South African Property Review June 2019

PROPERTY SOUTH AFRICAN PROPERTY REVIEW - LogoTreatment.pdf

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2016/08/25

June 2019

11:31 AM

REVIEW

The voice for the industry

Get ready to network!

Build-up to SAPOA’s Annual Convention & Property Exhibition

Challenging times Understanding the issues Planning the future

Research

Industrial vacancy report

State of City Finances

Financing spatial transformation

Entrepreneur one-on-one

It’s a bug’s life: Khanyi Mdhluli

from the CEO

Challenging times.

Understanding the issues.

Planning the future Being hosted in the heart of the Mother City, this year’s Annual Convention & Property Exhibition will once again present an exceptional forum for networking among leading property professionals, suppliers, buyers, purchase influencers, consultants and the media. The event also brings together former SAPOA Presidents, CEOs and directors of property companies, political analysts, experts from the banking sector and prominent academics for a holistic approach to commercial property development and management

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A special word of gratitude to all our sponsors, most

notably principal sponsors GladAfrica, for your valuable contribution in making this event possible.

We look forward to welcoming the industry to the Mother City, and to interacting with you during our plethora of networking opportunities and robust

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plenary discussions

ut aside from the networking opportunities, there are hard-hitting issues that will be discussed and debated.

This year, the Convention is themed “Challenging times. Understanding the issues. Planning the future.” The reality is that our country is facing economic, political and social volatility, and these challenges transcend into the property sector. Preparation during uncertainty can be the defining line between success and demise, and this year’s Convention sets the stage for progressive discussions on how to not only overcome uncertainty but to thrive and discover opportunity in volatile times.

The Convention’s programme will address these and other issues to ensure that the sector continues to inspire further development and productivity through achieving specific outcomes.

Our keynote speaker will be South African-born politician and anti-apartheid activist Lord Peter Hain, a UK Member of Parliament and Cabinet Minister, now in the House of Lords, who will talk about rooting out corruption and detangling the Bell Pottinger and Gupta web.

Day Two of the conference will focus on the listed property sector, intellectual capital and the economy. What happens in the listed property sector is often a predicate for what’s happening in the country at large. Drawing on industry insights and expertise will help us understand the factors that we can expect to have impact on the property market in 2020. This will be discussed and debated during the discussion “What does 2020 hold for the listed property sector?”

Education, training and development initiatives are the backbone of the organisation and assist in the built environment landscape, and will be unpacked by Professor Jonathan Jansen from Stellenbosch University under the topic “Intellectual capital remains key: The future of skills”. Day Two will conclude with an engaging debate about our country’s economy, which is plagued by policy uncertainty and corruption. This promises to be a heated debate with likely varying views from our expert panellists. It will be led by Nedbank’s senior economist Nicky Weimar.

Plenary sessions on Day Three will commence with a discussion on retail, how the industry has undergone a significant transformation over the past decade, and whether South African retailers and asset managers can adapt and respond to changing consumer demographics and preferences. Trend analyst Dion Chang and Andrew Barnes, Head of Strategy at Ebony & Ivory, will lead this conversation.

The final day will also see what’s likely to be the most hotly debated panel discussion with a number of prominent political analysts headlining the panel.

Activist, author and musician Sizwe Mpofu-Walsh will lead the dialogue about the political uncertainty of our country, with Max du Preez, Ongama Mtimka, Ebrahim Fakir, Ralph Mathekga and Karima Brown, all with their own strong views and opinions, serving as the session’s panellists. This not-to-be-missed political debate will be facilitated by Iman Rappetti.

SOUTH AFRICAN PROPERTY REVIEW

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from the CEO

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1 BCX Head Office. Architects: SVA International 2 Akwa Hotel. Architects: SAOTA 3 Menlyn Learning Hub. Architects: Boogertman + Partners 4 West Hills Mall in Ghana. Architects: ARC Architects

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Is South Africa still a compelling property market when compared to the rest of the world? And are we experiencing a water crisis or is water in crisis? These two topics will be covered in the final session of the three-day conference. Senior analyst Barnaby Fletcher will lead the panel discussion entitled “SA vs The Globe: How do we rate?” alongside Preston Mendenhall, Nesi Chetty and other industry experts.

Our plenary session will conclude with Benoit le Roy, Chief Executive Officer of Water Shortage SA, unpacking the water crisis.

The three-day event will end on a lighter note with entertainment in the form of Alan Committee and Defending The Caveman.

The SAPOA Annual Convention & Property Exhibition, to be hosted by award-winning journalist Iman Rappetti, promises to remain true to its history of encouraging conversation and deliberation on issues of pertinence within the commercial property sector.

The social components are always a highlight of the conference, and this year will be no different. From a day on the greens of the Atlantic Beach Golf Club to a scenic city tour around some landmark and award-winning Cape Town sites, the exhibition hall, the Women’s Breakfast and Pop of Colourthemed Convention Dinner and awards evening, the conference offers a little something to cater for a wide range of interests and audiences.

Late registrations for the conference and various networking events are still open at www.sapoa.org.za/convention/ registration/delegate-registration.

A special word of gratitude to all our sponsors, most notably our principal sponsors GladAfrica, for your valuable contribution towards making this event possible.

We look forward to welcoming the industry to the Mother City, and to interacting with you during our plethora of networking opportunities and robust plenary discussions.

Best regards, Neil Gopal, CEO

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June 2019

PROPERTY SOUTH AFRICAN

REVIEW

South African Property Review

PROPERTY SOUTH AFRICAN PROPERTY REVIEW - LogoTreatment.pdf

1

2016/08/25

June 2019

11:31 AM

REVIEW

The voice for the industry

Get ready to network!

The SAPOA Annual Convention and Property Exhibition offers property professionals an ideal venue to network with their peers and leading decision makers in the commercial property space. Keynote speakers and

Build-up to SAPOA’s Annual Convention & Property Exhibition

Challenging times Understanding the issues Planning the future

panellists get to grips with the trends of the day that

Convention Build-up

affects us all.

Research

Industrial vacancy report

Entrepreneur one-on-one

SOMETIMES AN EXTRA SQUARE METRE GOES THE EXTRA MILE.

It’s a bug’s life: Khanyi Mdhluli

State of City Finances

Financing spatial transformation June 2019

3 From the CEO 6 From the Editor’s desk 12 Legal update City of Johannesburg Land Use Scheme 2018: New requirements for land use and development 14 Legal update Companies Act amendments to include business rescue relief for landlords 20 Post-election comment Election results set to boost commercial property prices and lower yields 22 Convention build-up Get ready to start thinking – and acting 28 Entrepreneur one-on-one The transformative charm of a Ladybug,

bringing construction dreams to life 31 Opinion Efficient project management reduces costs, drives innovation in property construction 32 Vacancy report Global trends show greater returns

from industrial assets 35 State of city finances Financing spatial transformation 44 Howmuch.net Visualising how a “No-deal Brexit” would affect the world’s economy 46 Social 54 Off the wall No more plastic bottles?

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

Don’t let limited space, limit business.

Editor in Chief Neil Gopal Editorial Adviser Jane Padayachee Managing Editor Mark Pettipher Copy Editor Ania Rokita Taylor Public Relations Officer Maud Nale Production Manager Dalene van Niekerk Designer Eugene Jonck, Fanie van Niekerk Sales Pieter Schoeman: pieter@mpdps.com Finance Susan du Toit Contributors Chantelle Gladwin-Wood, Maike Gohl, Maud Nale, Tshepo Tshabalala, Raul Photography Mark Pettipher

Visit abland.co.za to view our groundbreaking portfolio of space for commercial, industrial, retail, motor and mixed-use precincts.

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

e: philip@rsalitho.co.za

SOUTH AFRICAN PROPERTY REVIEW

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from the Editor’s desk

Heading to the Cape As we build up to SAPOA's Annual Convention & Property Exhibition, Property Review caught up with some of the speakers who’ll take part in this not-to-be-missed event

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t’s fascinating to look forward to what SAPOA has in store for us on 18 June.

As Neil Gopal's CEO message tells us, the theme for this year’s Convention is “Challenging times: Understanding the issues and planning the future”.

From my interviews with Convention Chairman and SAPOA’s President Elect David Green as well as the local line-up of speakers (which took place before the elections on 9 May), it is obvious that there is plenty of goodwill and support for President Ramaphosa in the country.

But not everyone was optimistic about the President being able to turn the country’s economic woes around in just five years, and some were sceptical that he would last the full term.

Everyone, however, is in agreement that South Africa’s education system needs to be reformed. In addition, jobs need to prioritised.

Dr Thabi Leoka pointed out some worrying statistics, which – if left unaddressed – will create an even greater burden on our society and the economy.

Professor Jonathan Jansen is deeply concerned that both our secondary and tertiary education systems are not equipping young learners with enough skills. Employers of today are looking for abilities that go beyond academic qualifications – they want multi-tasking skills and teamwork.

Both Nicky Weimer and Dr Leoka seem to agree that the economy is flawed, and it is hampered by the corruption that has befallen our state-owned enterprises.

The “infrastructure”, as they put it, has been in decay for many years, both physically and economically, and it will take a fair amount of time to unravel the mess and to implement strategies to remedy the situation.

But how has this affected the property industry? Green feels that, since South Africa has gone through economic turbulence before, the industry requires long-term commitment. He is optimistic

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that we’ll ride out the storm again – but not until we have clarity on certain policies and on the land-reform debate.

He is also deeply concerned about our water and energy, and predicts that we’re far from being energy-sufficient and headed for more load shedding.

Speaking to Dion Chang, we get an insight into the changing face of retail and the impact of online shopping.

Shoppers are buying more wisely than before, and online retail is allowing them to browse extensively before they buy.

Ultimately, this means that malls as we know them today need to find new ways to attract customers.

The debate, which will be led by Sizwe Mpofu-Walsh, will be a must-attend plenary session. The young, progressive political observer appears to be in touch with South Africa’s youth, and has strong views that pull no punches. He hopes for a more competitive political system and a younger Parliament that is accountable, forward-thinking and not fraught with party in-fighting.

I look forward to catching up with those of you with whom I’ve interacted in the past year, as well as to meeting and networking with new members.

Enjoy the Convention. I’ll be reporting back on it in the August edition.

Mark Pettipher, Editor and Publisher

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THE SAPOA ANNUAL CONVENTION & PROPERTY EXHIBITION CAPE TOWN ICC 18-20 JUNE 2019

Join Neil Gopal, CEO of SAPOA, at the Cape Town International Convention Centre for this year s annual Convention. The Convention promises to remain true to its history of encouraging conversation and deliberation on issues of pertinence within the commercial property sector.

Being the industry representative for an estimate 90% of the country s commercial and industrial property companies, our members collectively own close to R 1 trillion in assets.

As the premier property conference of the year, the Convention will once again present an exceptional forum for networking among leading property professionals,suppliers, buyers, purchase influencers, consultants and the media. The event also brings together former SAPOA presidents, CEOs and directors of property companies, political analysts, experts from the banking sector, and prominent academics for a holistic approach to commercial property development and management.

The Convention, which culminates in a Convention dinner, aims to empower stakeholders with novel points of view to consider in their upcoming projects, and a host of new acquaintances to do business with and form long-lasting business relationships based on a mutual commitment to improving our country’s commercial property landscape.

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KEYNOTE SPEAKER

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TOPICS OF DISCUSSION

MEET SOME OF OUR ENGAGING SPEAKERS

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legal update

City of Johannesburg Land Use Scheme 2018: New requirements for land use and development The City of Johannesburg Land Use Scheme 2018 was published by the City of Johannesburg Metropolitan Municipality (Council) on 2 January 2019 and came into operation on 1 February 2019. This Land Use Scheme is published in terms of the Spatial Planning and Land Use Management Act of 2013 (SPLUMA) and the City of Johannesburg Municipal Planning By-law of 2016 (Council By-laws), which provide that the Council must adopt and approve a single land use scheme for its entire area that will determine the rules and processes regulating the use and the extent of the development of land therein

By John Webber, Director and National Head of Cliffe Dekker Hofmeyr’s Real Estate practice, and Melissa Peneda, an associate in Cliffe Dekker Hofmeyr’s Real Estate practice. First published on Golegal.co.za, 18 January 2019

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he City of Johannesburg Land Use Scheme 2018 replaces the 16 different town planning schemes that have previously been in operation, and which applied to all properties within the City of Johannesburg.

Any consent, approval or land use right permitted in terms of one of the previous town planning schemes that were in force immediately prior to commencement of the new Land Use Scheme on 1 February 2019 shall be deemed valid under the new Land Use Scheme (provided that it is exercised by 31 January 2021), and all applications submitted to and pending before the municipality prior to 1 February 2019 shall be dealt with in terms of the town planning scheme applicable at the time of submission.

The definitions of the new Land Use Scheme are, however, of importance here. An “application” is defined as “a complete application”, and an application is only considered to be “complete” when all the information necessary for the Council to assess the application as set out Schedule 1 to the Council By-laws has been submitted to the Council.

When read in conjunction with the relevant provisions of the Council Bylaws, this essentially means that if a land use development application has not yet reached a certain stage of the submission process by 31 January 2019 (for instance, in the case of a township 12

SOUTH AFRICAN PROPERTY REVIEW

establishment, if a traffic impact assessment that was a requirement at the submission of an application has not yet been submitted to the Johannesburg Roads Agency), then it will not be regarded as “complete”, and a new application will have to be made in terms of the new Land Use Scheme.

The Land Use Scheme sets out, among other things, general conditions applicable to all erven as well as new rules relating to “spaza” or house shops, home enterprises, subsidiary dwelling units, childcare centres on residential erven, land to be used for religious purposes, and conditions relating to agricultural holdings and farm land The Land Use Scheme sets out the various Use Zones that are applicable to land and buildings in the City of Johannesburg, and lists the purposes for which such land may and may not be used, as well as the purposes for which such land and buildings may only be used with explicit consent of the Council.

The Land Use Scheme sets out, among other things, general conditions applicable to all erven as well as new rules relating to “spaza” or house shops, home enterprises, subsidiary dwelling units, childcare centres on residential erven, land to be used for religious purposes, and conditions relating to agricultural holdings and farm land.

This approach is meant to introduce a departure from the inconsistent approach of the previous 16 town planning schemes, which date back to the apartheid era. Town planning schemes for certain areas prescribed more stringent requirements for land development than others. The new approach introduces an integrated and uniform framework of conditions of use and rules for development that are applicable across all regions falling within the City of Johannesburg.

The new Land Use Scheme introduces several new rules and processes that are intended to promote economic development, attract investment, and represent a more inclusive and integrated approach towards the regulation and enforcement of land use and development rules in the City of Johannesburg. Developers would be well advised to carefully consider the new Land Use Scheme’s provisions, together with SPLUMA and the Council’s By-laws, in preparation of all envisaged land development applications since its commencement on 1 February 2019.

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legal update

Companies Act amendments to include business rescue relief for landlords It is neither quick nor easy to get an amendment to commercial legislation. After five years, we appear to be in the last stages of achieving an amendment to the Companies Act, which will give landlords a preferent claim against a tenant under business rescue for the expenses paid public utility services by the landlord on behalf of the tenant under business rescue

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his will relieve the almost inevitable situation in which landlords, unlike other creditors, are obliged to pay out money on behalf of financially distressed tenants under business rescue for utility services such as rates, electricity, water and sewerage to prop up the failing company with little hope of recovery.

Thus, where the landlord, as part of the agreement with the tenant, pays any utility services on behalf of the tenant while under business rescue, the total amount paid will be considered “post-commencement financing” provided to the tenant, which will give the landlord the right to a refund of the amounts paid ahead of other creditors. The fairness of this provision is obvious.

The latest version of Section 135(1A) which has been urged on the authorities

by SAPOA will read: “To the extent that any amounts due to the landlord subject to a contract by the company which is placed in business rescue proceedings, are not paid to the landlord during business rescue proceedings in respect of and not exceeding the aggregate for all public utility services, such as the company’s share of rates and taxes, electricity, water, sanitation and sewer charges paid by the landlord to third parties during the business rescue period referred to in this section, such amounts will be regarded as post-commencement financing as contemplated in Section 135(1).”

The right of a landlord to recover the aggregate of all public utility services paid on behalf of the tenant under business rescue will also give the 14

SOUTH AFRICAN PROPERTY REVIEW

landlord a vote in meetings with creditors on the basis that their voting right is proportionate to the amount paid, is a major step forward as a result of the dogged persistence by SAPOA of a landlord’s rights.

There are other proposed intended changes to the Companies Act coming down the line, which you should be aware of.

The suggested amendment to Section 25 recognises the frustration caused by delays in the Companies and Intellectual Property Commission (CIPC) offices. If the CIPC does not respond to a proposed amendment to a company’s memorandum of incorporation which is lodged with it within 10 business days, the amendment will take effect immediately, unless some other date of commencement is stated in the proposed amendment

The Companies Tribunal will now play a role in mediating or adjudicating on issues relating to broad-based black economic empowerment, which means that companies need to take their responsibilities seriously once the amendment is in place.

The suggested amendment to Section 25 recognises the frustration caused by delays in the Companies and

Intellectual Property Commission (CIPC) offices. If the CIPC does not respond to a proposed amendment to a company’s memorandum of incorporation which is lodged with it within 10 business days, the amendment will take effect immediately, unless some other date of commencement is stated in the proposed amendment.

There is a keenly awaited amendment to the way in which loans or other financial assistance can be given by a holding company to its subsidiaries.

Financial assistance of this nature will no longer need to be backed by a special resolution of shareholders. The board will have to be satisfied that, after providing the financial assistance, the holding company will remain solvent and liquid, and that the terms under which the financial assistance is given are fair and reasonable to the holding company. This amendment will save a great deal of unnecessary time and money, particularly for public companies who want to fund their subsidiaries. A similar regulatory burden will be relieved by the amendment of Section 48. A special resolution will not be necessary when the company implements a pro rata share buyback for smaller companies where the shareholders are also the directors.

In order to align ourselves with international requirements, particularly for the prevention of money laundering, all companies will be required to maintain and disclose a register of beneficial owners of their shares. A beneficial interest includes the right to receive any dividend, to exercise votes or other rights attaching to the

legal update It has been found that the report of social and ethics committees to their boards has not fulfilled the outcome that was hoped for. Many of the social and ethics committee reports are patently downloaded in exactly the same words from other companies’ reports, and there is no proper attention being given in many cases to the very important function of this committee shares, or the entitlement to dispose of or direct the disposal of shares. Share registers will have to be expanded to promote transparency in relation to the control of companies and the distributions made by companies.

It has been found that the report of social and ethics committees to their boards has not fulfilled the outcome that was hoped for. Many of the social and ethics committee reports are patently downloaded in exactly the same words from other companies’ reports, and there is no proper attention being given in many cases to the very important function of this committee.

The amendment will therefore require companies with social and ethics committees to present a report that has been “externally assured” to the shareholders at the annual general meeting.

Social and ethics committees are supposed to look at the company’s commitment to social and economic development, anti-corruption, B-BBEE, employment equity, good corporate citizenship, labour and employment conditions, consumer relationships, and a sustainable environment and commitment to health and public safety. It is not clear how the accuracy of the report can be “externally assured” because the external party consulted is unlikely to know the details of the company’s activities or lack of activities in these fields.

The amendment will also require that half of the directors who are members of this committee should not be executive directors nor executive directors employed in the previous year.

The disclosure of the remuneration and benefits of directors and prescribed officers remains a matter of debate.

Shareholders and the public want to know how much money directors and senior managers are being paid. The directors and senior managers, on the other hand, want some privacy with regards to their personal information.

The amendment will require not only the earnings to be disclosed but for the directors and officers to be named as well. The authorities have not yet worked out how they will balance transparency and privacy, and the final wording is awaited. The directors’ remuneration report for each financial year will have to be approved by the board and presented to the shareholders at the annual general meeting.

Transparency regarding company documents went too far in early drafts of the amendments. The suggestion was that Section 26, relating to access to company records, would be extended so that, on payment of a fee, members of the public would get access to notices and minutes of annual meetings, communications to shareholders and minutes of all shareholder meetings.

They did not realise that making this change would give access to private and commercially sensitive information of companies. The authorities have now committed to limit the public’s access to company documents so that third parties do not get access to any company’s commercially important private information.

An existing bureaucratic nuisance will be eliminated. It will no longer be necessary to get the consent of the Takeovers and Regulation Panel to the merger transactions of private companies below a certain threshold.

Until now, these transactions have been notified only to get an exemption, and they are of little relevance to the Panel.

This change will save everyone a lot of time and unnecessary communication.

Fortunately, a proposed amendment of Section 38A takes us back to where we were under the previous Companies Act. A court will again have the power to validate the creation, allotment or issue of shares which are otherwise invalid. In addition, companies required to appoint an auditor must do so at a shareholders’ meeting (not necessarily the annual general meeting). The coolingoff period for auditors’ appointments has realistically been reduced from five to two financial years. This recognises that there is not an endless pot of auditors with the experience required to take on these functions.

There are other provisions tidying up aspects of employee share schemes, forcing companies to change their name when ordered to do so, clarifying the powers of the Companies Tribunal, and clarifying the alternative disputeresolution mechanism.

There are other provisions tidying up aspects of employee share schemes, forcing companies to change their name when ordered to do so, clarifying the powers of the Companies Tribunal, and clarifying the alternative disputeresolution mechanism The Financial Reporting Standards Councils will have the power to issue financial reporting pronouncements that are binding on companies and intended to align us with international reporting standards, adapted for local circumstances provided the pronouncements are not in conflict with IFRS. The DTI is pushing these amendments through. They have been delayed somewhat by the recent election, but it is hoped they will be given priority and brought into law in the next few months, once Parliament is in operation again.

Patrick Bracher Norton Rose South Africa Inc SOUTH AFRICAN PROPERTY REVIEW

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Mafonti Morobi Education Officer T: +27 (0) 11 883 0679 F: +27 (0) 86 276 1865 E: eduofficer@sapoa.org.za W: www.sapoa.org.za University of Johannesburg (UJ) Dumisani Ndumo T: +27 (0) 11 559 2427 E: property2@uj.ac.za SOUTH AFRICAN PROPERTY REVIEW

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A DYNAMIC & REFRESHED COURSE FOR THE WORKING PROFESSIONAL COURSE PROFILE & OBJECTIVES

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post-election comment

Election results set to boost commercial property prices and lower yields With the elections over and the results announced, we can start to expect more movement in the commercial property sector across South Africa. Along with decreasing property vacancy levels, the election results should yield a positive capital inflow of foreign investment and bring stability to the interest rate John Jack, CEO of Galetti Corporate Real Estate

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e can expect prices across the commercial property sector to rise while the yields improve over the next 18 months. This will be driven by an increase in positive investor sentiment as well as occupier confidence, causing more movement in the sector.

During the lead-up to the elections, investors were cautious of an upset – and, given the geared nature of the asset, of possible significant capital loss. With increased political clarity and the elections now out of the way, we can expect investors to once again transact, which will be a much-needed shot in the arm for the commercial property sector.

Improved business confidence Should Cyril Ramaphosa remain at the helm of the ANC in the long term, I believe that we can expect an improved business confidence index based on his “pro-business, pro-capital” narrative.

This will lead to occupiers taking steps to actively invest in or expand their operations, which will directly impact demand for space and, therefore, the entire commercial property sector.

There is usually a lag period, which would see us waiting for at least six to 12 months to see any impact in take-up. We did, however, see an immediate up-tick in enquiries for space as soon as the elections started to show results, which was largely in line with expectations.

The ANC’s win could give Ramaphosa the mandate to roll out his plan to boost the industrial sector with incentives.

However, the government is typically 20 18

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Listed property sector The listed property sector has just come out of one of the worst 12 months in its history, with significant revisions already seen. A recovery in the market in general would see good returns, and if business confidence does indeed improve, we can expect the REIT sector to recover over the next few quarters.

Questions around Eskom

Galetti Corporate Real Estate CEO John Jack

slow to move, so one would imagine the market would only see this type of transition happen in the next 18 to 24 months. When the rollout does happen, we can expect it to have a significant impact on the sector as well as on job creation.

Market movement Some of the key commercial property investment strategies leading up to the elections included a largely “wait and see” approach. Those properties that did trade, did so at a discount. I anticipate that the impact of the elections will only be felt by the commercial property sector towards the end of the year, given the length of time it takes for the next commercial lease event to present itself.

Investors who grabbed opportunities during the lead-up to the elections will be well poised now as the market begins to gain momentum.

With the Eskom situation remaining fragile, what is needed right now is capital spend to bring the infrastructure up to spec. In order for the government to make meaningful improvements to Eskom, the country’s GDP must grow – and for this to happen, we need a clear policy, a stable political landscape and increased business confidence.

Ratings agencies I believe the ANC’s relatively strong victory (although reduced) will fill the ratings agencies with confidence, and I’m hopeful that South Africa can fight off another downgrade. A stable rating gives investors breathing space, and allows them to sweat their assets and attract tenants on the basis that South Africa maintains its stability and growth on the back of the government’s plans.

Looking into the future, commercial property across the board should benefit from a positive election outcome. Those investors who took advantage of the soft yields offered in the market in the run-up to the elections stand to gain the most, with the industrial sector being one of the quickest to react.

JOIN US ON AN ARCHITECTURAL TOUR OF THE V & A WATERFRONT

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JUNE 2019

Time: 09h30 – 16h00

Bus leaves the CTICC promptly at 09h30 10:00 – 11:00 Battery Park Tour • Include a historic tour of Amsterdam Battery • Urban planning discussion • Future plans for the V&A 11:15: - 13:00 Silo District Tour • Talk on the desalination and cooling plants process • Silo District architectural tour • Walk through common areas of the hotel and office buildings 13:00 – 14:00 Lunch Radisson Red Roof Top Tucked in the heart of the V&A Waterfront, RED Roof is more than just a hotel bar. Soak up the sunset over Table Mountain.

Sip on a drink of your choice and relax.

14:00 – 15:30 Zeitz MOCAA Tour The Zeitz Museum of Contemporary Art Africa is the largest art museum in Africa, and the largest museum in the world showcasing the art of Africa and its diaspora. The museum is dedicated to researching, collecting, and exhibiting this art, and houses an impressive collection of work from all over the continent and beyond. The exhibition space covers 6,000 square meters over nine floors, with 100 gallery spaces.

Register before 11th June 2019 RSVP to Marija Spasevski: marija@soafrica.com

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YOU ARE INVITED TO THE SAPOA CONVENTION DINNER JOIN US FOR A SPECTACULAR EVENING

Be bold Be alive Be transformed Be vibrant COME IN YOUR FAVOURITE LOOK AND BE A POP OF COLOUR

20TH JUNE 2019 19H00 CTICC – HALL 10 COST: R1000 excluding vat per person R1200 excluding vat per accompanying person

RSVP to Marija Spasevski: marija@soafrica.com YOUR HOST

Convention build-up

Get ready to start thinking – and acting As the SAPOA Annual Convention & Property Exhibition draws ever closer, we look forward to 18 June by speaking to some of this year’s keynote speakers, as well as to the Convention Committee Chairman (and SAPOA President Elect) David Green.

This year’s line-up is truly impressive, and will feature South African-born politician Lord Peter Hain – an anti-apartheid activist, UK MP and Cabinet Minister and a member of the House of Lords – as the lead keynote speaker. The line-up also includes several high-profile South Africans: Professor Jonathan Jansen, a member of the Faculty of Education at Stellenbosch University; Nedbank senior economist Nicky Weimar; trend analyst Dion Chang, the founder of Flux Trends; and Sizwe Mpofu-Walsh, an author, musician and activist who is also a Fellow at Wits University

By Mark Pettipher

Challenging times, understanding the issues, planning the future Now that the elections are behind us, it’s time to look forward to a more positive, brighter future – even though the results were in line with what most people had anticipated.

So says David Green, SAPOA’s Convention Committee Chairman and President Elect David Green, SAPOA’s Convention Committee Chairman

“T

he challenges we face haven’t gone away just because we’ve gone through the election process,” says Green. “Many people felt they had to wait to see the outcome of the elections before making any major real estate or other decisions. But the outcome was predictable – and now we all want to forward positively.

“Like any business-driven industry, the property industry is power-hungry. It needs to adapt to the changing climate.

There is a hunger for renewable energy sources to be fast-tracked, for processes to be implemented and, importantly, for cutting through red tape to enable us to proceed with our mandate to produce cheaper, reliable energy supplies.

“Now that the government is in place, we would welcome a ruling party that is clearer on its policies. This would go a long way towards securing what the international market thinks about further investment in South Africa. As always, we are reliant on our government being 20 22

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transparent about issues such as land expropriation without compensation, as well as what it will offer in terms of stimulus packages to stimulate job creation and future investment.

“Property is a long-term asset class.

Historically, we have seen downturns in our market before, from which we have recovered. But the road to recovery from the current downturn will be a longer one than some might expect.

“Regardless of economic downturns, the property industry has always responded positively – and very quickly – to changes, adapting to the way people work, embracing the challenges in the market and welcoming new technology.

We are witnessing the growth of sectors such as collaborative workspaces, and leading property players have begun to recognise that their existing tenant bases are the key to their success. They need to grow and nurture those relationships in order to retain this income stream.

“Mall owners have seen a drop in consumer spending globally, and this has also been the trend in South Africa.

The consumer is spending more wisely and I expect that to continue. There are still opportunities in retail development, specifically in the rural areas and in taking retail to the consumer. However, larger malls will continue to draw the bulk of spending – as long as they engage with their clients, and offer entertainment and other activities to attract the communities they serve.

“The trend towards online shopping is not necessarily going to have a huge effect on South Africa’s malls right now – but retailers are aware that they need to follow it, and mall owners know that they will need to adapt their marketing strategy accordingly.

“From a sector point of view, the industrial property market will continue to grow, supported by online shopping trends, which will play a part in boosting warehousing demand. We can also see increased interest in co-sharing of warehouse space as landlords and existing tenants try to maximise their income or, conversely, reduce their overheads by taking in additional cosharing warehouse users.”

Convention build-up Green is also the Chief Executive Officer of ProAfrica. While the company is expanding through Africa, it is also facilitating the domestic occupiers’ market in realigning its exposure to market forces. “As such, we are seeing a definite trend of occupiers not wanting to take on long-term lease commitments,” he says. “Additionally, occupiers require more efficient working spaces while also seeking maximum flexibility from their current leases commitments.

“From a tenant’s perspective, it is costly to relocate, which means their first option should be to negotiate better lease conditions, and to look for other efficiencies and savings available at their

current location. For their part, landlords also want to reduce vacancy rates and tenant churn, so it may be that negotiating a downsize or a more open workspace and facilitating joint expenditure on essential upgrades (such as the investment in renewable energy infrastructure and other efficiencies) goes a long way towards retaining existing tenants.

“Understanding growth and market trends as well as the downturn in our economy means being aware that any anticipated economic upturn is going to be a potentially slow process. The current trend for most companies is to downsize, consolidate and even

outsource services. Landlords need to make sure that their tenants are happy – with everything from their lease terms to essential maintenance – and to be mindful of the tenants’ need to cut running costs.

“With a number of larger corporates consolidating their office leases and downsizing their real estate requirements, lower-grade buildings are suffering the brunt of current vacancy rates.” But here Green sees a rising opportunity to fulfil the renewed emphasis for living closer to work: “A positive outcome would be for older office blocks to be converted to residential use. This is certainly the space to watch.”

Education, intellectual capital remains key South Africa’s deficient education system is the single greatest obstacle to socioeconomic advancement, transformation, and the reduction of unemployment, poverty and inequality

“U

niversities do not produce enough skilled people across all disciplines,” says Stellenbosch University’s Professor Jonathan Jansen damningly. This raises the question: what are skills?

“If in a 21st-century economy all we are doing is producing people with the limited skills needed to be an engineer, accountant or teacher, then we have a problem,” says Jansen. “I’d like to think that universities don’t just train people to deliver their discipline competently; rather I’d like to believe that we teach people to think. As an educator of future educators, I believe education needs to be looked at in a social science context, with a broader understanding that the principles of curriculum planning are about the transference of knowledge.

“New-generation educators are taught to have skills that enable them to teach using new-generation tools such as artificial intelligence, machine learning, robotics and computer aids. If your notion of skills transference through education is the ‘narrow’ objective of being a particular person in an organisation, then you’re

out of touch with reality. We need to be educating young people to have crosscutting skills, and to have the ability to communicate, engage in critical thinking and be able to work in a team.”

Jansen uses his other “home base” to illustrate his point. “In Mountain View in California, employers taking on young people are looking beyond the basic set of skills. They are more focused on the candidates’ ability to do other things.

“In South Africa, getting a job is not so much about the qualifications and passes a student may have – it’s more about the networking and connections a person may have. As a rule, a broad set of skills and networking from A to B should be a winning combination in our modern 21stcentury society. The sad thing is that, in South Africa, we are not producing enough young people who carry the broad set of skills required.

“Even though we likely spend more on education than the US and the UK as a percentage of our national GDP and the national budget, we’re not able to turn our resources into results. Eighty percent

Professor Jonathan Jansen, Faculty of Education at Stellenbosch University

of our schools are underperforming, which is ultimately a drain on the economy.

“These are enormous issues; and they are well documented. The Human Capital Theory points us to a direct correlation between investment in education and the outputs both at individual and social levels. Until we can fix that in our 29 000 schools, we will continue to struggle in every domain.”

There are solutions to the crisis, he says. “We need to go back to grassroots level. Teachers are paid; as such, they have a contract with the country and they need to show up. Unions need to be curbed, and the responsibilities of teaching and advancing education need to be taken more seriously. We need a government that understands that we are in crisis; one that goes beyond political rhetoric.

Take this, for example: how difficult is it to replace pit latrines at the 3 000 schools that still have them?

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Convention build-up “If the government is not willing or able to take control, then the private sector can, and should, play a major role in helping to educate our young.

“There is no end of talent out there, and there is a huge amount of integrity in the private sector determined to make a difference not only in the construction of schools, but in social and affordable housing as well.

“The best solution would be for the private sector to partner with the government. There are enough people

in government institutions who are well versed in their field of expertise and are prepared to collaborate with the private sector. We just need an enabling government to take heed.

“We also have to deal with another unpleasant reality of our country: youth migration. The best of our young talent is leaving our shores. Their reason? They don’t feel safe, and the levels of crime according to the latest stats explain why.

In its recent election campaigns, the government has not really given them

a sense that there is place for them in the country – and with the latest economic downturn, job security is playing a major role in decisions to go or stay.

“We look forward to see whether policy will change and become more inclusive. As it stands, our education system is not good enough to keep young families in South Africa. We cannot dwell on the 25 years since the advent of the ‘new’ South Africa. The government of the day is still failing to convince people that they belong.”

South Africa’s economy is still plagued by policy uncertainty and corruption The JSE overall index declined four percent year-on-year in 2018, while the listed property sector lost almost a quarter of its value. The only two asset classes that have beaten inflation have been high-income funds and offshore assets

N

edbank senior economist Nicky Weimar is brutally honest about the country’s “Ramaphoria”. “President Ramaphosa’s early tenure has not made much difference to policy certainty or the economy’s performance, which has been patchy and weak for several years,” she says. “GDP growth likely contracted further in the first quarter of 2019, and the weakness has been widespread.

“For the past five years, since 2014, we have seen a similar pattern: we have been on a slow slide to lower ground.

The country’s average annual five-year growth rate is only about one percent at the moment, and there has been no change since Ramaphosa took over the Presidency a year ago. In fact, we started 2018 in a recession, and while we had a small recovery in the second half of the year, it had more to do with the low base of the first half than any underlying confidence or upward momentum.

“Many businesses are genuinely concerned about the developments in the country, but we remain optimistic that President Ramaphosa will give the ‘green light’ to the National Prosecuting

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Authority to deal with corruption, and allow us to believe that there will be greater accountably in Parliament.

“South Africa’s problems run far deeper, though – a result of the past 10 years’ bad and misguided economic policies. It does not help that South Africa is constantly entertaining radical ideas.

Even though these ideas may not have been transformed into legislation or regulation, the mere fact that we are considering them undermines business and consumer confidence.

“All this uncertainty, coupled with a dysfunctional labour market and inadequate, unreliable and expensive economic infrastructure (mainly provided by the country’s state-owned enterprises, which are operationally inefficient and financially crippled), adds to the cost of production, convincing both foreign and local capital to consider investing elsewhere. As a result of driving up the cost of production, these ills make it difficult for companies to make money.

Real earnings on the Johannesburg Stock Exchange have deteriorated markedly over the past five years.

Nedbank senior economist Nicky Weimar

“The reality is, the President needs to deal with South Africa’s structural issues, and with that come painful decisions. In the short term, there is a cost. Restructuring requires retrenchment and reorganisation.

The displacement of people is unpopular, which is costly to politicians.

“Another solution is to open the market to the private sector, which allows the process to happen indirectly by creating competition and ensuring that only the strong and agile survive.

The outcome will be the same: there will be labour unrest, and pressure will be put on politicians to change the route.”

For real change to happen, Weimer believes we need a strong leader with broad support and legitimacy. “The last time we had a major structural change was between 1994 and 2004,” she explains. “That’s when we joined the world economy, opened our markets, dropped tariffs and allowed foreign competition into our country. That structural change also had displacement issues – but it was undertaken by a leader

Convention build-up who had legitimacy. The early government also managed expectations really well.

“We are encouraged by the honesty of our current President, but he will have to deal decisively with the ongoing challenge of restructuring the stateowned enterprise – and he will have to find ways to reduce the frightening unemployment figure, which has been reported to be 27,6%. This, along with clarifying the policy on the expropriation

of land without compensation, is what’s hampering business confidence.

“While we need effective land reform, the bottom line is that there will probably be a gradual approach to the more difficult issues, and that it will yield slow results. This means that this year will be another lost year, with a growth rate of about 0,9%, going to 1,3% next year and possibly 1,6% in 2021. South Africa needs growth to be more in the region

of five or six percent in order for there to be any significant positive impact on the economy.”

Weimer predicts that there will not be much change in the value of the rand, nor will there be much change in the interest rates, which will remain flat for the next three years and keep a certain level of economic growth. “But what makes economic sense in South Africa doesn’t necessarily make political sense.”

No short-term solution to South Africa’s woes Economic growth has remained low in the last 10 years.

The longer we are in decline, the more difficult it will be to get out of it, especially in a time when overall global growth is not as strong as it once was

D

r Thabi Leoka is a board member of Corruption Watch, and part of the PIC Commission of Enquiry appointed by President Ramaphosa, as recommended by the former Reserve Bank Governor Gill Marcus.

Leoka kicks off our conversation by talking about South Africa’s economic decline. “We don’t have the support of global growth to act as a buffer while trying to enforce disruptive reform,” she says. “You don’t want to ‘yank’ the economy too hard because it will cause a recession – but at the same time, South Africa hasn’t dealt with its structural issues for the past 25 years!

“The latest unemployment figure of 27,6% is only part of the truth. The broader figure is closer to 38%, and includes those who have stopped looking for a job. We cannot begin to grow the economy when almost 40% of the workforce is unproductive and not contributing to economic growth.

“There is an immediate need for the government to focus on unemployment and prioritise jobs for the unskilled, which are highly labour-intensive. This will get the basic micro-economy moving, but it’s easier said than done.

“Looking at the nearly 40% of South Africans who have stopped working, we find that a large majority are the youth,

aged between 15 and 24. We are talking about 33,12% of people who are not in the education system, not in employment or any form of training. The government needs to focus resources less on smart people and more on initiatives such as Youth Employment Services (YES), which recognizes that about six-million young people are shut out of the economy. YES is driven by business and fully supported by the government.

“The formal economy is not large enough to absorb all of the educated, and it requires certain skills sets that young educated South Africans do not have. Corporate South Africa should intervene at tertiary level (and it is, to some extent), but where government needs to get it right is basic education.

Our current education system does not equip our youth to be entrepreneurs or to think for themselves.

“Statistics tell us that if 100 pupils start school, 60% may write matric and only four percent will get a degree in four to five years. This is frighteningly sobering.

Greater emphasis needs to be placed on early childhood learning and basic education, leading to enrolment in TVET colleges and technikons. Both offer practical artisan training with hands-on experience as well as applied theory.

What this implies is that the educated

Dr Thabi Leoka, member of Corruption Watch

elite will have papers that will get them through the door – but they will be of no use until they have gone through some form of in-house training or internship.

“SMMEs are often owned and run by people who have not excelled academically, and are often looked down on. There needs to be a mind shift away from stigmatising people who don’t hold a tertiary qualification. This is where ‘big’ business can help. Mentorship can aid an SMME’s growth. By partnering with them at the beginning of a project, the SMME could be the company that sustains the project long after the initial initiative has ended.

“Financial and banking services are generally averse to taking risks and do not back SMMEs. Perhaps that needs to change. By offering mentorship and business guidance, those services will see a return on investment in the long run.

“Where South Africa needs to grow is in sectors that are tradeable. These sectors include mining, agriculture and manufacturing, and each of them offers high revenues while utilising relatively low skills levels.”

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Convention build-up South Africa has signed the African Continental Free Trade agreement with 49 of the 55 African countries. Leoka hopes that our country will use this to capitalise on opportunities, and is concerned that currently only 14% of our total trade is inter-African. She also has firm ideas on this being the reason our economy is not growing: we are operating in isolation and not trading significantly with our neighbours. “When the world economic crisis of 2008 came about, we were hit very hard because we relied on trade with Europe. Europe, the Asian countries and the Americas all had inter-trade agreements, so they had a buffer against the worst effects of the financial crisis.

“With a statistic of 70% of South Africans destined to be living in an urban environment in the next few years, we need to be developing more rural opportunities to stem the migration to our towns and cities, or face the danger of trying to absorb the 40% unemployed into the fabric of our urban society.

Failure to address this crisis could result in further urban decay.”

Critical of government policy, Leoka highlights BEE constraints. “To encourage foreign investors, the government also needs to address the ambiguities that have been brought about by the country’s BEE policy,” she says. “Many foreign investors complain that their BEE partners are not qualified and are

simply a drain on resources. Here the government needs to improve its vetting process and re-look the vetting of the companies that have been identified as potential FDI partners.

“Having been given the next five years to get things on a path that will grow our economy, President Ramaphosa has a battle on his hands. South Africa’s problems will not be fixed in the next five years, or even 10. Foundations and reform need to be laid down, education and employment need to be stimulated, hope, trust and policy clarity need to be established. The reality is our society will only reap the benefits in 15 to 20 years.

The question is, are South Africans patient enough to wait?”

Following trends in retail: Is it make-or-break time?

Can South African retailers and asset managers adapt and respond to new shifts in demographics, attitudes, technology and consumer preferences?

D

ion Chang is a trend analyst and the founder of Flux Trends, and he has plenty to say about what he calls “the perfect storm that is brewing”. Along with Head of Strategy at Ebony and Ivory Andrew Barnes, Chang will be leading the panel discussion at the Convention.

“Andrew will focus on a globalisation theme, while my focus will be more about the here and now,” he says. “The aim is to, in as short a time as possible, give two comprehensive and separate approaches to the subject.

“A burning question when looking at purchasing behaviour and the decline in retail sales, is why we are building more and more retail malls. ‘The perfect storm’ will highlight everything, from our sluggish economy and the oversaturation of retail space to the impact of online shopping and the change in consumer behaviour, as well as looking at the advent of a sharing economy and what that entails.

“It is important for us to understand the shifting undercurrents in the retail sector and to be objective. At the same 24 26

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time, we need to throw up some red flags, such as customer expectations, for example. The last customer journey has been digitised and on-demand – people want a combination of delivery and ‘click and collect’.

“There are trends that we will examine during the discussion, such as the evolution of retail and its future, and the fact that it’s becoming more experiential.

Retailers should not confuse experience with entertainment – this is not so much a transactional relationship as a more transformative one, where there is real value-add.

“Younger shoppers are more inclined towards the choices of virtual shopping, so stores that have little or no stock rely on experiential in-store augmented reality to lure in young customers.

“Communication comes under the spotlight as well. We will look at a new trend – ‘Free From Movement’ – and how it is being promoted. Consumers in developed countries are moving away from processed food and drinks, and are looking for products that are perceived

Dion Chang, trend analyst and founder of Flux Trends

to be more ‘natural’. It is an umbrella term relating to any food or drink that’s been designed to exclude ingredients to which customers are either allergic or intolerant.

“Two decades ago, the concept of a mall was represented by a town square.

Digitisation has obliterated that concept.

Larger brands are questioning the need for multiple outlets, when a combination of a mega-flagship store and e-commerce works just as well, if not better.”

“E-commerce and online shopping might still be in their infancy in South Africa, accounting for about two percent of retail turnover, but the local consumer market technically only consists of the 12% to 15% of the population who are taxpayers. So we’re talking about two percent of a smaller consumer market.

That reframing is significant.

Convention build-up “And while it is a smaller consumer group that shops online, e-commerce has already changed their shopping habits: they pre-shop online (i.e. do their

research), and when they do go to a mall, they become ‘stealth bomber shoppers’ (i.e. park as close as possible to their preferred outlet to get in and out quickly).

This kills the concepts of window shopping, browsing and impulse buying – which, in essence, is what shopping malls were designed for…”

South Africa faces another year of political uncertainty Two decades of rainbow mythology have soothed South Africa into a state of chronic complacency. We were sold a lie: that the vote would resolve our country’s fundamental problems, if we only had the patience to wait. Somehow, over the past two decades, we’ve replaced a vision for dramatic social change with another, soaked in the “tranquillising drug of gradualism”

T

hese first few sentences from his book Democracy & Delusion best describe how Sizwe Mpofu-Walsh, a Fellow at Wits University, musician and outspoken political commentator, feels about our beloved South Africa. “Deeply conservative dogmas are holding South Africa back,” he writes. “They transcend traditional political divides and enjoy wide dissemination through a sophisticated infrastructure of power. Confusingly, these creeds are draped in the language of ‘liberation’, ‘non-racialism’ and ‘prosperity’ while serving the interests of the narrowest elite.

They can be summarised in 10 myths which, together, constitute South Africa’s democratic delusion: ● Living conditions are steadily improving. ● Free education is unachievable. ● Land reform threatens stability. ● State participation in the economy is dangerous. ● Zuma’s legal woes can be ignored. ● Racial justice is unjust. ● The ANC liberated South Africa. ● South Africa has a free media. ● Elite schools benefit society. ● South Africa has reckoned with Marikana.”

Mpofu-Walsh describes himself as a “younger voice, emerging in the political discourse that analyses the status quo”.

“Twenty-five years after the birth of South Africa’s new democracy, we don’t

have a young enough Parliament,” he says. “There is no young voice of reason.

The promise of the 1994 moment has largely evaporated. While President Ramaphosa has been given the mandate to preside over the country for the next five years, I’m sceptical that he will be able to reverse the decline.”

He doesn’t hold out much hope for the government’s agenda. “They may be able to stem the flow of corruption and dissatisfaction in the short term, but all they will be doing is putting ‘sticky plasters’ on the problems.

“There is an interesting generation of young MPs waiting in the wings of Parliament, who will hopefully tread things up across all party lines. Interestingly, of the 10 000 people who were in the running for representative office in the recent elections, the vast majority were between the ages of 30 and 40 – but the minority who are above 60 tend to dominate the major decisionmaking structure.

“My hope is for a more competitive political system, in which we get our constitutional institutions of accountability to start working, as opposed to just praying that the ANC NEC will arrive at wise decisions. If we could have a more competitive parliamentary system, one with stronger accountability and transparency, we would have a chance of climbing out of the malaise that we’re in right now. The threat of losing power needs to be real – it is the true source of accountability in a democracy.

Sizwe Mpofu-Walsh, author, activist and Wits Fellow

“Part of our ills is due to the fact that there is a certain amount of ageism in our politics, compared to countries such as Ethiopia, which has a President in his 40s, or the democracies of Western Europe, North America and even Latin America. We can’t even imagine what it would be like to have a much younger person – someone in their 40s – as the president of South Africa.

“You ask whether five years is enough to turn the country around. The simple answer is, I don’t think so. It’s not even clear at this stage whether President Ramaphosa will win the internal ANC battle. He will probably have to placate one major faction after another.

“As a result, I think we will go through another period of ambiguity. On the one hand, there will be a sense of national hope – but on the other, the fundamentals of the economy will continue to show a decline, as is evidenced by the latest unemployment figures of 27,6%.

“A more competitive Parliament would ensure that if the ANC administration doesn’t perform, there would hopefully be sufficient oversight and accountability – led by the other parties – to keep the government alert. What is more, the younger South African is becoming less tolerant of the misdemeanours of the recent past, as is the general populace.

Government beware…”

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entrepreneur one-on-one

The transformative charm of a Ladybug, bringing construction dreams to life In the second instalment of our Property Point entrepreneur series, we interview Khanyi Mdhluli, the founder and Director of Ladybug Consulting, in a truly inspirational story of growth and determination

By Mark Pettipher

L

Khanyi Mdhluli, founder and Director of Ladybug Consulting

“

Any young woman who wants to get into the property industry needs to understand ‘grit’. She must stay true to herself, upholding her convictions and investing in them as her life’s passion.

She needs to build a good support network and always surround herself with people who have the knowledge to assist her

”

Khanyi Mdhluli t: +27 (0)11 312 0147 c: +27 (0)829317534 e: khanyi@ladybug-consulting.com w: www.ladybug-consulting.com 26 28

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adybug is the result of its owner’s property dream. “I was working at McKinsey & Company and studying for an MBA,” says founder Khanyi Mdhluli. “At the same time, I decided to renovate my home, which is when I saw an opportunity to deliver construction projects in a better way. So I created a company that would treat your asset, be it a home or an office, as if it were my own.

“Contractors often have an unfortunate reputation, and I wanted to change that perception. From the outset, I wanted my company to be known for integrity, reliability and quality workmanship. I felt there was an opportunity to simplify the client interaction, to be transparent and, above all, to be honest with clients.

“Chances are that, at some point, every person will want to build or renovate their home or workspace, or alter it in some way. I have flair and an eye for enhancing properties – and, importantly, I have a background in project management. What’s more, I’m a woman, making a difference in an industry that is dominated by men.”

Background Mdhluli was a genetics undergraduate at Wits University when she realised the field wasn’t the right fit. She decided to expand her studies to include business administration and management, before migrating to operations management and project management.

“My interest in genetics was piqued when I first saw a representation of the double helix at a Wits University open day,” she says. “I look quite different from the rest of my family, and this drew me to studying genetics. It wasn’t very long before I realised that I don’t belong in a lab… Still, I finished the degree.

“Because I prefer to engage with people rather than stare into a microscope,

I looked for a discipline that would allow me to work with people. Wits offered a postgraduate diploma in management, which allowed me to segue to management studies. Since I’ve always been drawn to various business processes, my electives for my MBA studies included process project management, entrepreneurship and storytelling.”

Founded in 2015, Ladybug evolved into an NHBRC-certified construction, renovations, tenant installations and project implementation company that assists residential, commercial and social sector clients with the implementation of specialised construction projects. Ladybug started off with small-scale renovations in private residences, and was soon running multimillion-rand residential renovations and tenant installations in Gauteng.

A look at ladybugprojects.co.za online and @ladybug_projects on Instagram highlights the diversity in clients and scope, showcasing a multidisciplinary, technically skilled team spanning across greenfields construction projects, residential renovations, beauty spa tenant installations, office installations, project management and landscaping. The company’s philosophy is about bringing people’s construction dreams to life while making a difference in its employees’ lives.

It is 100% black female-owned.

The biggest challenges “I wouldn’t call these challenges, but rather disciplines or procedures that I cycle through on a regular basis,” says Mdhluli.

“The first is to channel the sales engine, and to get new business in. I spend the majority of my time on this function. We get most of our business through word of mouth, but we definitely need to generate more interest in the company and increase our conversion rate.

entrepreneur one-on-one “The second is to manage the team.

Ladybug has eight core employees, and we bring in contractors as and when we need them. I engage with the team constantly to find, directing constructive solutions and refining our projects. The process is collaborative and systematic.

“The third function revolves around dealing with operations. Our key aim is to ensure our clients are happy with our solutions, which means we need their buy-in from the get-go – to our vision for their project, and to the quality and excellence that we’re proposing. Everyone involved needs to understand that we’re building dreams and making a difference by employing the right people to carry out the work.”

The Property Point Entrepreneur Programme

Learning from experience

Role models

“Any young woman who wants to get into the property industry needs to understand the concept of ‘grit’,” says Mdhluli. “She must stay true to herself, upholding her convictions and investing in them as her life’s passion. She needs to build a good support network and always surround herself with people who have the knowledge to assist her.

“Crucially, if you’re going to play in the property space, you’ll need access to capital. There are three ways to do this, known as the three Fs – friends, family and funders.

“Finance comes in many forms. You can seek assistance from friends who’ve been down a similar path, who know what you’re going through, and who understand how crucial it is to help one another succeed.

“You can often find opportunities by networking with like-minded people who are already circulating money in the community, and who will look out for you.

Don’t let pride prevent you from telling others when things aren’t going well.

Community members can be surprisingly sympathetic, and will often advise and support you when you most need it.

“There is also the more traditional route of acquiring venture capital, or a loan from a financial institution.

Whichever way you go, make sure you do the graft and produce a decent, wellthought-out business plan.”

While there are many successful women in the property industry, Mdhluli is most inspired by women who take on a task to make a difference, persevere in it, and thrive. Oprah Winfrey is one such person and, closer to home, so is Thuli Madonsela, who took on a complex role as the Public Prosecutor and gave it her all. “She knew when to be practical, she knew when to be tactical, she knew when to stick to her guns, and she knew when to walk away.”

From these role models, Mdhluli has learnt that it’s okay to fail. “But fail fast – then move on,” she says. Dwelling on the problem or on the past is unhelpful.

“But the person who’s had the greatest influence on me by far is my mother, Mercy Mdhluli. I got my grit and perseverance from her. She was a working mom with a master’s degree in public administration, and was constantly on the go. Even though she’s retired now, she will always step in to help me, whether it’s by looking at my books or answering the phone at reception.”

Ladybug got involved with the Property Point programme after doing a pitch at Growthpoint. “We wanted to launch a product at Growthpoint’s campuses,” says Mdhluli. “We were asked whether we were on the supplier database (we weren’t) – but the Head of Procurement saw merit in what we were proposing. She introduced us to Hannes de Meyer, who gave us a pretty intense and in-depth ‘grilling’! He looked at our portfolio of clients and our operational models to see whether we understood the complexity of working in the industry. He was the one to introduce us to Property Point, which became our enterprise business partner.”

Greatest career influence

offered a job at the company – and almost eight years later, I left as an associate director. David guided me at every turn.

He was my first mentor, and he helped me navigate the early stages in my career.

“The second person who affected my life profoundly was Lwazi Ngwenya (recently passed away), when I worked at Discovery. He had a beautiful mind. I was at a crossroads, having spent 11 years working as a consultant in the corporate environment, and I was ready for a change.

He helped me figure out how best to use my skills set and build up some savings to begin my entrepreneurial journey.

“As a result, I joined Hollard and committed to a year-long project with its NGO incubator unit, KYB (an organisation that focuses on the ‘foundation years’ of a child’s life), to legalise and legitimise 100 Early Childhood Development Centres in the City of Johannesburg. Working three days a week, I was involved with every aspect of the project, from dealing with architects and planners to managing the teams and networking with contractors.

These were all skills I would eventually need to develop Ladybug – which was what the other four days of the week were for. I was a budding contractor, working to establish my business.”

Vision Mdhluli’s ambition is to go beyond construction. She has registered the Ladybug Property Group, and wants to incorporate all her business interests under a single property banner. Right now she runs a recruitment agency (BLK Recruitment Agency) and a project management and consulting business, but she also buys property to renovate and resell it (or, depending on market forces, to keep it).

“I want to have a property portfolio that is sustainable, that will outlive me and that will become my legacy,” she says.

“During my internship, my first boss, David Storey, identified certain traits in me that I needed to work on before I could be offered a full-time job,” says Mdhluli. “He referred me to a number of people so I could spend time working with them and honing the best possible skills. After three months of this ‘probation’, I was SOUTH AFRICAN PROPERTY REVIEW

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opinion

Planning for digital retail: What does the future look like?

In the age of hyperconnectivity, enabling seamless experiences will be key

By Nomzamo Radebe, CEO of Excellerate JHI

T

oday’s consumers are well-informed, demanding and always in a rush. And while the death of the brick-and-mortar store has often been “foretold”, people continue to go to malls for shopping and entertainment. Retailers and property development partners have to balance contradictory messages: do we prepare for a fully digitally-driven environment with e-commerce at the centre, or find a way to merge hyperconnected digital habits with physical shopping experiences?

Seamlessly connected, 24/7 As of 2017, there were 3,4-billion Internet users in the world – 46% of the population, according to Euromonitor. By 2022, that figure will be 58%. Along with more people, more “things” will be connected via the Internet of Things (IoT). In homes, connected fridges will send notifications

when supplies are low, and may even send a grocery list to the owner’s device.

For retailers, the rise of the IoT and overall hyperconnectivity mean that consumers will be very specific in what they want, and will demand their needs be met seamlessly and instantaneously.

Retailers will have to harness technology to create a “friction-free” environment.

Embracing cash-free living Some analysts are forecasting a shift towards an entirely cashless society. In South Africa, many are already ditching their wallet as smartphones become the new (digital) wallet. According to a study

by PayPal, 85% of respondents used a mobile phone to make a purchase in 2017. Tellingly, most South Africans would rather leave home without their wallet than without their beloved device.

Conscious living, conscious shopping With climate change now firmly on the global agenda, consumers are becoming increasingly aware of their environmental impact, which includes their shopping habits. According to research firm J Walter Thompson Intelligence, consumers expect brands to be sustainable and are willing to pay more to support those that are. In a 2018 study, “New Sustainability”, the firm stated that 89% of those surveyed “care personally” about protecting the planet, 92% said they are trying to live more sustainably, and 83% would always pick the brand that has a better record of sustainability.

With digital transformation becoming a global business imperative, local retailers will have to ensure their digital strategy closely reflects the evolving needs and values of their customers.

Dare to dream Meet entrepreneur Samukelo Nkosi, the founder and CEO of soon-to-belaunched Quickprop, a cloud-based property management system

By Mark Pettipher

Samukelo Nkosi, founder and CEO of Quickprop Systems.

I

n the era of digital transformation and the 4th Industrial Revolution, it is not surprising to find entrepreneurs working on apps and digital solutions. And Samukelo Nkosi believes he has come up with a unique one.

“I was speaking to a potential client about property systems that are currently available, and we realised many are outdated,” he says. “The solution for us is to create a bespoke system and app tailored specifically to a client’s needs.”

Quickprop is a start-up that was conceptualised in 2018. It’s affiliated with SEDA and Property Point.

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“It will be a pay-per-feature offering,” says Nkosi. “That way, you only use what you need. We interrogate your business needs and apply our core cloud-based system, configuring it to allow for a holistic and conferable solution.

“We understand that each client has a unique way of doing business, so our system offers tenant screening, lease administration, employee management, facilities management, service providers, the issuing of work orders, and even property accounting. There is also a tenant portal, where maintenance requests and payments can be made via the app.”

Nkosi’s entrepreneurial journey has been one of discovery and tenacity. He started – and closed – a construction business in his first year at Wits University, where he struggled with funding for his first two years as an undergraduate.

A bursary from Services SETA means he’s able to complete a BSc in construction.

He has been involved in the property industry through networking, being part of the South African Institute of Black Property Practitioners (SAIBPP) Learning and Growth Committee, and helping to launch SAIBPP’s Wits Student Chapter in 2017. He is also currently a member of the Youth in Property Association, and is a project manager for Wits’s skills development and graduate programme.

opinion

Efficient project management reduces costs, drives innovation in property construction East Africa continues to grow as an attractive investment prospect for both international investors looking for favourable returns and global organisations establishing their presence in the region. Despite being open for business, the region can present challenges for companies that may lack the sufficient in-country knowledge and local expertise needed to derive costefficient solutions without compromising on quality

By Kenneth Oigo guide the client in identifying those areas in the supply chain that could potentially qualify for rebates or exemptions.

The team should also be able to assist with ensuring that products are correctly packaged, coordinated and tracked in the manner required to qualify for such exemptions, extending from furniture, fixtures and equipment through to operating supplies and equipment.

Importing through the free trade area known as the Common Market for Eastern and Southern Africa can result in healthy tax rebates and even no import duties.

W

hile it is important to be able to provide cost-saving opportunities to the client, be aware that if best-practice cost controls as evidenced through formal procedures and essential record-keeping are not instituted at the beginning of the project, the build could face cost escalations rather than cost savings.

Cost escalations during construction generally result from inflation and scoping issues that stem from poor budgeting and improper briefing.

Optimising benefits through taxes and tariffs Having a firm grasp of in-country legislation in terms of the application of tax rebates or exemptions can save considerable costs for the client. In some instances, savings of as much as 20% of the tax component can be gained.

To optimise these potential benefits, the project management team should (where applicable) advise the client on the need to engage a tax expert.

Additionally, the team should keep sight of the procurement list in order to

Conforming to regulations It is obvious that all building must be done according to the required by-laws in order to avoid penalties and the extension of statutory costs.

However, some companies may find themselves falling foul of the law due to rudimentary issues such as a failure to renew permits where necessary.

Situations such as these are entirely avoidable, yet failure to remain cognisant of by-law requirements or permit expiry dates can result in unanticipated costs due to punitive payments.

Alternative building techniques Traditional building methods can result in costly developments that have been over-designed and over-reinforced. As newer techniques and technologies become available, these should be leveraged to enable cost-efficient and innovative solutions.

The project management team should thus be highly knowledgeable with regards to value engineering techniques and new technologies, as well as the

potential that these have in terms of optimising development.

Project managers should encourage all engineering consultants to “think outside of the box” when it comes to framed structure technologies, energysaving solutions for mechanical, electrical and plumbing, and finishes.

Comprehensive life-cycle costing A detailed interrogation of the life-cycle costing is required in order to gain a financial overview that balances initial cost with long-term requirements. Each component must be considered – for example, does the client require a particular generator solution that is low on maintenance but high on capital?

As the client would generally require running costs to be as low as possible, it is critical to enable recoveries and savings in the long term.

Conclusion While East Africa is on an upward trajectory, there remains a tendency towards a conservative approach that can affect choices from engineering design through to the selection of building materials.

From investors making significant financial investment into capital projects to global companies engaging in head office fit-outs bound by cost and time, the opportunity to save costs is critical.

Having a project management team in place that is knowledgeable, and is able to align a client’s particular needs with local conditions and drive the project with innovation and cost-sensitivity, will ensure that value can be extracted throughout the project life cycle.

SOUTH AFRICAN PROPERTY REVIEW

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vacancy report

Global trends show greater returns from industrial assets

With the release of the SAPOA Industrial Vacancy Report, we talk to MSCI Vice-President Eileen Andrews and Executive Director Phil Barttram about the change in focus in research and reporting on the industrial sector

By Phil Ruimte

F

or more than four decades, MSCI’s research-based indexes and analytics have helped the world’s leading investors build and manage better portfolios. Phil Barttram, MSCI Executive Director, explains the importance of accurate analysis. “Clients rely on our offerings for deeper insights into the drivers of performance and risk in their portfolios,� he says. “Our line of products and

New segmentation

services includes liquid and illiquid indexes and analytical models, as well as best-in-class real estate benchmarks and ESG research.� “In keeping with MSCI’s global methodology, our data is comparable regardless of geographical location,� says Eileen Andrews, MSCI Vice-President, about the change in reporting. “The industrial market in South Africa has matured, and our clients are demanding

that we adjust our classifications, in particular with regards to distribution centre (DC) warehousing. “In line with our clients’ investment approach, we needed to look at the sector in greater detail. We have expanded beyond the traditional sub-sectors to separate DCs from warehousing in order to enable investors to measure the related risk and return more accurately.�

Type

Description

Warehousing and distribution

Industrial: Warehouse

Buildings designed for long-term storage of goods, which may include raw materials, spare parts or components. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs etc. They are usually large plain buildings with loading docks for easy transfer of goods.

Warehousing and distribution

Industrial: Distribution centre

A facility designed to store large amounts of goods for varying lengths of time, ranging from extensive storage to setup for immediate distribution. Excludes refrigerated warehouses, coded separately below.

Warehousing and distribution

Industrial: Refrigerated distribution

This asset type typically features coolers and freezers, which drive the use of refrigerated distribution facilities.

Manufacturing

Industrial: Light manufacturing

A light industrial business where all processing, fabricating and assembly or disassembly of items takes places wholly within an enclosed building.

Manufacturing

Industrial: Heavy manufacturing

Heavy manufacturing buildings can be identified easily from the exterior. Because the buildings are designed to house specialised equipment to produce goods or materials, they are large and distinctive structures.

Multi-parks

Industrial other: Workshops

Small purpose-built or converted units explicitly intended for use by small-scale operations, typically for hand-crafted goods, or making or repairing small items.

Industrial other: Industrial park

An industrial park (also known as industrial estate or trading estate) is an area zoned and planned for the purpose of industrial development. May comprise a variety of light industrial, warehouse and repair activities. Excludes refrigeration centres and distribution centres as described above.

Multi-parks

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vacancy report

Other industrial

Industrial other: R&D flex space

Characterised by high-quality design and finishes. Most of the space in R&D Flex is utilised as either hi-tech manufacturing/laboratory, or office. These can assume as much as 75% of an entire building.

Other industrial

Industrial other: Warehouse showroom

Warehouse showroom facilities and R&D Flex buildings share certain common attributes. Warehouse showrooms have three core differentiating characteristics: building flexibility, upscale appearance and high build-out (e.g. wine-tasting warehouse outlets).

Other industrial

A data centre is a facility used to house computer systems and associated components, such as telecommunications and storage Industrial other: systems. It generally includes redundant or backup power supplies, Data switch centre redundant data communications connections, environmental controls (e.g. air conditioning, fire suppression) and security devices.

Other industrial

Industrial other: Truck terminal

All truck terminals are cross-docked with a very low square-feetto-dock ratio: one dock for most buildings. Building dimensions are another classification variable. Truck terminals are rectangular in shape.

Other industrial

Industrial other: Personal/ self-storage

Self-storage provides rooms, lockers, containers, and/or outdoor space in which tenants can store and access their goods.

Self-storage tenants include businesses and individuals.

Other industrial

Industrial: Application not known

Where direct or indirect assets are known to be industrial but the specific type has not been identified.

Other industrial

Industrial: Application not categorised

Where direct or indirect assets are known to be industrial but do not fall into any of the specific office categories. Use for indirect industrial vehicles, including a variety of different specific types.

“Industrial assets are attracting much more capital than previously,” says Barttram. “Our research is based on information from 32 countries, and we are seeing a trend that warehousing in particular is being linked to online trends and just-in-time delivery.

“While multidimensional use applies to all asset types – office, retail and industrial – many tenants and landlords are looking for ways to make buildings adaptable. Industrial multi-parks clearly demonstrate that property owners are looking for asset level adaptability in order to look after and retain tenants.

Because our aim is to provide our clients with better information so they can make sound investment decisions, we are able to identify shifts in capital allocation trends and adapt our classification in line with the market’s evolution. It is essential that our analytics and data can consistently capture how an investment is performing relative to any other asset – not just in South Africa but anywhere in the world.”

“As an example, a macro trend in the industrial sector has been a move towards just-in-time delivery and related distribution space, and we have seen increased focus on specialist warehouse portfolios in South Africa,” says Andrews. “Investors appreciate a globally consistent and comparable measure of how these assets are performing, both domestically and against international alternatives.”

“In line with that trend, we are also seeing the need for property owners to understand the risks and benefits of technology, both for their tenants’

sake and in terms of the sustainability of their asset’s income,” adds Barttram.

“In an environment where it is increasingly important to retain relationships with tenants, property owners are having to future-proof their assets against the impact of technological disruption, whether that is in the form of artificial intelligence or the Internet of Things.”

Taking a closer look at the chart below, we can see how, in 2018, industrial returns have outperformed those of the retail sectors across multiple countries measured by MSCI.

SOUTH AFRICAN PROPERTY REVIEW

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vacancy report

Furthermore, the chart showing the trend of South African total returns by sector shows this trend is holding true on the domestic front.

What the SAPOA report shows The national industrial vacancy rate as recorded in December 2018 was 3,6% as measured by the MSCI Annual Property Index, down 10bps on a year-on-year basis. Encouragingly, and in contrast to the retail and office sectors, the industrial sector’s vacancy rate is down from 5,2% in 2016.

Slight improvement in occupancy notwithstanding, base rental growth slowed to 4,6% during the year.

Historically, rental growth has lagged behind shifts in vacancy rate as excess supply or demand typically takes a time to filter through to pricing. This suggests that rental growth may improve in the short to medium term, given the low vacancy rate of the last two years.

The basic rental growth of 4,6% recorded for the 12 months ended December hasn’t filtered through to an equal level of capital growth, which suggests that valuers are still taking a cautious view on the sustainability of the sector’s near-term earnings.

Meanwhile, a net income growth of 3,9% year-on-year was recorded for the industrial sector in 2018 as costs grew at a faster rate than gross income.

South Africa’s steadily growing manufacturing production has resulted 32 34

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in the industrial property sector’s low vacancy rate. On an index basis, manufacturing production got back up to 2008 levels during December 2018.

While the growth in manufacturing volumes observed during 2018 was encouraging, the impact of Q1 2019’s load-shedding will be critical.

The sector will also look to sustained improvements in efficiency measures like capacity utilisation and unit labour costs to support market rental growth.

With the exception of manufacturingrelated industrial property, all other segments saw vacancy rates soften during the 12 months ended December 2018. The vacancy rate of manufacturing property (at 0,5%) is the lowest among the industrial segments, suggesting that the improved manufacturing data and currency appreciation during the first half of 2018 may be filtering through to the segment’s underlying fundamentals.

Analysing industrial property by box size reveals that there is currently more space available in small- to mid-sized units with industrial property smaller than 5 000m² seeing an increase in vacancy rate relative to the year before to end above five percent.

The larger industrial size brackets saw vacancy rates remain relatively stable during 2018. The vacancy rate of large industrial units (>25 000m²) has trended down over the last three years, consistent with occupier consolidation trend observed in the office sector.

For more than four decades, MSCI’s researchbased indexes and analytics have helped the world’s leading investors build and manage better portfolios. MSCI Executive Director Phil Barttram explains the importance of accurate analysis.

“Clients rely on our offerings for deeper insights into the drivers of performance and risk in their portfolios. Our line of products and services includes liquid and illiquid indexes and analytical models as well as best-in-class real estate benchmarks and ESG research”

state of city finances

Financing spatial transformation South Africa’s national urban agenda prioritises urban densification, but the municipal revenue model, which is dependent on property rates, incentivises urban sprawl. The gap between city finance (core revenue model) and spatial transformation needs to be bridged, to ensure that the desired spatial objectives are incentivised and built into the day-to-day running of cities. While property rates are a good local tax and should remain, an alternative revenue model is needed that rewards cities financially for developing brownfield sites and restricting peripheral greenfield development 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.

A

lthough the policy environment opposes sprawl and promotes compaction, the dominant development is one of sprawl. There is a clear link between the development of land and city revenue, as articulated in the IUDF’s Policy Lever 5, “Efficient land governance and management”, which envisages “cities and towns that grow through investments in land and property, providing income for municipalities, which allows further investments in infrastructure and services, resulting in inclusive, multi-functional urban spaces” (ibid: 75). Achieving this objective is difficult given the current “revenueraising model for cities, which is heavily reliant on property rates” (SACN, 2018: 10). As much of their revenue comes from ratepayers, municipalities “have no incentive to use valuable land for poor people” who cannot afford to pay high rates (ibid: 3). Therefore, cities face the contradiction of having to strengthen land values and being expected to provide well-located land for the poor in order to achieve spatial transformation.

Further investigation is needed into land development models and their revenue generation.

The main own-revenue sources for cities are property rates and electricity charges. Property rates provide cities with revenue autonomy, allowing them to go about their daily business and to raise finances off their balance sheet. As cities come under pressure to find additional

South Africa’s urban agenda, expressed through the Integrated Urban Development Framework (IUDF), is spatial transformation. This “new deal” for South African cities seeks a “sustainable growth model of compact, connected and coordinated cities and towns” (DCOG, 2016: 7). Compact growth is a clear policy choice of South Africa (ibid; FFC, 2011; SACN, 2016), as urban sprawl has consequences for: ● The environment – the loss of valuable open space and biodiversity when land is developed (Yusuf & Allopi, 2010); ● City finances – servicing ever-expanding urban areas comes at a high cost to municipalities (WCPG, 2013; FFC, 2011); and ● Consumers – households located far from opportunities have to pay high transport costs, and the increased travel-related carbon emissions further compound the environmental issue (ibid).

revenues and maximise own revenues, property rates represent a leverageable revenue tool. One way in which municipalities can increase their revenue from land is by changing the zoning, which results in changing the cent-inthe-rand property rates on the land.

Property rates are, therefore, inextricably linked to spatial development (Slack, 2002), which may explain why cities are not achieving compact growth.

This chapter argues that a municipal revenue model dependent on property rates incentivises urban sprawl. The chapter looks at the impact on shortterm municipal revenue of greenfield rezoning and development compared to brownfield development. Although the focus is mainly on formal development processes (i.e. those involving the private sector), the development of informal

settlements and RDP settlements also contributes to urban sprawl and has an effect on city finances. However, such developments seldom provide rates revenue for the municipalities, as they are typically occupied by poorer households that benefit from indigent policies.

After explaining why local governments favour property rates, the chapter gives an overview of property rates in South African cities, and the relationship between property rates and sprawl.

Scenarios are used to explore the implications of rezoning agricultural land to urban land uses, both theoretically and through the case study of Ekurhuleni.

The chapter presents three interlocking issues that need to be considered in developing an alternative revenue logic, and concludes with recommendations and suggestions for further research.

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state of city finances In this chapter, “sprawl” refers to the conversion of peripheral undeveloped (mainly agriculturally zoned, but also other natural or recreational uses) land to either residential or commercial uses.

What constitutes peripheral land is not always clear in South Africa, but here it means land that is on the urban fringe.

This chapter is relevant because the national urban agenda and cities have a clear compact development intent. Should there be an indication that property rates do in fact contribute towards sprawl, then cities, National Treasury, the Department of Human Settlements and others need to be cognisant of such implications, so that appropriate steps can be put in place to address this contradiction between policy intent and the incentives created by making property rates the core source of local government revenue.

Figure 17: Standard deviation in city revenue sources (2007/2008-2015/2016)

Figure 18: Average breakdown of cities’ own revenues (2015/2016)

Why local governments favour property rates Property taxes are widely identified as being ideal taxes for local government, and are seen, by some, as the “perfect local tax” (Daud et al, 2013: 6). They are “a mainstay at the sub-national level, especially for local governments” (Bahl & Martinez-Velazquez, 2007: 1). In lowand middle-income countries, property taxes are regarded as an excellent local government tax for four main reasons.

1. Their enormous, untapped revenue-generating potential Revenue from property taxes represents on average just 0,6% of GDP in developing countries compared to 2,2% in OECD countries (Bahl, 2009).

In sub-Saharan Africa, South Africa is the only country where property taxes amount to more than 1% of GDP (McCluskey et al, 2017).

2. Their stability Property rates represent a stable revenue source for cities because they are levied on immobile assets, which are less sensitive to the business cycle than other taxes (Daud et al, 2013; Bird & Slack, 2002; Bahl & MartinezVelazquez, 2007). They are also difficult to avoid, as the asset is visible.

Furthermore, property values are assessed relatively infrequently and 34 36

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remain constant during the periods between evaluations. Figure 17 illustrates this stability, with property rates having the lowest standard deviation of all city revenue sources.

3. Their relatively nondistortionary nature Compared to other taxes, property taxes have a negligible distortionary effect on business and consumer decisions (McCluskey et al, 2017; Bahl, 2009), and taxes on immovable, particularly residential, property are the “least distortive tax instrument in terms of reducing long-run GDP per capita” (Norregaard, 2013: 14).

4. Their inherent fairness Property taxes represent, to some extent, a benefit charge for access to local government services, and so property values will generally be higher in areas with better services (Bahl & Martinez-Velazquez, 2007) – they are a form of land value capture.

Taxpayers are generally receptive to property rates, which they consider to be fair insofar as they assess the

value of their own properties as proportional to the benefits that accrue from this expenditure.

Property rates can also be designed to be strongly progressive, especially in countries with high levels of inequality, such as South Africa. This is because the transparency of property taxes makes it easier to remove the tax burden on the poor at local level, as relatively lowvalued properties can be exempt from the tax. Property rates can also generate revenue for a city’s redistributive agenda.

As Figure 18 shows, most cities’ own revenues come from exchange transactions (electricity, water, sanitation and cleaning services), which generally have to be used for providing these services in the spatial areas from which they were received, leaving little room for redistribution. In contrast, property taxes are more discretionary, and allow cities more freedom in allocating expenditure – cities can use these taxes in other areas, as part of their redistributive agendas.

state of city finances Property rates in South African cities Section 229(2) of the South African Constitution enshrines the power of municipalities to impose rates on properties within their boundaries. This section also dictates that this power “may be regulated by national legislation”.

Under this proviso, national government enacted the Municipal Property Rates Act (MPRA), No. 6 of 2004, amended in 2014, to govern the administration and implementation of property rates across municipalities. The MPRA states property rates play a critical role in “promoting the economic and financial viability of municipalities” and “providing local government with access to a sufficient and buoyant source of revenue”. It acknowledges that “income derived from property rates is a critical source of revenue for municipalities to achieve their constitutional objectives”. The Act provides a framework for municipalities to impose rates on property, which is a proportional rate based on the rand value of a property, and to develop policies on the levying of such rates. This framework allows certain property types to be excluded from rating in the national interest and provides for exemptions, reductions and rebates in the interests of redistribution, as well as the ability to levy different cent-in-the-rand rates for different categories of property.

In the case of metropolitan municipalities (metros), property rates contribute, on average, 16,8% of total revenues and 22.4% of own revenues, the autonomously mobilised revenue base that is crucial for the effective operation of a local government. Property rates are the most important discretionary revenue source for cities (SACN, 2015), contributing about 40,3% of metros’ non-exchange revenues,which include various transfers from national government that are often conditional in nature (Figure 19). True fiscal decentralisation relies upon both discretion and autonomy in the raising and spending of revenues. Non-exchange own revenues are truly autonomous and discretionary, as they are generated by cities themselves and are not ring-fenced in any form. Property rates contribute 92,9% of metros’ non-exchange own revenues, making them probably the

most important revenue source for cities in terms of local governance.

Property rates are considered particularly crucial to cities because they are the revenue with the greatest upward potential in the current revenue model (SACN, 2015). However, a key disadvantage of property rates is they are not growth elastic, and property valuation is laborious, time-consuming and infrequent. This means that growth in revenues from property rates is generally slower than growth in revenues from other tax bases (Alm et al, 2012). The MPRA requires municipalities to assess property values every five years, although it does include a provision to assess annually.

Re-evaluations happen infrequently because administering property taxes is difficult and costly – which is also why central governments are generally happy to devolve this function to local governments. As a result, while the property values may grow, tax revenues remain largely static in the years between re-evaluations. But in an environment of fiscal uncertainty and fluctuating demand for services, revenue growth is a short-term concern for South African cities. Therefore, cities are often forced to actively seek year-to-year growth in revenues through their most reliable revenue source – property rates.

Municipalities can increase revenues received from property rates through several mechanisms: ● Undergoing a complete rates base determination process, ● Increasing the cent in the rand charged per property type, ● Re-evaluating the property register, ● Limiting the use and impact of valuation thresholds, ● Improving collection rates to capture unpaid bills, and ● Changing the composition of the base through rezoning decisions.

To assess their attractiveness and pitfalls in the South African city context, these mechanisms are tested against the following criteria: revenue-generating potential, cost implications, complexity and political/public acceptability.

Figure 19: Proportional contribution of property rates (grey) to revenues (2015/2016)

As Table 29 shows, the easiest way for municipalities to increase their revenue from property rates is to rezone properties and land parcels to a category with a higher cent-in-the-rand rate. The MPRA lists the property categories for which municipalities must determine a cent-inthe-rand rate, from which property rates are determined and levied. Categories include residential, commercial and SOUTH AFRICAN PROPERTY REVIEW

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state of city finances Table 29: Assessment of mechanisms for increasing property rates in South African cities

not change. If a parcel of land is zoned for agriculture, the average property rates would be R1 100. Rezoning this parcel of land to typical urban uses would lead to property rates increasing to R4 650 (if residential use), R7 875 (if mixed residential/commercial use) and R11 100 (if commercial use).

The relationship between property rates and sprawl in South Africa

Figure 20: Comparison of cent-in-the-rand rates for agricultural, residential and commercial properties (2016/2017)

Figure 21: Comparison of rates revenue according to different zonings

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agricultural properties. Figure 20 shows the cent-in-the-rand rate averaged across all metropolitan municipalities for these three categories. The rates range from 0,002 for agricultural to 0,009 for residential and 0,022 for commercial properties. The cent-in-the-rand rate for agricultural property is equal to 24% of the rate on residential properties, and directives from the Ministry of Cooperative Governance and Traditional Affairs prohibit this ratio from exceeding 25%. The rate for commercial properties is equal to 247% of the rate for residential properties and more than 1 000% of the rate for agricultural properties.

Across all municipalities, agricultural properties are taxed at a far lower rate than typical urban properties (residential and commercial). Therefore, the rezoning of land and properties from agricultural to urban land use will naturally result in increased rates revenue for municipalities.

Figure 21 shows the impact of different zonings on a property whose value does

The previous section shows clearly the revenue potential of rezoning low-rated (typically agricultural) land to residential, commercial or mixed-use. As low-rated land is usually found on the urban fringe, this suggests that an underlying financial logic is driving outward urban expansion.

If cities want to grow their rates base, more rateable and higher-value properties must come onto the valuation roll (SACN and Urban Landmark, 2009). The way in which property taxes work means that municipalities can increase their revenues by approving the development of undeveloped land. This relationship between spatial outcomes and property tax is not unique to South Africa, and what is becoming increasingly clear is that property tax (which is considered a good local tax) is influencing the outward expansion of cities (Slack, 2002; Brueckner & Kim, 2003; Song & Zenou, 2006; Ermini & Santolini, 2017), especially when property rates feature prominently in a municipal revenue profile (Slack, 2002).

This section explores the correlation between property rates and urban sprawl, arguing that the need for shortterm revenue drives municipalities to promote sprawling development. This development will often take the form of greenfield development, which is the development of a site that has not been built on before (often rural areas, including the rural-urban fringe), rather than brownfield development, which is the redevelopment of a site that has been built on before (normally associated with inner-city areas). Greenfield development is a core symptom of sprawl, while brownfield development is indicative of densification in the urban core.

The logic underpinning this hypothesis is that municipalities seeking revenue

state of city finances injections will be inclined to allow, or even actively promote, development that increases revenue from property rates.

Figure 22: Average contribution of revenues from property types to total rates revenue for all metros (2011/2012-2015/2016)

The contribution of core property types to total property rates revenue Over the past five years, the proportional contributions of agricultural, commercial and residential properties to total rates revenue appear to have remained relatively flat (Figure 22). However, the magnitude of the changes suggests a general decrease in agricultural property.

In 2016, agricultural property contributed 27,4% less to total rates revenue than in 2011. Residential property contributed 4,4% less, while commercial property contributed four percent more to total rates revenue. This sharp drop in the contribution of agricultural property may be evidence of a shift in the property patterns across the metros.

However, this data does not show the growth in rates received per property type. As Figure 23 illustrates, across the metros, rates received for residential and especially commercial properties have grown much faster than rates for agricultural properties.

Importantly, the average growth in rates received from residential and commercial properties has outstripped growth in rates charged on such properties. In contrast, the growth in rates received on agricultural properties has been slower than the growth in rates charged – and has been negative in three of the cities.

Given that property re-evaluations occur relatively infrequently, the expectation is that, all other things being equal, the growth rates would be about the same for rates received and for rates charged. This discrepancy in the growth suggests that the tax base is evolving, with commercial and residential properties making up an increasing proportion of the property tax base, while agricultural properties are diminishing. It is further circumstantial evidence of a general shift in the distribution of properties, away from agricultural spaces and towards more urban spaces through urban sprawl.

Figure 23: Average compound annual growth in rates received and rates charged on agricultural, residential and industrial properties (2010/2011-2015/2016)

Implications of greenfield vs brownfield development on per-property revenue As previously mentioned, greenfield developments are associated with dispersed cities and urban sprawl, while brownfield developments are associated with compact cities and densification of the urban core (SACN, 2016). Having established their spatial impact, a simulation was run to understand the implications of these distinct forms of development on a city’s revenues.

A random sample was taken of 1 000

properties in each municipality that broadly represent the property value distribution in South Africa. Then, using each municipality’s property rates policies, the average revenues received from these properties were estimated for the different spatial development scenarios. These scenarios were, in turn, used to determine the per-property revenue implications of brownfield and greenfield developments on city revenues (Figure 26).

As Figure 26 shows, both brownfield and greenfield developments have a SOUTH AFRICAN PROPERTY REVIEW

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state of city finances positive impact on the revenues in all nine municipalities, but greenfield development has a significantly higher impact. This indicates clearly a fiscal incentive for municipalities to promote greenfield developments.

Figure 26: Impact of brownfield and greenfield developments on per-property municipal revenue

Ekurhuleni as a case study The next simulations looked at the implications of rezoning activities on city revenue in Ekurhuleni. Ekurhuleni was chosen as it has the most disaggregated property rates data of all the cities coupled with the availability of relevant land use data. Although Ekurhuleni is a metropolitan municipality and (as expected) largely urban in nature, about 10% of its land is zoned for agriculture.

Figure 27: Annual property rates revenue increases of rezoning of 10% agricultural land in Ekurhuleni

Revenue implications of rezoning agricultural land The first simulation established that the rezoning of agricultural land (located mostly on the periphery) not only facilitates the development of greenfield sites, but also increases revenue for a municipality.

The simulation projected the revenue impact of rezoning 10% of existing agricultural land under various scenarios: ● Rezoning entirely to residential land. ● Rezoning entirely to commercial land. ● Rezoning to a mix of commercial and residential land, based on the city’s current mix.

These scenarios were run assuming (i) the value of the land remains constant, (ii) the value of the land increases by 50%, and (iii) the value of the land increases by 100%.

Figure 27 summarises the results and shows that the revenues received from property rates are directly proportional to the amount of agricultural land rezoned to urban, the rate in the rand on the property type to which the land was rezoned, and the value of the property subsequent to the rezoning.

Although rezoning agricultural land increases the city’s rates revenue, the increase is proportionally small. Even under the most lucrative of projections – in which 10% of agricultural land is rezoned to commercial use and its value doubles – the annual increase in rates 40 38

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(R20,31-million) represents less than half a percent (0,45%) increase in Ekurhuleni’s total annual rates revenue. This is because, although 10% of land in Ekurhuleni is zoned for agriculture, this land represents just 1,57% of Ekurhuleni’s total property value. This suggests that the latent value of agriculturally zoned land lies not only in the higher rates that can be charged following rezoning, but also in the higher value of urban properties by land area occupied relative to agricultural properties.

The analysis includes a 50% and 100% increase in value because municipal revenue increases in stages: after rezoning, the cent-in-the-rand rate increases; then, once the land has been developed, the value of the property is likely to increase significantly, as services and infrastructure are provided. The higher rateable value increases the overall revenue received, and the sentiment that the land (and adjacent land) is developable heightens.

In terms of the MPRA, rates are levied on property values alone, rather than the value of the land they occupy. Therefore, municipalities can gain significant

revenue from developing land, so that the property value per parcel, or area, of land is increased. Agricultural land has a much lower value density than urban land, particularly commercial land, which provides an additional perverse incentive for municipalities to allow for the rezoning and development of extant, agricultural land. Research suggests that the value increase is significantly higher than 100%, as illustrated in the next section.

Revenue impact of greenfield vs brownfield development To understand the potential real-world revenue implications of the hypothetical rezoning activities in Ekurhuleni modelled above, it is necessary to factor in the value density and then calculate the revenue increases that would result from redeveloping agricultural land for fully developed urban use. The value density means the average property value per land area for each property type, and the values used were based on the city’s current land use and property value compositions.

The revenue impact of developing 10% of existing agricultural land in

state of city finances Impact of different development models on city property rates: The latent value of agricultural land Relatively typical greenfield (similar to Waterfall Estate, Johannesburg) and brownfield (similar to Maboneng, Johannesburg) developments were modelled to compare the impact of converting to mixed-use. The model looked at the development of 20 units on a greenfield site (of 20 000m2) compared to a brownfield site (1 000m2). The property values are based on current Johannesburg properties of similar condition, and the cent-in-the-rand rates are based on the 2016/2017 City of Johannesburg property rates policy.

A completed greenfield development will generate significantly higher revenue from property rates because of the lower value of rates payable on agricultural land. In contrast, the rates base of a brownfield site is relatively high, and so converting to mixeduse produces a lower (but still significant) growth in revenue. However, the revenue per square metre tells a different story, with the brownfield redevelopment providing far more revenue per square metre of land than the agricultural redevelopment.

Furthermore, no rezoning is required when industrial- and commercial-use properties are converted to residential use, which means that the new subdivided properties – even if residential in nature – will be rated as commercial-use by the city. In comparison, developing agricultural land to urban use always requires rezoning.

Ekurhuleni was calculated under three scenarios of redeveloping agricultural land, as (i) residential land, (ii) commercial land, and (iii) a mix of commercial and residential land proportional to the current composition of the city’s urban spaces. The results are summarised in Figure 28, which shows, again, that such redevelopment has a positive impact on the city’s annual property rates revenue.

The increase in rates received if just 10% of agricultural land is redeveloped as commercial land is R1,1-billion, or 24,53% increase in Ekurhuleni’s property rates revenue. If the agricultural land is redeveloped to a mixed urban land use, which is representative of the current land-use mix and the most rational redevelopment scenario, the city’s property rates revenues would grow by 8,62%.

For the purpose of comparison, the same set of projections were run for brownfield development, based on redeveloping 10% of existing urban land in Ekurhuleni. Again, the assumed land value per area distribution was based on the city’s current land use and property

Figure 28: Full urban development of 10% agricultural land in Ekurhuleni

value compositions. The three scenarios of redeveloping urban land were as (i) residential land, (ii) commercial land, and (iii) a mix of commercial and residential land proportional to the current composition of the city’s urban spaces. The results are summarised in Figure 29, and show that brownfield development increases Ekurhuleni’s property rates revenues by R72,85billion, or 1,61% (under the most lucrative scenario). This increase is minimal relative to the increases from a similar greenfield development.

Figure 29: Full urban development of 10% of agricultural and urban land in Ekurhuleni

A fully established greenfield development results in far more property rates revenues than a fully established brownfield development (Figure 29).

This enormous difference, relative to the nine-city simulation run earlier, comes from the latent land value density (i.e. value per area of land) in agricultural land relative to land already under urban use. This causes a two-fold effect that dramatically increases revenue once agricultural land is converted to urban use, whereas redeveloping existing urban land parcels might not require zoning SOUTH AFRICAN PROPERTY REVIEW

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state of city finances changes and is unlikely to increase the value of the land as drastically as converting agricultural land.

The above scenarios clearly demonstrate that cities can increase their own revenues significantly by rezoning agricultural land to urban land, and subsequently developing it. The fiscal incentive to allow, or even facilitate, such redevelopment is obvious given the current revenue logic, where property rates are the predominant leverageable tool for increasing city own revenues.

Under current rates policy, agricultural properties are levied at far lower rates than urban properties, and rates are based on the value of the property, not the land. This essentially dictates that cities maximise property rates revenues through sprawl-promoting development.

While many factors, including speculative developers, come into play, cities have to take the final decisions, in the face of competing pressures, to restrict sprawl and to ensure an adequate revenue base that meets growing demands.

Towards an alternative revenue logic The analysis in this chapter provides clear evidence of the perverse spatial impact of property tax. There is an inherent contradiction between compact cities and the financial incentive for municipalities to promote greenfield development. Given the overarching policy emphasis on spatial transformation, an alternative revenue logic is required. In moving towards a revenue logic that is more closely aligned to spatial transformation, three interlocking issues need to be considered.

1 Align the functionality of property rates to spatial transformation Property rates in and of themselves are not a driver of sprawl; it is how they are structured in relation to space that facilitates sprawl-inducing, revenueseeking practices. Currently, property rates are levied on the value of the property as a whole, and so any developments on the property will affect the charges levied. Taxing these property developments disincentivises the intense development of land, which reduces the capital-to-land ratio, 42 40

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Figure 30: Relationship between tax revenues and level of improvement on land

a defining feature of urban sprawl (Banzhaf & Lavery, 2010; Brueckner & Kim, 2003). Property taxes can be implemented in alternative ways.

The land tax In essence, all properties have two components: a parcel of land and a set of improvements made on that land. A land tax means taxes are levied on the value of a parcel of land, not on the built structures or improvements made.

Such a tax incentivises the intense development of land, as improvements do not attract additional taxes, which increases the capital-to-land ratio and reduces sprawl (Banzhaf & Lavery, 2010).

Moreover, a land tax is more reliable and non-distortionary than the current property tax, as the supply of land in cities is fixed. When set at a sufficiently high rate, as is the case in many East Asian countries, a land tax has reduced urban sprawl and discouraged land speculation (Collier et al, 2017).

However, a pure land tax tends to be regressive, because both rich and poor landowners are charged the same tax for land of a similar value, irrespective of the structures built on that land.

Therefore, the tax will proportionally burden poorer landowners more than it will burden rich landowners.

Moreover, to capture the same revenues as those from a property tax, municipalities would have to set a pure land tax at such a high rate that it would prohibit poor residents from owning land at all.

Split-rate taxes These taxes are a compromise between the pure property tax and the pure land tax. Like the property tax, rates are levied on both the land value and the value of the improvements made – but different rates are applied. A lower rate is applied to improvements than to the land, in order to incentivise development.

Reducing the tax burden on landintensive developments promotes densification and discourages sprawl (Bengston et al, 2004). Evidence from several cities in Australia, Denmark and the state of Pennsylvania in the US shows that implementing a split-rate tax results in reduced sprawl and increased urban redevelopment. In Figure 30, the split rate tax line has a gentler slope than the property tax line, indicating that it incentivises more intense development of land; and a lower starting point than the land tax line, indicating less of an unfair burden on poor landowners.

Geographically differentiated property tax According to Banzhaf and Lavery (2010), property taxes have both a “density effect”, which disincentivises improvements to the land and promotes less dense development, and a “dwelling size effect”, where households respond to increased property taxes by using less housing capital. If the dwelling size effect is stronger than the density effect, reducing dwelling sizes, as a response to property tax, results in reduced sprawl (ibid). A study across many urbanised areas

state of city finances found that higher property rates in the urban core lead to reduced urban density and increased sprawl, but higher property taxes in non-urban areas of the cities encourage more compact cities (Ermini & Santolini, 2015). This suggests that implementing a property tax regimen, which taxes non-urban properties at a higher rate than properties in the urban core (whether through a land tax, property tax or splitrate tax), could promote density in the urban core and reduce sprawl.

2 Use city spatial planning powers more effectively and consistently The Spatial Planning and Land Use Management Act (No 16 of 2013) gives municipalities the power to manage land use and urban expansion. The Act specifically refers to spatial justice, calling on municipalities to explore ways of making property and shelter affordable for poorer residents. However, not allowing undeveloped peripheral land to be developed drives up land and property prices in urban areas (WCPG, 2013) – less land is available, which pushes up the premium for land. The municipality only captures this increase in land value when the valuation roll is updated, but the higher land cost drives up the cost of development and ultimately excludes the poor from accessing such property.

Land value capture principles are also based on a “maximise value” approach, which makes including the poor challenging: “if the aim is to maximise revenue, inclusive development cannot be a priority” (SACN, 2017a: 68). Thus if municipalities reject all new peripheral development and facilitate infill and redevelopment processes, at the same time new financial arrangements will be needed to ensure that sufficient shortterm revenue can be generated, that levels of affordability can be maintained in the city, and that open space networks and biodiversity are valued.

3 Diversify and expand the municipal revenue mix Property taxes are a good local tax, providing a stable and discretionary

revenue stream for municipalities. But over-reliance on property taxes may make it difficult for municipalities to turn down greenfield development.

To this end, it is important to look at diversifying municipal revenue sources, so municipalities have several levers they can use to grow their revenue base.

Such revenue sources would have to make revenue and policy sense for cities. Building on the case put forward by the SACN expert panel on alternate municipal finance (SACN, 2017b), Chapter 5 of this report provides a comprehensive analysis of possible local government taxes.

Conclusion Over the past 20 years, municipalities have received important revenue injections from new developments on the periphery of cities, and the shortterm, ongoing revenue gains from rezoning agricultural land cannot be underestimated. This chapter argues that the over-reliance on property rates as the primary discretionary revenue source for municipalities is driving a perverse incentive to facilitate new peripheral developments.

While property rates will remain, as they are a good local tax, their functionality is sub-optimal for the spatial developmental policy objectives in South Africa. A new revenue logic is required to address the functionality of the property tax mechanism, the planning and infrastructure support offered by municipalities to peripheral sprawling developments, and the overreliance on property rates in the municipal revenue profile.

National departments such as Human Settlements and Transport, which deal with the relationship between rezoning activities and property tax, need to take cognisance of the role property rates play in driving the spatial form of cities.

Appropriate steps should be taken to address the contradiction between policy intent and the incentives created by making property rates the core source of local government revenue. National Treasury should also incorporate this critique of the over-reliance on property

tax into its work of investigating alternative revenue-raising measures for municipalities.

Municipalities have a role to play in ensuring spatial planning is implemented effectively and consistently in line with the policy for compact cities, as well as leading the debate on alternative revenue sources. To date, the financing of spatial transformation has been seen as separate to the existing core revenue model of cities. A rationalisation of this revenue model and all its components is needed, to ensure that the desired spatial objectives are incentivised and built into the day-to-day running of cities. An alternative revenue model should result in cities being financially rewarded (not stifled) for developing and densifying brownfield sites and restricting peripheral greenfield development.

Greater collaboration between financial practitioners and spatial practitioners is required to better understand the relationship between finance and spatial development.

Limitations and further research Data limitations associated with poorly aligned spatial and financial information meant that the statistical (and possible causal) relationship between property rates and sprawl could not be fully examined. Instead, using the prevailing sentiment in the literature on the spatial impact of property rates, a hypothesis was constructed on the functioning of this relationship in South African cities. The available data suggests that sufficient evidence supports this hypothesis.

This chapter does not discuss or quantify the net effect of sprawl – the revenue received versus the expenditure required to develop and service outlying areas. This is an important consideration and might provide valuable financial insight to inform decision making.

Further research is required, and the “spatialising” of financial intelligence in cities is an important step for understanding the relationship between spatial patterns and municipal finance.

Channing and Bernard (2015) provide a comprehensive and useful guide to spatialising property registers.

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howmuch.net Who stands to gain the most from a “No-deal Brexit”?

1. China: US$10,2-billion increase in exports 2. United States: US$5,3-billion increase in exports

Visualising how a “No-deal Brexit” would affect the world’s economy

3. Japan: US$4,9-billion increase

Since the UK voted in June 2016 to leave the European Union (EU), international markets have experienced uncertainty over how trade with the UK would change. In April 2019, the United Nations Conference on Trade and Development released a report titled “Brexit: Implications for Developing Countries”, which analyses the consequences the UK’s changing tariff structure as a result of Brexit will have on other countries

in exports 4. Thailand: US$3,9-billion increase in exports 5. South Africa: US$3-billion increase in exports

Who stands to lose the most as a result of a “No-deal Brexit”?

By Raul Amoros; first published on 29 April 2019

1. European Union: US$3,6-trillion decrease in exports (not shown on the map) 2. Turkey: US$2,4-billion decrease in exports 3. South Korea: US$714-million decrease in exports 4. Pakistan: US$497-million decrease in exports 5. Norway: US$209-million decrease in exports

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I

f the UK and the EU were to agree on an exit plan, the UK would maintain its current trade agreements with international partners for the next two years before implementing trade deals of its own. However, if the UK does not reach an agreement with the EU (“Nodeal Brexit”), existing trade agreements between the UK and other countries will no longer apply. This means that other, non-EU countries that export

goods to the UK will be subject to high MFN tariffs, dramatically tipping the balance of exports around the world.

This change in trade balances is the subject of our visualisation.

The visualisation takes a look at which countries stand to gain and lose the most in the event of a No-deal Brexit. Shades of pink indicate the countries that will lose exports, while shades of green indicate countries that will gain exports.

The size of each country corresponds to the magnitude of the effect. For the purposes of this visualisation, we are not showing countries that have an export change of less than US$1-million.

According to the UN report, the UK is currently responsible for 3,5% of world trade and imported US$680-billion worth of goods from other countries in 2018.

Although the EU stands to lose the most in the event of a “No-deal Brexit”, the report states that developing countries with a high percentage of exports to the UK, including Turkey and Pakistan, would also experience severe economic harm. By contrast, countries that currently have higher tariffs than the UK, including China, the US and Japan, would gain the most exports. Overall, the effects on world trade remain to be seen depending on whether the EU and the UK reach a deal or not.

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Open dialogue: KwaZulu-Natal Crime and grime, work stoppages, electricity outages and violent service delivery protests came under the spotlight at a recent SAPOA breakfast presentation and networking event at the Mount Edgecombe Country Club

By Lyse Comins

FROM LEFT Afrika Ndima, Russell Curtis, Bernadette Khumalo, Phindile Makwakwa and Musa Mbhele

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waZulu-Natal members attended the event in good numbers, and enjoyed a pre-event coffee on the balcony and a hot breakfast as early-bird golfers prepared for a round sponsored by Rokwil Property Developments and Cato Ridge Logistics Hub Consortium.

The focus of the event was the city’s readiness to attract investment and its solutions to concerns the property sector has raised with the eThekwini Municipality around issues of slow building plan approvals, electricity and water cuts, climate change, and vigilante groups interrupting developments. eThekwini Municipality’s newly appointed Chief Operating Officer Musa Mbhele spoke quite frankly as he listed the sector’s concerns and presented some of the government’s interventions to improve the ease of doing business in the future.

“This is a crucial sector for our economy,” Mbhele said. “It’s crucial in the creation of jobs and especially in providing us with the rates income we need to sustain our city, so it’s a sector we take very seriously.”

Concerns highlighted ranged from complaints about the slow process of

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getting plans for new developments approved and the implementation of projects, and capital expenditure on social services such as rural roads and housing, to the need to get the city’s one-stop shop for the processing of new development applications running more efficiently. Mbhele said the property sector had also raised concerns about how the city intended to tackle climate change, rapid urbanisation, crime and grime in the CBD and surrounding areas, and the inability of formal businesses to compete with informal traders.

“We are not just talking about people coming from rural areas to the city,” he said. “We are talking about people coming from other parts of the continent.

They find refuge in the city and in the process we have to provide them with basic services – the problem is they are beginning to invade strategic land parcels set aside for development.”

Mbhele spoke about a R2-billion investment that the city had lost to Cape Town because it had failed to relocate an informal settlement that had sprung up on a strategic land parcel. “These are real concerns that have an impact on the property sector,” he said. “The biggest

one, which is raised often, is the problem of work stoppages. How do you run a modern economy with cowboys stopping projects? You ask what the city’s position is, and you say that you’re the goose that lays the golden eggs – but you don’t see the city assisting with the problem of work stoppages.”

Concerns also included maintenance of ageing infrastructure, power cuts that take a long time to fix, which results in millions in lost revenue for businesses, and violent service delivery protests, including the burning of public property.

Mbhele said the role of his office was to oversee the organisational reengineering of the city’s services to strategically address these issues, change the organisational culture and improve services overall.

One of the interventions in place is the establishment of customer relations managers to provide businesses with a direct line of assistance from the city, for problems ranging from electricity cuts to waste management.

“Because this in-depth organisational re-engineering will take time, one of the first interventions is to come up with a Rapid Response Unit, hopefully

social in the next four to five months,” said Mbhele. “The responsibility of this unit will be to ensure that while we wait to change the organisational culture – which in certain instances is taking decades – at least we will be able to respond to some of the concerns customers have.

“Despite negative publicity, Durban is still open for business. Our proposed interventions will be taking shape, and we are committing to them. I’m hoping to have an even greater impact in my new role as Chief Operating Officer.”

Mbhele’s talk was followed by a panel discussion, which featured Trade and Investment KZN Chief Executive Officer Neville Matjie, Invest Durban Deputy Head Russell Curtis, Tourism KZN Chief Executive Officer Phindile Makwakwa and facilitator Afika Ndima, who is a project executive in the office of the Deputy City Manager. The discussion focused on Durban’s huge tourism and investment potential.

Invest Durban’s Russell Curtis said there was a need for the city to make a “quantum leap”, and to partner with the private sector in developments.

“Durban must make a step change,” he said. “We need a greater level of honesty – we are running out of time, so we need to stop being politically correct.

“We need to become far more frank in our conversations, and we need a greater number of partnerships, because we don’t have all the funds or all the ideas required. In order to deliver on our mandates, we have to act with a greater level of urgency and truly understand our position – which, in some cases, is on the edge of a precipice. We can no longer sit on islands of prosperity surrounded by seas of poverty.”

FROM LEFT Colin Levin, Shougan Govender, Brian Kannigadu and Tashveer Mungal

Akhil Ganesh and Ilona Govender

Nhlakanipho Nene and Michael van der Meulen

Sponsored by

FROM LEFT Sibusiso Makhatini, Afrika Ndima and Frank Reardon

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Growthpoint Cape Town hosts students’ networking evening Growthpoint’s downtown Claremont office was the venue for this evening networking function held on 21 May

By Mark Pettipher

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efore introducing Growthpoint’s Regional Head David Stoll and Head of Investor Relations Lauren Turner, Associate Professor François Viruly, the Director of the Nedbank Urban Real Estate Research Unit at the University of Cape Town, opened the evening’s proceedings. He welcomed 65 students from the University of Cape Town and the Cape Peninsula University of Technology. Not to overshadow the hosts, Viruly chatted briefly about the commercial property sector and the diverse opportunities within it.

Stoll took us through a number of slides, briefly outlining Growthpoint’s beginnings in 1987, and its original listing as a public company on the Johannesburg Stock Exchange with just 17 properties valued at R90,1-million. He explained how the company has grown and diversified to become an industry leader with a market capitalisation in excess of R70-billion and assets worth more than R122-billion.

Turner, who was visiting from Growthpoint’s Johannesburg office, presented a more in-depth review of Growthpoint’s activities and prospects.

The presentations were followed by questions from the assembled students.

To end the official part of the evening, SAPOA’s Western Cape Regional Vicechairman Khalied Jacobs spoke about SAPOA’s role in the industry and the importance of making meaningful connections and contacts through events such as the student networking evening. He also explained that the commercial property sector is a niche one and that the students are part of an elite class, and encouraged them to join the association.

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FROM LEFT Associate Professor François Viruly (UCT) and SAPOA Regional Vice-chairman Khalied Jacobs with Growthpoint’s Lauren Turner and David Stoll

Students from UCT and CPUT fully enjoyed the opportunity to network

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Students from UCT and CPUT fully enjoyed the opportunity to network

Sponsored by

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PROPERTY SOUTH AFRICAN

REVIEW

The voice for the industry

Each SAPOA member is a leading player and decision-maker in the commercial property arena, they use the South African Property Review as a way to gain important peer exposure and recognition.

With a South African property market value in excess of R5,7-trillion, SAPOA members control about 90% of South Africa’s private sector

commercial land and buildings stock, and manage the majority of property funds listed on the JSE. Open to all commercial property professionals, advertising in the online South African Property Review is an ideal way to reach these important decision-makers.

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● Downloadable connected digital data links and much more ● Reader engagement through

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websites and e-mail hot links ● Interactive advertising ● Call to action opportunities ● The stories behind the stories ● One-on-One interviews ● On Show showcasing properties ● Linkedin and Facebook following

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For advertising opportunities and rates contact t: +27 (0)21 856 1276 / e: pieter@mpdps.com For editorial enquiries contact e: mark@mpdps.com

According to Google an average time spent on a website blog is 4min.

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CDH hosts Brokers’ Breakfast Cliffe Dekker Hofmeyr’s Cape Town office was the venue for a well-attended breakfast seminar on 14 May

By Mark Pettipher

FROM LEFT Cliffe Dekker Hofmeyr presenters Robyn Geswindt, Daniel Fyfer, Simone Franks and Andrew Heiberg, and event organisers Mieke Vlok and Simone Immelman

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liffe Dekker Hofmeyr’s Ben Strauss, Robyn Geswindt, Daniel Fyfer, Simone Franks and Andrew Heiberg took us through a variety of topics.

Ben Strauss opened the proceedings with the complex matter of the pros and cons of buying or selling shares in a property-owning company versus selling the property itself. His presentation also covered the tax angle.

Robyn Geswindt was next, presenting interesting case studies on electronic signatures, and their validity, formality and legality. Electronic signatures in South Africa are approved under the Electronic Communications and Transactions Act, which was instituted in 2002. The South African law adheres to the EU Directive on electronic signatures.

Any company operating in the South African market can use e-signatures as a signing method; they are treated as equal to handwritten signatures.

Still, there are some critical restrictions as determined by the South African legal system.

Most importantly, the e-signature legislation in South Africa does not imply mandatory signing of contracts to make them valid. The agreement is enforced when two or more parties agree on terms orally, in writing or electronically. However,

an electronic signature is a must if you need to provide evidence in court.

Commercial property finance and property sale agreements came next, as Daniel Fyfer outlined some of the lengthy processes and obstacles encountered when applying for clearances.

Rouwkoop and penalty clauses were explained by Simone Franks. A rouwkoop clause originates in South African common law. The word is derived from the Dutch words meaning “regret” and “purchase”.

In essence, it is a clause in an agreement that entitles a party to that agreement to pay an agreed sum of money to be allowed to withdraw from the agreement (purchase his/her freedom). If a purchaser in an agreement containing a rouwkoop clause withdraws from the agreement and pays the agreed rouwkoop amount, the purchaser will be acting in accordance with the terms of the agreement, and his/her withdrawal will not amount to a breach of the agreement.

Franks also discussed an interesting development in drone law, which requires the “pilot” to have a licence to operate the drone if it is being used for commercial purposes. In addition to regulations as to where the drone may be flown, there are now also several tests an individual has to pass before operating the drone.

Cliffe Dekker Hofmeyr’s Ben Strauss opened the presentations

The South African Civil Aviation Authority (SACAA) views a drone as an aircraft, and expects it to abide by the same law as manned aircraft. This means a commercial drone pilot must undergo certification. The first step is to acquire a Remote Pilot’s License (RPL), before applying for an Air Service License via the Department of Transport and a Remote Operator’s Certificate through SACAA. Only once a person has all these certificates can they operate drones commercially.

For anyone considering commercial drone work or requiring in-flight drone insurance, the RPL is a must-have.

To wrap up the presentations, Andrew Heiberg took us through the latest developments on expropriation of land without compensation. We await further clarification from the government on whether or not the Constitution will be amended accordingly.

SOUTH AFRICAN PROPERTY REVIEW

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social

The brokers networking breakfast was a well-attended function, and presented a great networking opportunity

Sponsored by

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SOUTH AFRICAN PROPERTY REVIEW

THE SAPOA ANNUAL CONVENTION & PROPERTY EXHIBITION 2019

Date: Venue:

18 June 2019 Atlantic Beach Golf Course

Format:

Four-ball alliance, better 2 scores to count

Prizes:

Top 3 four-balls Nearest to the Pin Longest Drive Hole-in-One Lucky draws

Prize Giving:

16h00 at the Clubhouse.

Early dinner to be served & full bar facilities for the duration of the prize giving.

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Sponsorship available for 2 holes Contact Jane Padayachee: marketingmanager@sapoa.org.za for more information.

Booking Enquiries should be directed to Puseletso Dube at events@sapoa.org.za or book online: www.sapoaconvention.co.za/ registration/delegate-registration

Golf day sponsor

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SOUTH AFRICAN PROPERTY REVIEW

off the wall

No more plastic bottles?

You might not know that 50% of plastic packaging is single-use (used once and thrown away), which leads to plastic pollution in our rivers and oceans. It’s encouraging to find a company that is developing alternative containers that are disposable – and even edible

By Tshepo Tshabalala

A

n edible, biodegradable alternative to plastic? Yes, indeed. Ooho is a water sachet that you can actually eat.

Made from Notpla, a material that combines seaweed and plant ingredients, it biodegrades in four to six weeks, making it ideal for on-the-go consumption.

Brown seaweed, the main ingredient in Notpla, is one of nature’s renewable resources. Growing by up to one metre per day, it doesn’t compete with food crops, doesn’t need fresh water or fertiliser and actively contributes to deacidifying our oceans.

The product is the brainchild of Rodrigo Garcia Gonzalez and Pierre Paslier, who co-founded Skipping Rocks Lab in 2013 while studying innovation design engineering at Imperial College London and the Royal College of Art. After their first video of Ooho went viral in 2013, they joined Climate KIC, Europe’s largest funded accelerator focused on climate innovation.

The team collaborated with chemists and chemical engineers from the Imperial College to test Ooho at running events, festivals and takeaway shops.

They soon started to work on a scalable manufacturing technology.

At the heart of the manufacturing solution is a local manufacturing machine that produces Oohos on-site in the range of 20 to 150ml sachets, depending on the application. The primary business model is to lease the machine and sell cartridges of materials to co-packers and event organisers, enabling them to produce and sell fresh Oohos containing drinks or sauces as needed.

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SOUTH AFRICAN PROPERTY REVIEW

Applications ● It will replace plastic cups and bottles at running events, races and other sporting events. ● It’s a fun way to provide juices, water or even alcoholic cocktails at festivals and events without using plastic. ● It’s a plastic-free solution to wasteful sauce pots and condiment sachets, and can encapsulate a wide range of sauces, salad dressings and condiments. Developed with the delivery industry in mind, the sachets made from Notpla range from 10 to 60ml and can be composted with food waste.

Notpla sachets are also convenient for takeaway sauces. ● It can be used as a food liner, waterproofing and grease-proofing cardboard takeaway boxes. The Notpla Liner is tackling the problem of lined cardboard, usually coated with plastic made from oil or corn, both of which are non-sustainable.

The company has developed a coating made from Notpla for the food takeaway industry. It’s natural, biodegradable and even re-pulpable.

Future products Nets: We rely heavily on the convenience of nets for carrying produce such as onions, garlic and citrus fruit.

Heat-sealable films: From wrappers to packets of powder and dry food, heatsealable films will enable brands to pass on plastic. They can be designed as water soluble or insoluble films, depending on the application.

Sachets: The company is developing sachets for non-food products such as screws, nails and other hardware. Made from Notpla, these will biodegrade as soon as they come in contact with soil, moisture or bacteria, and will disappear within weeks.

JUNE 2019

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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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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

JHB +27 (11) 642 8751 | PTA +27 (12) 460 3304

www.delqs.com