News, Rapport, Financial Mail, Engineering News, South African Property Review, Property 24, South African Home Owner and Tiso TV. 58

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FROM LEFT Julia Hinton, Glynis Kearney, Adele Rhodes and Tasneem Bulbulia

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Unshakeable women gather at WPN Leadership Conference 2019 Women’s Property Network (WPN) Gauteng Chapter hosted its annual Leadership Conference on 8 March in Rosebank, Johannesburg. Sponsored by Standard Bank, the half-day event is aimed at women working across South Africa’s real estate industry

Head of Corporate and Investment Banking at Standard Bank Disebo Moephuli with host Cathy Mohlahlana

WPN Gauteng Chapter Chairperson and Nthwese Development Business Development & Operations Manager Jackline Okeyo

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his year’s WPN Leadership Conference coincided with International Women’s Day. The theme – “Be Unshakeable” – encouraged women to remain resilient during the tough, uncertain economic times prevalent in the listed property and construction sector last year. The conference also encouraged women to think more collaboratively in positioning themselves and pursuing opportunities; this is an approach which could see women become a more formidable force in the sector.

“Over the years, WPN’s focus on creating a professional networking platform for women in the sector and raising funding to provide bursaries to women studying towards propertyrelated degrees has proven to be beneficial – we have seen an increased number of female entrants actively participating in the sector”, says Jackline Okeyo, Chairperson of WPN’s Gauteng Chapter. “Going forward, we are seeking opportunities to create greater impact and further empower women in the sector. We are working on some exciting new initiatives that we’ll announce during the year.

Seasoned journalist and news anchor Cathy Mohlahlana hosted the event. The line-up of speakers included co-founder and Executive Director of Sesfikile Capital Kundayi Munzara, Founder of Be-Clear Tanya Stevens, Country Director of WEConnect International Jean Chawapiwa, Infrastructure Executive at Tongaat Hulett Developments Tshepiso Kobile, Director at Schwenn Incorporated Charmaine Schwenn, Standard Bank’s Executive Relationship Manager Somaya Joshua, CEO of Izandla Property Nonhlanhla

Mayisela, and keynote speaker Irene Charnley, the founder of Pan-African telecoms group Smile Telecoms.

The various discussions centred around insights into developing a strong sense of self-awareness to perform at one’s peak, as well as how women can use their achievements and roles to further build on the legacy of empowerment in the sector.

“Our involvement in sponsoring the WPN Leadership Conference is testament to our ongoing support of female professionals and entrepreneurs within the real estate sector,” says Disebo Moephuli, Head of Corporate and Investment Banking at Standard Bank.

“The development of leaders is crucial, and we are incredibly proud of our association with WPN’s drive to change the narrative across the entire spectrum of the real estate sector.”

Since 2008, WPN has awarded more than 70 bursaries to the tune of R4,3million to previously disadvantaged female students working on a propertyrelated degree or diploma at various institutions around the country.

Sponsored by: Standard Bank

For media, contact: On behalf of the WPN Vincent Mothiba e: vkhutso@gmail.com c: +27 (0)78 490 5008 Tshego Tshangela e: Tshego.tshangela@gmail.com c: +27 (0)84 624 2996 SOUTH AFRICAN PROPERTY REVIEW

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off the wall

Turning a “tragic” plastic problem into a nation-building solution Imagine South Africa’s un-recycled plastic waste – all 1,1-million tons of it per year – could create thousands of jobs, clean our environment and help build our houses, hospitals, schools and roads…

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on Thompson, CEO of the Center of Regenerative Design and Collaboration (CRDC), is about to make this a reality. He is the inventor of a process that can turn any plastic – dirty or clean, and in any form – into the very building blocks of sustainable development. The products, EcoArena pre-conditioned resin aggregate (PRA) and Ecoblock, are innovative environmentally friendly products that incorporate regenerated waste-plastic particles with a standard sand-cement mixture to produce a highly resistant, durable cement or cement block, providing a viable upcycling usage of this waste material.

The product has been tested – and applied – for the past two years by Pedegral in Costa Rica, with great success.

The CRDC is also collaborating with international US chemicals giant Dow in

The key benefits of CRDC EcoArena Concrete and construction

●● 10% increase in strength ●● 8 to 16% decrease in weight (with 5 or 10% PRA) ●● Increase in thermal properties ●● Same fire resistance as with standard concrete ●● EcoArena PRA can be used in pressed concrete products as well as in bagged cement or poured concrete ●● Lower dependency on other raw materials ●● Obvious marketing benefits ●● Reduction in cement industries’ carbon footprint and Carbon Tax (South Africa)

Environmental

●● Support for the United Nations’ Sustainable Development Goals ●● Reduction of carbon footprint by eliminating plastic-to-landfill and plastic pollution (one ton of mixed plastics going to landfill has an emissions factor of 21,3842kg CO2e) ●● Ability to upcycle all types of plastic into EcoArena PRA – i.e. no costly separation required ●● Reduction of plastic pollution in rivers, oceans and cities, and impact on landfills ●● Support for “Zero Waste” to landfill, plastic producer responsibility, and government programmes or initiatives ●● Permanent elimination of waste plastic from the environment CRDC and EcoArena are foundation partners of Habitat for Humanity.

Social and SMME

●● SMME and job creation from waste-plastic collection, plastic shredding SMMEs, and transport ●● Cleaner cities and healthier environments ●● Support for SMME concrete block manufacturers ●● Support for the building of better social housing in Africa with a stronger product that benefits the environment and the society.

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the development of EcoArena as a lead initiative to end plastic waste.

In South Africa, the CRDC has partnered with a leading operations company, which has extensive expertise and a long track record in on-site waste management, plastic recycling, wasteto-energy and implementation of zero waste to landfill solutions.

The UN wants individual countries to sign up to “significantly” reduce plastic production, including a phasing out of single-use plastics by 2030 – a goal inspired by the 2015 Paris Agreement on voluntary reductions of carbon emissions. www.news24.com/Green/ News/plastic-in-crosshairs-atun-environment-forum-20190311

South Africa currently consumes 1,5-million tonnes of plastic annually, of which only 21% is recycled. The rest ends up in landfill, in rivers, on beaches and in our oceans. Industry, commerce, retailers and consumers are seeking better ways to work with plastic. Most assume that the abolition or drastic reduction of the culprit plastic would be the best solution.

CRDC will be testing EcoArena PRA with two concrete manufacturers in the Western Cape and a South African cement producer.

The product and process EcoArena incorporates regenerated waste plastic particles with a standard sand-

cement mix to create a highly resistant, durable cement, concrete block or any formed concrete product. Each EcoArena block contains 260g of plastic, none of which needs to be separated, cleaned or treated in any way. Very little water is used in the process. The resultant EcoArena block represents a five to 10% decrease in total weight compared to a standard concrete block.

The process begins upon the disposal and recovery of the waste plastic, which is then converted to a solid mass via heat extrusion and ground to the required particle specifications. After this processing phase, the resulting mixedpolymer aggregate is incorporated directly into a mixer with a sand-cement mixture. Once a homogeneous mixture is achieved, the moulding process for creating the standard block begins. What emerges shows no visible difference from traditional concrete aggregates.

In terms of resistance and mechanical characteristics, the resulting product is equal to a traditional concrete block. The only difference is that it’s considerably lighter and stronger while also effectively using a large quantity of plastic waste and eliminating it from landfill, with the attendant benefits of reducing CO2 emissions of plastic in landfill.

EcoArena will help to reduce carbon footprints for municipalities, plastic manufacturers and the cement and concrete industries.

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INNOVATIVE AND APPROPRIATE SERVICES 4 1

2 1 Menlyn Learning Hub. Architects: Boogertman + Partners 2 West Hills Mall. Architects: ARC Architects 3 & 4 Studios @ Burnett. Architects: Boogertman + Partners

While adequately and timeously providing traditional quantity surveying services and utilising the best that technology can provide, DelQS identified certain services as being vital to the bottom line of property developers and investors To this end it has researched the needs of its clients and has developed expertise and systems

related to the following: •

In-house developed financial viability analysis, including detailed estimates of construction cost, acclaimed to be precise and logical in presentation

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Extensive building contract expertise and quality contractor procurement systems

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In-house developed cost control system that proactively tracks past and potential future construction cost decisions and provides a precise audit trail

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Ensuring that final settlements with contractors are based on the conditions of contract leaving, with recommendations, any other settlement decisions to the client

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Expertise and a track record of dealing with projects elsewhere in Africa and beyond

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Expertise in almost all building development categories

Associated offices: GHANA | KENYA | MAURITIUS | NAMIBIA | NIGERIA | TANZANIA | UGANDA

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www.delqs.com