South African Property Review October 2019 by SAPOA

South African Property Review

PROPERTY SOUTH AFRICAN PROPERTY REVIEW - LogoTreatment.pdf

2016/08/25

REVIEW

11:31 AM

October 2019

The voice for the industry

Cape Town CBD

Sustaining high investor confidence

Education, retail and research

Gleexpo

Africaâ&#x20AC;&#x2122;s first elevator and escalator conference and exhibition

One-on-one

Stepping up to facilities management

State of City Finances Financing public transport

October 2019

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from the CEO

Competition Commission Code of Conduct On 9 September 2019, the Grocery Retail Market Inquiry (GRMI) issued a draft Code of Practice on Retail Leasing (“Code”) to certain participants in the retail property sector, and requested comments from stakeholders in the property sector. The Code, as SAPOA understands it, flows from the GRMI process and its consideration of rentals in retail property

e have some deep concerns with regards to the process adopted in relation to both the Code and the GRMI’s consideration of rentals in the market for lettable retail property. From the outset, SAPOA disagrees that the market for lettable retail property is characterised by structural competition concerns, discriminatory rentals or the prevalence of unfair practices engaged in by owners of lettable retail property against tenants and prospective tenants. We are also fully aware of, and agree with, the imperative for all South African businesses to support small, medium and HDP-owned businesses in order to grow the economy and create jobs. However, the Code in its current form has not been prepared on the basis of enough empirical data to ensure that it is reflective of the actual circumstances in the market it would seek to regulate. It is unreasonable of the GRMI to expect comments on the Code within a period of four business days. Stakeholders must be given an opportunity to meaningfully engage with the issues underlying the Code and the legal implications of the Code. SAPOA met with the Competition Commission on 18 September 2019 to discuss the Code and the GRMI process as it related to rentals, and to ventilate its principal concerns with the Code. These are:

a landlord being available to the prospective tenant without the legal basis for the recourse being explained in the Code. ●● That the Code may result in unintended consequences, which may harm the very class of businesses it seeks to protect, as well as harm competition – for example, the level of transparency required by the Code relating to how rental rates are arrived at may dilute competition and offend the very objectives of competition law.

●● That the GRMI Report doesn’t evidence a clear factual basis for the need for a Code, and there has been no stakeholder participation insofar as the process leading up to the drafting of the Code and it being circulated to stakeholders. In addition, the time frame within which SAPOA and other stakeholders were expected to respond to the GRMI’s draft Code prevented meaningful engagement and is unreasonable. ●● That the Code is not clear in its provisions, and needs to be clarified and explained in several respects. ●● That landlords having to provide reasons for declining to grant a tenant in the designated class a lease suggests recourse against

As such, SAPOA unfortunately cannot support the Code in its current form, and has advised the GRMI that we wish to engage with the GRMI further on this very important matter. In the spirit of constructive cooperation with the Commission, SAPOA has agreed to facilitate an information session between the Commission and various stakeholders. The Commission has, in turn, proposed that this engagement occurs at SAPOA’s offices in Sandton on Friday 4 October at 10am. For the full response to the Competition Commission, please see the letter by Albert Aukema of CDH on page 10. Best regards, Neil Gopal, CEO SOUTH AFRICAN PROPERTY REVIEW

contents

October 2019

PROPERTY SOUTH AFRICAN

REVIEW

The voice for the industry

South African Property Review

PROPERTY SOUTH AFRICAN PROPERTY REVIEW - LogoTreatment.pdf

2016/08/25

REVIEW

11:31 AM

October 2019

The voice for the industry

Cape Town CBD

ON THE COVER Africa’s first global lift and escalator conference and exhibition took place in Johannesburg, attracting more than 1 400 visitors and 68 exhibitors.

Sustaining high investor confidence

Education, retail and research

Gleexpo

Africa’s first elevator and escalator conference and exhibition

One-on-one

Stepping up to facilities management

State of City Finances Financing public transport

October 2019

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

SOUTH AFRICAN PROPERTY REVIEW

3 From the CEO 6 From the Editor’s desk 8 Legal update Site invasions: Potential processes that can be followed 10 Legal update Competition Commission Draft Code of Practice for Retail Leasing 12 Legal update Economic transformation, inclusive growth and competitiveness 18 Entrepreneur one-on-one Stepping up to facilities management 20 Planning and development Research on the implementation of the inclusionary housing policy 22 Opinion Government has the potential to unlock land assets 24 Opinion Listed property: Stress-tested and bearing up in a very tough market 26 GLE Expo First Global Lift & Escalator Expo in Africa 32 Recycling Turning waste into cash 34 ASAQS addresses late and non-payment by national, provincial and municipal government 36 State of City Finances Financing public transport 46 Cape Town CCID Cape Town CBD sustains high investor confidence, CCID report reveals 52 Report back SAIBPP Convention 56 Networking 58 Social 61 Howmuch.net Where does plastic come from? 62 Off the wall Imagine your dream workspace… FOR EDITORIAL ENQUIRIES, email mark@mpdps.com Published by SAPOA, Paddock View, Hunt’s End Office Park, 36 Wierda Road West, Wierda Valley, Sandton PO Box 78544, Sandton 2146 t: +27 (0)11 883 0679 f: +27 (0)11 883 0684 Editor in Chief Neil Gopal Editorial Adviser Jane Padayachee Editor Mark Pettipher Copy Editor Ania Rokita Taylor Public Relations Officer Maud Nale Production Manager Dalene van Niekerk Designers Eugene Jonck, Fanie van Niekerk Sales Pieter Schoeman: pieter@mpdps.com Finance Susan du Toit Contributors Albert Aukema, David Steynberg, Liliane Barnard, Maud Nale, Mumtaz Moola, Nicola Jenvey, Peter Barnard, Raul Amoros/howmuch.net, Stephné du Toit, Tshepo Tshabalala Photography Mark Pettipher 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. Designed, written and produced for SAPOA by MPDPS (PTY) Ltd e: mark@mpdps.com

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62 SOUTH AFRICAN PROPERTY REVIEW

from the Editor’s desk

Sign of the times Publishing trends over the past few years have changed. Multinational publishers are moving away from print and offering digital-only editions of our favourite consumer publications. Going forward, South African Property Review will be a digital-only publication

n some respects, telling you about SAPOA’s decision to make South African Property Review into a digital publication is like preaching to the converted. I say this because you’re already reading this online! But what does it mean to us as publishers? For a start, we’re no longer constrained by a specific number of pages that we need to adhere to, which allows us to be able to talk in greater depth about certain subjects. We’re able to bring in more relevant and meaningful information in the form of graphs, tables and charts, and wherever they are referenced, we can direct you to those references for greater clarity. In short, we can more easily back up our findings, and use references with greater authority. When it comes to that important government legislation or promulgated rules and regulations, we can give you an overview while being able to direct you to the information in its entirety, so you can form your own opinion. Editorially, we are not abdicating excellence in writing responsibly: we’re asking more questions and looking for greater depth in what we offer. The view of our industry is rapidly changing, and whether we like it or not we’re part of the fourth industrial revolution. Property Review needs to change quickly; it needs to be responsive and deliver rich media to our readers. To this end, we are (and have been for some time) enhancing our articles with embedded video and soundbites. In future, we’d like to start conducting video interviews, during which we can see the personalities of our interviewees to come alive far beyond what is possible on a static page. 6

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As you can probably tell, I’m excited about the prospects. We’ve been driving a digital version of Property Review for a few years already, but there is so much more we can do. Our sales director, when approaching potential advertisers, is often told, “We don’t advertise in print.” Our enhanced digital offering will mean that any client’s advertising campaign can be brought to life. Your TV advert can be embedded in your magazine advert; your reach could become greater, and your “call to action” much more focused and targeted. I’m not telling you anything new when I say that Property Review is targeted specifically at SAPOA members. Ninety percent of South Africa’s commercial property owners are SAPOA members; they see the value of the association. South African Property Review is the voice of the industry. The association champions the industry’s causes, and the magazine is a valuable tool in spreading the word about not only what SAPOA is doing for its members, but also for members to tell one another what they’re working on and what innovative ideas they have.

The written word is being made more powerful by including rich media Evidence of what I’m talking about can be seen in this month’s issue. It seems to be “report and conference” season: this month alone we attended the SAIBPP Convention in Durban, Africa’s first elevator and escalator convention and exhibition, and the release of CCID’s annual review. We’ve conducted one-onone interviews with opinion-makers, entrepreneurs and financiers. All this amounts to more editorial than we would have been able to run had we had to consider print. Having said that, we’ve still got print in the back of our mind – so you can download a PDF version of whatever article you’re reading to print out later, or download the entire magazine and save it on your desktop or device. If you’ve come to Property Review via the magazine’s landing page, you would have seen the app option. The app is “smart”: it knows whether you’re using a tablet or a phone, as well as the kind of operating system you’re running. Follow simple instructions to get the app onto your home screen; once it’s there, the magazine will automatically refresh with the latest issue as soon as it is uploaded each month. Google Analytics allows us to track the number of readers and page views we have (and which pages hold the readers’ attention for longest). We’ll be studying that data and your reading habits so that we can improve our offering. Thank you for your loyal readership, and thanks for staying online with us. Mark Pettipher, Editor and Publisher

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legal

Site invasions: Potential processes that can be followed A brief note on the issue of site invasions, the roles and responsibilities of developers and contractors regarding them, and the potential processes that can be followed when such invasions occur Courtesy of Cox Yeats Attorneys Ncondo Chambers, Vuna Close, Umhlanga Ridge, Durban Dx 50 PO Box 913, Umhlanga Rocks 4320 T: +27 (0)31 536 8500 | F: +27 (0)31 536 8088 | W: www.coxyeats.co.za 16 September 2019

Introduction We set out below a brief note on the issue of site invasions, the roles and responsibilities of developers and contractors regarding them, and the potential processes that can be followed when such invasions occur.

History The original business forums that we are aware of began invading construction sites during or around 2016. The first business forum that we encountered was the Delangokubona Business Forum. The issue of site invasions began in KwaZulu-Natal. It soon spread to the Eastern and Western Cape, and has now moved into Gauteng. The approach as adopted by the invaders has developed into a new business model in the country, and it has unfortunately extended to cleaning services, refuse collection, security and till operator positions as well.

The invaders There are usually four groups that approach construction sites and engage in unlawful conduct/make unlawful demands. The groups are: ●● Local communities; ●● Business forums; ●● Taxi associations; and ●● uMkhonto weSizwe Military Veterans. 8

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There is little to no co-ordination or standardised approach between or within the various groups, and experience shows that each group is simply trying to advocate their own position and push their own agenda.

The approach Groups will generally arrive on site at the premises unannounced and en masse. They will demand to speak to upper management. They will frequently threaten violence, shutdowns, damage to property and personal injury in the event that meetings do not take place, or if their demands are not met.

The demands made In respect of construction sites, the invaders typically insist that 30% of the work on site must be given to them/their members/their constituents. This 30% demand seems to have arisen out of a misinterpretation of regulations promulgated under the Preferential Procurement Policy Framework Act. Those regulations refer to the government having the power to direct that building contractors tendering for government projects subcontract up to 30% of the work to designated groups. These requirements do not apply to private developments. Regardless, invaders typically do not appreciate the difference between private and public projects, and believe that their/

legal

their members’ alleged locality to the site entitles them to 30% of the project work. This misconceived entitlement appears to have bled into other sectors, and it is now becoming a general proposition that 30% of works/jobs have to be given to “locals”, i.e. the invading parties – who, in fact, may be principally based anywhere in the country.

Employers’ involvement In respect of construction sites, the building agreement governing the relationship between the developer and the contractor would typically record that all risk on and attributable to the site is passed to the contractor on handover, and is only returned to the developer on completion. Accordingly, developers would typically be well within their rights to refuse to get involved, and insist that the contractor take all the steps necessary to reduce the delay and solve the problem. There are typically four approaches that contractors adopt when these invasions occur, either before or immediately after negotiation periods: ●● Pay-offs; ●● Appointments under duress; ●● Police intervention; or ●● Obtaining court orders. Apart from the legality issues, pay-offs are problematic to the industry in general as they incentivise invaders to continue with their behaviour. In our experience, forced appointments are typically only to the detriment of the project. The rate of progress slows down, the quality decreases and the prices increase. At the end of the day, the developer ends up receiving a substandard product. Without civil judgments ordering police intervention, charges laid with the police are typically unhelpful and go unprosecuted. Charges could be intimidation, harassment, assault or trespassing – which the police often struggle to deal with given other, more serious crimes and a lack of resources. The most effective approach can frequently be that of approaching the Civil Courts. Court orders can be obtained to prevent the offending individuals from committing any unlawful acts, and directing the police to take all steps necessary to give effect to the court order. Provided that some of the offenders’ organisations and individuals can be named and can be contacted, the application can be launched, and the order granted, in a matter of days.

In our experience, these orders mean ensuing help from the police is often the most effective way of deterring invaders from continuing with the unlawful conduct. In other circumstances, negotiations have been successful and beneficial appointments have been made. Alternatively, proposals such as free shareholding or stake-holding have been granted to individuals/forums so as to prevent unlawful conduct. This option does present other risks and is not always successful. We typically only deal with sites and developments where contractors or developers are not prepared to acquiesce to the unlawful demands. In the event of an invasion, we recommend that both contractor and developer jointly approach the situation, decide on which approach they wish to adopt, and resolve the issues as quickly as possible. We are always available and willing to assist. PETER BARNARD Cox Yeats

Your legal team on the ground in South Africa. fasken.com

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legal 1 Protea Place, Sandown 2196 Private Bag X40, Benmore 2010, South Africa Dx 42 Johannesburg T: +27 (0)11 562 1000 F: +27 (0)11 562 1111 E: jhb@cdhlegal.com W: cliffedekkerhofmeyr.com Also at Cape Town and Stellenbosch

The Competition Commission of South Africa Grocery Retail Market Inquiry Uuzaji Building Block E Second Floor The DTI Campus 77 Meintjies Street Sunnyside Pretoria 0002

Our Reference Account Number Your Reference Direct Line Direct Telefax Direct Email Date

Albert Aukema Sunel Grimbeek +27 (0)11 562 1250 +27 (0)11 562 1000 albert.aukema@cdhlegal.com 11 September 2019

Attention: MS SUNEL GRIMBEEK retail@compcom.co.za COMPETITION COMMISSION DRAFT CODE OF PRACTICE FOR RETAIL LEASING

1. We act for the South African Property Owners Association (”SAPOA”), and this submission is made on its behalf. This submission is made to the Competition Commission’s Grocery Retail Market Inquiry (”GRMI”) on an urgent basis given the importance of the issues it traverses, and we trust that the GRMI will give this submission due consideration. 2. SAPOA is a well-respected and representative association, committed to actively and responsibly representing, protecting and advancing its members’ commercial property interests within the property industry. Its members comprise a diverse range of property owners, with its membership ranging from listed firms to small and medium enterprises and enterprises owned by historically disadvantaged persons (HDPs). 3. SAPOA has considered the preliminary report issued by the GRMI as well the draft Code of Practice on Retail Leasing (”Code”) subsequently issued by the GRMI to certain participants in the retail property sector on Friday 6 September 2019. We understand that the Code is a consequence of the GRMI’s views, as expressed in the preliminary report, that there are significant disparities between large and small tenants in the market for lettable retail property insofar as rentals, escalation rates and related commercial terms are concerned. 4. SAPOA is extremely concerned regarding the process adopted in relation to both the Code and the GRMI’s consideration of rentals in the market for lettable 10

SOUTH AFRICAN PROPERTY REVIEW

retail property. At the outset, we note that SAPOA disagrees that the market for lettable retail property is characterised by structural competition concerns, discriminatory rentals or the prevalence of unfair practices engaged in by owners of lettable retail property against tenants and prospective tenants. 5. The leasing practices of owners of lettable retail space and the determination of rentals, escalations and related contractual arrangements are complex matters, and are broader than the issue of lease exclusivity in retail property as identified in the terms of reference and statement of issues published by the GRMI. SAPOA and its members were not aware that interventions in rental pricing were being considered within the context of the GRMI. Had there been notice that rental pricing formed part of the GRMI process, SAPOA has no doubt that its members would have participated vigorously and constructively in the GRMI process on these matters. 6. Although SAPOA is aware that certain of its members have now, at a very late stage in the GRMI process, received requests for information regarding rentals after the publication of the preliminary report, this process has not afforded stakeholders sufficient time to appreciate the full import of the Commission’s process and the basis for the findings about discrimination in the market for lettable retail property insofar as rentals, escalation rates and related contractual arrangements are concerned.

legal 7. It is unreasonable of the GRMI to expect comments on the Code within a period of four business days. Stakeholders must be given an opportunity to meaningfully engage with the issues underlying the Code and the legal implications of the code. The Code, or a regulation to achieve its objectives, may have a significant impact on the market for lettable retail property, and there are many areas of the Code that need to be expanded on and explained by the GRMI before stakeholders can meaningfully engage with it. 8. SAPOA is fully aware of and agrees with the imperative for all South African businesses to support small, medium and HDP owned businesses in order to grow the economy and create jobs. However, the Code in its current form has not been prepared based on enough empirical data to ensure that it is reflective of the actual circumstances in the market that it would seek to regulate. 9. The Codeâ&#x20AC;&#x2122;s requirements that landlords (i) give transparent insight into how a firmâ&#x20AC;&#x2122;s rentals are determined, (ii) disclose differences in rental levels and escalations, and a push by the Code to ensure escalation rate uniformity, may well have the effect of reducing competition in what is currently a very competitive market. Intervention in the mechanisms for determining prices (rentals and escalation rates) in a dynamic and competitive market such as the market for lettable retail property should be approached with great circumspection, and based on credible and wide-ranging empirical economic assessment. As such, it is respectfully submitted that the GRMIâ&#x20AC;&#x2122;s preliminary report does not contain a proper basis to justify any intervention, and the proposed Code has not been properly conceived of. 10. SAPOA unfortunately cannot support the Code in its current form, but wishes to engage with the GRMI on this very important matter. It is therefore respectfully requested that the GRMI does not proceed to address rentals, escalation rates and related contractual terms in an overly hasty manner within the very limited amount of time remaining in the current GRMI process.

Yours faithfully,

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ALBERT AUKEMA CLIFFE DEKKER HOFMEYR INC SOUTH AFRICAN PROPERTY REVIEW

legal

Economic transformation, inclusive growth and competitiveness On 27 August 2019, the National Treasury released a policy paper entitled “Economic transformation, inclusive growth, and competitiveness: Towards an economic strategy for South Africa”, and requested submissions from various industries. Below is SAPOA’s submission on issues affecting the property industry 15 September 2019 Honourable Minister of Finance Private Bag X115 Pretoria 0001

Rita.Coetzee@treasury.gov.za

Dear Honourable Minister of Finance, We refer to the National Treasury policy paper entitled “Economic transformation, inclusive growth, and competitiveness: Towards an economic strategy for South Africa”, which was released on 27 August 2019. We thank you for allowing us the opportunity to make a submission on issues affecting the property industry. The South African Property Owners Association (“SAPOA”) is a non-profit company, and is recognised as the representative body and official voice of the commercial and industrial property industry in South Africa. SAPOA was established in 1966 by the leading and large property investment organisations to bring together all role-players in the commercial property field, and create a powerful platform for property investors. SAPOA, the “voice of commercial property”, is recognised as the representative body and official voice of the commercial and industrial property industry in South Africa, with a combined portfolio in excess of R500-billion. SAPOA members control approximately 90% of all commercial and industrial property in South Africa. SAPOA also enjoys representation on key South African bodies such as BUSA, Nedlac, the Services SETA, the Property Sector Charter Council, National Treasury steering committees, various Chambers of Commerce and local and provincial planning structures. SAPOA members’ investments constitute both local and international assets. We are encouraged by the government’s stance to consider factors that would contribute to specific growth reforms that can achieve the outcomes of economic transformation, inclusive growth and competitiveness. Our submission will focus on the commercial property industry and outline some of the challenges being faced. 12

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We believe that business should proactively and constructively engage the government on certain spheres of policy-making. The alternative is that damaging policies can become a reality, causing capital flight and a lack of appetite for further investment.

CHALLENGES FACED BY THE COMMERCIAL PROPERTY INDUSTRY 1. PROPERTY RATES Current situation Property rates have been the second-fastest-growing operating cost item for property owners and investors since 2007, with a compound annual growth rate of 9,7% (inflation + 3,6%). Indeed, only electricity costs have risen at a higher pace. Over the last decade, property rates have consistently increased at a faster rate than inflation, and have increasingly come under the microscope as landlords focus on preserving their net income in a challenging trading environment. Over the period 2005-2016, property rates grew at an annualised rate of inflation + 8,2%, equating to a compound annual growth rate of 12,1% in nominal terms. Real increases in property rates have been especially pronounced in the retail sector. Since 2007, retail property rates have grown by a compounding 12,7% per annum (inflation + 6,4%). Given their above-inflation growth and their higher growth relative to other operating costs, property rates have increased as a percentage of total operating cost over time. In 2005, property rates worked out to 17,3% of total operating costs – by the end of 2016, this had escalated to 22,8%.

What do our investigations highlight? It is common knowledge that the South African municipal valuation sector is in dire straits and in need of urgent revision, especially insofar as the valuation of commercial properties.

legal Much criticism has been levied against the way in which the Municipal Property Rates Act (MPRA) has been implemented by municipalities. There is a general consensus that municipalities are performing better with residential properties than with commercial properties. When it comes to commercial properties, there is little consistency and accuracy with regard to the municipal values. In our view the fault does not lie with the Act as such; rather, the main weaknesses can be attributed to: ●● Inexperienced valuers being appointed to perform valuations; ●● Municipalities not grasping the vital relationship between a complete and accurate valuation roll and tariff setting, i.e. the property rates budget; ●● The complete lack of property information that would enable the municipal valuer to perform accurate and consistent valuations; and ●● Inadequate resources to compile valuation rolls that are consistent, and the maintenance thereof. Implementation of the MPRA is failing at most municipalities in the country. The implementation of the MPRA has become problematic, resulting in general and supplementary valuation rolls that are not accurate, consistent, efficient or uniform, as intended by the Act. This has a direct negative impact on property rates, and further impacts on landlord and tenant relationships, as property rates are one of the top expenses on the landlord’s list of operating expenses. Property owners may be liable for penalties if information is not submitted or is incorrectly submitted. Municipalities cannot continue to use property rates as a mechanism to balance their books.

2. PUBLIC PARTICIPATION In many of our engagements with government departments, our experience shows that public participation processes are used as a “tick-box exercise”. Allowing affected and involved stakeholders to engage over a by-law or a bill is part of the legal process, only for us to realise after lengthy engagements that most, if not all, of our comments have been ignored.

3. LACK OF RESPONSES One of the biggest areas of concern is the lack of acknowledgement of our correspondence and comments to government departments and local authorities. For an industry that contributes between six and eight percent of the country’s GDP, many of our letters and requests are ignored. This lack of engagement is having a direct and detrimental impact on the business environment.

4. INEFFICIENCY AT MUNICIPAL LEVEL The delays experienced with rezoning applications are on the increase. It is quicker to obtain approvals in Ghana or Kenya.

5. “CONSTRUCTION MAFIA” SITE INVASION Listed and emerging contractors are gravely concerned that construction projects worth a minimum of R25,5-billion are being violently disrupted and halted in South Africa, and the harm this causes to investor confidence in our economy. Recently, a joint venture between Aveng and the Europeanbased Strabag International pulled out of the R1,65-billion SANRAL Mtentu Bridge Project in the Eastern Cape because of site disruptions by armed gangs demanding to be part of the project. The project is part of the N2 Wild Coast Road Construction. NB: despite reporting this to the police and the interdicts obtained, the disruptors were released after arrests and continued disrupting the sites unabated with AK47 rifles. On 13 March 2019, a R2,4-billion German oil storage project being built by WBHO in Saldanha in the Western Cape was halted due to property and plant being burnt down by armed gangs demanding to be part of the project. Again, police arrived quickly, but said there was nothing they could do as only the public order police from Paarl could handle the situation. It took the public order police three hours to arrive, while local police and contractors watched properties burning. Contractors, including female engineers and staff, had to run for their lives into the veld. Some contractors have been killed on site.

6. UNLISTED REITs Scope of the problem ●● Under the current tax laws, unlisted property companies structured as variable rate loan companies are unfairly prejudiced on the basis of the composition of their shareholding; i.e., that a long-term insurer, pension fund, provident fund REIT or short-term insurer must hold at least 20% of the variable rate property loan stock company shares in order for the income generated to qualify as interest income and not be hybrid interest, which is now taxed at full company tax rates and the interest payment deemed to be dividends. ●● Extending REIT status to South Africa’s unlisted real estate entities will give them access to the same flowthrough of tax after net property income that the listed property sector already enjoys. It will level the playing field for the property industry.

Problems developing ●● Existing funds (which are subject to the 20% shareholder exemption) cannot raise capital, or else risk losing their special dispensation. This in turn affects the portfolio quality, and ultimately investors’ (pensioners’) values. ●● All the listings since 2014 (about R30-billion of real estate) were existing unlisted portfolios brought to market. Many of these funds are not institutional-quality and should not have been listed in the first place; they are harming investors as they flounder and giving the sector a bad name. SOUTH AFRICAN PROPERTY REVIEW

legal ●● There have been no new funds brought to market during this period without first being incubated by a listed peer, which is stifling employment and entrepreneurship. ●● The listed property sector currently employs well over 3 500 people, and provides dividend income to many, many more, which in turn provides much-needed tax revenue to the country. ●● Unlisted funds existing without regulation will take on excessive levels of gearing in order to reduce their taxable income. By giving these funds a formal environment in which to operate, the income will flow through the business and be taxed in the hands of the investors. ●● We estimate there is R50-billion to R100-billion more property that is trapped in this manner, and a further R50billion to R100-billion new funds that could be incubated, if supportive legislation for unlisted REITs is created. The implementation of the Financial Sector Regulation Act (2017) and the establishment of the Financial Sector Conduct Authority allows regulation of unlisted REITs. It is proposed that the government consider the regulation and tax treatment of unlisted REITs that are widely held or held by institutional investors, in line with the announcement in the 2013 Budget Review. It is imperative that we unlock this impasse at the National Treasury. The solution is easy – it merely requires the will and decision.

7. ELECTRICITY: PLANNING, PRICING AND ESKOM’S SUSTAINABILITY We are in agreement that future electricity supply and tariffs should be managed in a transparent and predictable manner. The paper suggests that “consideration should be given to regulations and legislation to enable households and firms to sell the excess electricity the generate through rooftop solar PV systems”. Given that SAPOA members own and control 90% of all commercial, retail and industrial properties in South Africa, there are tens of millions of square metres of rooftops that provide an ideal opportunity to generate and sell excess electricity back to the municipalities.

We recommend that the government consider dealing with the following: 1. NERSA currently limits every solar PV installation to a maximum output of 1MW, making most installations economically unviable. 2. One may apply to NERSA for a licence to exceed the 1MW limitation; however, such licence approvals are not forthcoming. 3. Local councils need to approve rooftop solar PV connections to the grid, which is once again a frustrating process. 14

SOUTH AFRICAN PROPERTY REVIEW

4. Certain municipal authorities are not allowing feedback of excess electricity into the grid for sale – the recommendation in the paper is to be encouraged. 5. In cases where excess electricity can be sold back to local municipalities, the price paid is significantly lower than Eskom’s tariffs (in some cases, as low as 20 cents per kilowatt hour). We would appreciate this being reviewed.

8. GOVERNMENT LEASING The Department of Public Works, with its large requirement of space for government departments, has used this objective as an ideal mechanism to accelerate property ownership by historically disadvantaged parties. SAPOA subscribes to the principles of transformation, and sees itself as a major contributor to this process in the property industry. SAPOA has empathy with the position of the Department of Public Works as a custodian of a number of property assets that can be utilised to accelerate BEE ownership, and fully acknowledges the Department’s prerogative to extend itself beyond the framework of the Property Charter in utilising these assets to achieve those objectives. SAPOA’s desire would be for the correct marketing of such initiatives as specific to the government’s circumstances in order to avoid a general mind-set in the industry towards deviation from the Property Charter Framework, as this would generally undermine the Charter and industry initiatives to achieve compliance. The industry requires more certainty with regards to government leases. Short-term leases, unsigned lease agreements and delays in (or lack of ) rental payment from the government is hindering business activity. A 10-year lease (nine years and 11 months) is the most bankable lease that would catapult new entrants into ownership and afford that new entrant some economic benefit beyond the residual value of the property. Escalations in lease agreements cannot be prescribed as there are disadvantages to prescribing a standard rate. It may lead to an inability to transact on a deal-by-deal basis. We believe that escalations should be market-related and not determined at the discretion of the Director General of the NDPW. We believe that all participants in this market should be treated equitably when leases are below market rentals. A rental reversion should rather be applied, than the escalation adjustment proposed. The implications of a discretionary escalation increase that is higher than the rate of inflation would place an unfair burden on the State and the taxpayer. 8.1 SAPOA, together with the DPW, wants to see efficiency in the areas of lease agreements, rental collection, development opportunities and so on, for the benefit of both landlords and historical, existing and new BEE beneficiaries.

legal 8.2 We require the DPW to resolve the lag in signing of leases between government and our members, and the late receipt of rental payments has had a highly negative impact on landlords. 8.3 The construction industry is in a state of emergency due to lack of work and non-payment of contractors (for completed and certified work) by public sector client departments, which go against the President’s statement that, “The stimulus and recovery plan prioritises infrastructure spending as a critical driver of economic activity” (President Cyril Ramaphosa, 21 September 2018). 8.4 Late payment of all suppliers by Public Works (including landlords) has caused SMMEs to go out of business.

The result While we acknowledge that there are many developments currently initiated, we believe the future pipeline is likely diminishing as a result of the above. Last year, SAPOA members invested four times more internationally than in South Africa. Domestic acquisition volume fell more than 50% between 2017 and 2018, and international investors have stayed away, leading to a double whammy locally. According to a recent study by Real Capital Analytics, South Africa-headquartered investors placed US$4,9-billion overseas in 2018, of which over 60% was invested in retail, and nearly 20% into each of the office and industrial sectors. All the cross-border investment for the year took place in Europe, with 30% focused on Poland and 17% in the UK. Among many other contributing factors, rising municipal rates and taxes have led the charge in the commercial property sector moving investments offshore. SAPOA members contribute significantly to the rates base, with rates and taxes being the second-fastest-growing operating cost item for property owners and investors. As a sector, commercial and industrial property wants to contribute in a positive way towards the efficient functioning of municipalities, but there is increasing amount of evidence indicating that the continuous over-inflationary increases in property rates are leading to investors seeking better returns offshore. We believe it to be in the interest of both commercial property investors and municipalities to find resolve on this matter to avoid a continuing trend, as it is increasingly influencing investment decisions in the property sector. The property sector is also concerned about the implementation of the way in which municipalities levy the rate in the rand on the value of the property. The rate is reset annually to cater for inflation, but should be reset back to original levels once the properties are re-valued (approximately every five years). If this isn’t done, inflation is then being provided for twice, which results in super-inflation

for the property owner. This is improper and, as the voice of commercial property, we aim to ensure that municipal rates are being reset in each new valuation year. SAPOA has, in the past, been vocal in challenging the legality of increased municipal rates charged to its members. Rising operating costs threaten the sustainability of net returns across the spectrum of commercial and industrial property investment. Since the sustainability of the property sector is a key focus for SAPOA, we have been vocal in challenging the consistency of municipal rates charged to our members. Consequently, the tougher trading environment is making it increasingly challenging for landlords to deal with the additional tax burden. We acknowledge that rates are necessary to fund municipal service delivery and outputs, but these must be levied correctly. Our Constitution and laws are clear: rates and taxes must be levied in a just and equitable way, and this should be done by accurately determining the value of properties. As an industry body, SAPOA is committed to ensuring rates are being levied from a correct base, and not being overcharged. We believe this is essential to further an enabling environment for business and the commercial property sector in South Africa, and to help ensure the sustainability of our economy. However, as much as SAPOA has been vocal about this matter, it is evident that municipalities are not really heeding to the call. As a result, and due to other contributing factors( site invasions, low GDP growth, a skills deficit, delays in rezoning applications approvals), many investors and property companies have moved their investments offshore. Seventyseven percent of all capital raised in South Africa in the property sector in 2018 was moved offshore. Acquisition volumes have fallen sharply, and overseas acquisitions by SAPOA members increased sharply in the past five years. Unfortunately, by using property rates as a tool to try to balance their books, municipalities will eventually become victims of their own success. Higher rates mean fewer developments, which translates to a contracting rates base. This dangerous and unsustainable process has already started gaining momentum, with billions of dollars being diverted offshore. In conclusion, we believe that these challenges undermine property rights in South Africa, and that giving the public and business the opportunity to influence policies in a meaningful way can go some way towards addressing low growth rates and negative investor sentiment. We would be happy to engage further with you – and once again, thank you for allowing us the opportunity to address these matters with your office. Kind regards, NEIL GOPAL SAPOA Chief Executive Officer SOUTH AFRICAN PROPERTY REVIEW

> Aim of the Course:

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3 Day Course

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GENERAL INFORMATION

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

CAREER EXCEL ACADEMY Vicki Fourie Programme Administrator T: +27 12 808 9959 F: +27 86 586 2024 E: Email: info@cea.co.za W: www.cea.co.za

Career Excel Academy

FMP

entrepreneur one-on-one

Stepping up to facilities management In a series of Property Point entrepreneurial one-on-one interviews, Property Review speaks to Thando Ncube, founder of the facilities management company STP Project Solutions, about his journey from being a security guard to becoming a business owner Interview by Mark Pettipher Words by David Steyberg

Thando Ncube, founder of STP Project Solutions

SOUTH AFRICAN PROPERTY REVIEW

he opportunities for small businesses to provide support in non-core areas of other small and medium-sized businesses are vast. This is the view of Thando Ncube, whose facilities management company STP Project Solutions is filling a gap in the market quite successfully after just three years in business. “I know there are businesses looking for fully fledged facilities managers but not willing to on-board a large company,” says Ncube, explaining that what makes his company unique and relevant is the fact that he can manage small organisations of between 300 and 1 000 people. “Those companies cannot hire someone internally – but they cannot

hire a huge facilities management firm either. This is my unique selling point: I understand their business model and offer them a solution. For example, a trucking company’s business is trucking, so everything that is not trucking is not its core business – and therein lies my value proposition.” With aspirations of forming a group of companies in the future, combining facilities management, architectural and design services, this is a far cry from where Ncube’s journey began. “I started as a security guard at Group 6 Security Services before joining Johnson Controls Facilities Management as a general handyman,” he says. “I then went through the ranks – facilities supervisor,

entrepreneur one-on-one

building supervisor, building manager, and finally account manager. I fell in love with facilities. I’m actually married to facilities!” Today, STP Project Solutions employs the services of about 16 people who fulfil the necessary electrical, plumbing and maintenance work. “All of them are qualified,” says Ncube, adding that his service providers receive training under his company’s banner. “Whenever we tender or submit a proposal, we ensure that we have the supporting documents. We cannot employ just anyone without a certificate or training. You need to hire the right people for quality and for compliance – if you don’t, you put yourself and your customers at risk.” As an entrepreneur and business owner, Ncube admits that despite being in business for three years and positioning his company to serve the interests of small and medium-sized businesses, he still finds his company’s size a challenge when applying for contracts. “Getting new business is a challenge,” he says. “One of the key issues is that, because we are a small business, some organisations feel it is risky to do business with us.

“We are growing, but I am yet to find people for some of the roles that I need to fill. Number one is to find my secondin-command – another Thando, so to speak, who would be the operations manager. I also need to find someone to do the admin and provide office support. And then, I need a team of handymen because that is the core of our business.” Making it this far is testament to Ncube’s perseverance, and his willingness to learn and be mentored by those who have come before him. “Tshinyi Magoro from CBRE’s facilities management division is one of the people who defined the person I am today,” says Ncube. “She taught me how to do business, how to conduct myself, what customer service meant. “The second person is one of the executive directors at Tracker, Clement Olivier. Tracker incubated me as one of its supply development providers, so Clement spent a decent amount of time with me, helping me to set up the business. He has taught me to be an ethical businessperson, and has been hugely influential on my overall development as a business owner.”

Ncube’s advice for hopefuls who want to start their own business in the property industry is to “just go and do business”. But, he says, “In any business, there are three things you must consider. First, you have to define an existing problem. Then, you have to find a solution to that problem. And third, you must find out whether customers are willing to pay for that solution. If they are, you will do well in business!”

SOUTH AFRICAN PROPERTY REVIEW

9, ing ,

planning and development planning and development

Research on the implementation of the inclusionary housing policy 22 August 2019

Hunt’s End Office Park Paddock View Building 36 Wierda West SAPOA hasRoad undertaken research on the implementation of the City of Johannesburg’s Wierda Valley planning and development inclusionary housing policy. This policy was approved by the council on 21 February Sandton 2019, with its mandatory implementation commencing on 23 May 2019. Through PO Box 78544

its implementation, in new residential developments comprising 20 dwelling units or Email: more,reception@sapoa.org.za a minimum of 30% of total units must be for inclusionary housing www.sapoa.org.za

Dear Sir/Madam

Dear members,

SAPOA has undertaken research on the and utilising existing housing mechanisms SAPOA has undertaken research on the implementation of implementation of the City of Johannesburg’s (Option 1); concern relating to unit size restrictions housing policy. This demand, policy was by Council on inclusionary housing policy. This policy was and funding, market andapproved construction approved by the council on 21 February 2019, cost of smaller units (Options 2 and 3); as well implementation commencing on 23 May 2019. Throug with its mandatory implementation commencing as the lack of negotiation guidelines, degree developments of 20ofdwelling units or more, a m on 23 May 2019. Through its implementation, of negotiabilitycomprising and prospects time delays in new residential developments comprising (Option 4). for inclusionary housing. of 20 dwelling units or more, a minimum While the reaction and effect of inclusionary of 30% of the total units must beset aside housing policy implementation will not be Dear members, Dear members, housing. for inclusionary homogeneous throughout development The objective of SAPOA’s the research was to determine the The objective of SAPOA’s research sector, the risks presented by the policy on the development feasibility ofand residential he objective of SAPOA’s research effect was toof determine guidelines, degree of negotiability, prospectsprojects of timein the C was to determine the potential are expected to bring about decreased and existing mechanisms (Option 4). theutilising potential effect of housing policy implementation the delays policy implementation onresearch the development investment in residential development on the residential sector, property market inves SAPOA has undertaken on the on implementation of the Cityproperty of Johannesburg’s inclusionary (Option 1); concern relating to unit size restrictions While the reaction to – and effectisoftransferred – inclusionary housing development feasibility of residential projects in the city, feasibility of residential projects in the city, in the city, while investment economy. TheFebruary research 2019 methodology was centred o housing policy. policy was on residential 21 with itsthroughout mandatory and funding, market and construction policy and subsequently theThis potential effect on approved the implementation will not be homogeneous and subsequently thedemand, potential effect on residential the by Council to external markets. residential property sector, property market The potential of implementing the residential stakeholders on effect housing themes. property property market investment and23 development, the property development sector, the risks presented by the cost ofsector, smaller units (Options 2on and 3); May as well2019. implementation commencing Through its inclusionary implementation, new development, and the was local policyare may thus include marketand the local The researchguidelines, methodology centred policy expected to bringdecreased about decreased investment as investment the lackeconomy. ofand negotiation degree economy. The research methodology was oriented housing supply and a downturn in developments comprising of 20 dwelling units or more, a minimum of 30% of the total units must around gaining input from property sector stakeholders on in residential development in the city, while investment is be of negotiability and prospects of time delays The central risk for the property sector is that inclusionary h centred on gaining input from property sector the residential construction sector, which inclusionary housing themes. transferred to external residential markets. The potential effect (Option 4). forstakeholders inclusionary housing. on inclusionary housing themes. may subsequently affect local economic The central for the property sector of is that inclusionary ofburdensome implementing the policy may thus includeand decreased marketto private developers threaten to derail t While theriskreaction and effect inclusionary The central risk for the property sector growth. Decreased supply of markethousing requirements may be financially burdensome to private orientated housing supply and a downturn in the residential housing policy implementation will not be projects. housing While the majority of increased private sector stakeholders is that inclusionary housing requirements oriented may catalyse developers and threaten to derail thethe development feasibility construction sector, which may subsequently affect local homogeneous throughout development may be financially burdensome to private housing in theeffect city. of The objective of SAPOA’s research was to determine theprices potential policy finds implementation of inclusionary research that the majorit of residential While the majority of private sector economic growth. housing, Decreasedthe supply of market-orientated sector, theprojects. risks by thedevelopment policy developers andpresented threaten to derail Accordingly, SAPOA advises stakeholders stakeholders agree with the principles and objectives of housing onfeasibility the development feasibility ofWhile residential inresidential the and subsequently the potential effect mayCity, catalyse increased housing in prices in the city. the property market the City of Johannesb of to residential projects. the projects in the property sector to consider the concerns are expected bring about decreased inclusionary housing, the research that the majority expect and Accordingly, SAPOAto strongly advises stakeholders in the ofin private sectorfinds stakeholders agree risks inherent thedevelopment, city’s inclusionary investment residential development regulatory burden and associated with the mandated requirem onmajority the residential property sector, property market investment and the local the policy to negatively impact the residential property market property sector to consider the concerns and risks inherent with the principles and objectives of inclusionary housing policy in and future property in the city, while investment is transferred economic fluctuations; the “30% of dwelling minimum ineconomy. the City of Johannesburg. Concerns relate an increased the city’son inclusionary policy in property futureunits” property The research methodology was to centred gaininghousing input from sector housing, the research finds that the to majority investment initiatives. to external residential markets. regulatory associated with thethe mandated requirements, investment expectburden the policy to impact residential The fullinitiatives. SAPOA findings be accessed on cost-offsetting effects of thecan availed incentives. The potential effect of implementing the stakeholders on inclusionary housing themes. property market the and Cityeconomic of Johannesburg Sapoa.org.za/events/presentations. which are inflexibility to in spatial fluctuations; the our Thewebsite, SAPOA findings are accessible on our website, at policy may thus include decreased marketnegatively. relate to an increased “30% of dwellingConcerns units” minimum inclusionary requirement; sapoa.org.za/events/presentations. oriented housing supply and a downturn in regulatory burden associated with the mandated Kind regards, Additional risks relate to the various options of impleme and the limited cost-offsetting effects of the availed incentives. The central risk for the property sector is that inclusionary housing requirements may be financially the residential construction sector, which requirements, which include inflexibility to Additional risks relate to the various implementation options, Kind regards, management of affordable units; and utilising e restrictions; spatial and economic fluctuations; the “30% may subsequently affect local economic including city-wide restrictions, management of to derail the development feasibility of residential burdensome toprice/rental private developers and threaten concern relating to unit size restrictions and funding, ma of dwelling units” minimum inclusionary growth. units, Decreased supply of marketaffordable and utilising existing housing mechanisms requirement; and the limited cost-offsetting projects. While the majority private sector stakeholders agree with the principles and objectives oriented may catalyse increased (Option 1); housing concern relating to unitofsize restrictions and effects of the availed incentives. housing prices in theand city. funding, market demand, construction cost finds of smaller NEIL majority GOPAL of inclusionary housing, the that the expect the policy to negatively impact Additional risks relate to theresearch various options of Accordingly, SAPOA advises stakeholders units (Options 2 and 3); as well as the lack of negotiation Chief Executive Officer implementation, includingmarket city-wide price/rental NEIL GOPAL the residential property in the City of Johannesburg. Concerns relate to an increased in the property sector to consider the concerns restrictions; management of affordable units; Chief Executive Officer SOUTH AFRICAN PROPERTY REVIEW 20 SOUTH AFRICAN PROPERTY OWNERS ASSOCIATION – NPC – REG NO 19 and risks inherent the city’s inclusionary Board of Directors D Green (President), A König (President I Mkhari (Immediateto Pastspatial President), N Gopal regulatory burden to associated with the mandated requirements that areElect), inflexibility and(Chief E Z Malinga, N Mashaba, K Matsau, W Mulder

GROUP

opinion

Government has the potential to unlock land assets The government is sitting on an economic stimulus goldmine, but is not exercising it despite having access to companies, businesspeople and tried-and-tested methods that could unlock a stimulus package for the fiscus the likes of which have never before been seen Interview by Mark Pettipher Words by David Steyberg

Brian Azizollahoff, co-founder and MD of Propertiq

“I would venture to say the government owns more land in this country than the private sector. Without an accurate register it is difficult to really know, but my ‘gut feel’ is that this is the case. In rural areas and in many urban areas – even in the middle of Hyde Park – there is vacant land owned by the government” 22

SOUTH AFRICAN PROPERTY REVIEW

he good news is that Finance Minister Tito Mboweni has emphasised that now is the time to move away from self-enrichment policies, and to look at vehicles that can help unlock true economic prosperity for the country. This is the view of Brian Azizollahoff, co-founder and Managing Director of Propertiq, a boutique property asset management and advisory services, leasing and development company. “In light of Mboweni’s proposal, it’s possibly a better time now to speak to the right people,” he says. “Essentially, what the idea centres around is the fact that the government is the largest owner of property in the country. There’s an opinion that says the private sector is larger because it would appear that most land (such as farms) and buildings are owned by the private sector, but I am not sure that this is an accurate assessment. My sense is that most land and buildings are, in fact, owned by the government. “Despite there not being an accurate asset register, it is commonly accepted that the government owns somewhere in the region of R1,5-trillion of buildings, compared to the entire listed sector, where the market cap is between R600billion and R700-billion, with the value of its assets just under or around R1trillion. On this basis, the government is the largest property owner by value of assets. “In terms of land, I would venture to say the government owns more land in this country than the private sector.

“The government needs to unlock some of the value that is inherent in such a large portfolio. What I am suggesting is a principle where the government aggregates a portfolio of properties and lists it on the JSE as a listed property entity, in the vein of an entity such as Resilient or Growthpoint or Arrowhead” Without an accurate register it is difficult to really know, but my ‘gut feel’ is that this is the case. In rural areas and in many urban areas – even in the middle of Hyde Park – there is vacant land owned by government. “The government needs to unlock some of the value that is inherent in such a large portfolio. What I am suggesting is a principle where the government aggregates a portfolio of properties and lists it on the JSE as a listed property entity, in the vein of an entity such as Resilient or Growthpoint or Arrowhead. There are any number of investors in the market, small and large, who would be keen to invest in such a portfolio. Once listed, the company can grow, since it has the ability to use its own shares as ‘currency‘ to acquire additional properties. It can raise mortgage funding from the banks for expansion. It’s in charge of its own destiny, with an independent board and its own

opinion management. This could all be achieved with a government portfolio, because the government is the owner of the assets and doesn’t have to acquire the properties in order to list a portfolio. “For example, let’s say the government aggregates a portfolio of R10-billion or R20-billion. It can be made up of any type of property, even railway stations or prisons – because the value of property is not in the bricks and mortar, but in the cash flow. The government then signs a 20-year lease over the properties, effectively making it a government bond underpinned by property assets. On listing, the shares are offered to the market, in the same way as was done by Telkom. Hypothetically, the shares could be listed at R1 or R2. It’s a way to encourage saving: people put money into an investment, and benefit from the escalations. “What I’m suggesting is not a new concept: what has already been done in the listed space can be replicated utilising government-owned properties. As the owner, the government doesn’t need anyone’s permission and does not even have to go to tender because it is offering these properties to the public at large, through a vehicle that will be listed on the stock exchange. From a BEE point of view, the company appoints the board and management. It would be in a position to appoint a black CEO, CFO, management team and board. And once management is in place, the issue of skills transfer can be addressed. “In this example, the listing would introduce R20-billion or more into the fiscus that could be utilised to reduce government debt. Yes, it means monthly rentals – but the rentals are offset by

“What I’m suggesting is not a new concept: what has already been done in the listed space can be replicated utilising government-owned properties”

“Remember: these entities would be run as businesses. The buildings would have to be well managed, because otherwise tenants wouldn’t renew leases. Management would have to focus on growing the business. As the company grows – and the economy hopefully stabilises, and we start to see some compression in yields – it could issue paper for acquisitions and development” the interest savings on the debt. If it can be done once, it can be replicated again and again. “Remember: these entities would be run as businesses. The buildings would have to be well managed, because otherwise tenants wouldn’t renew leases. Management would have to focus on growing the business. As the company grows – and the economy hopefully stabilises, and we start to see some compression in yields – it could issue paper for acquisitions and development. Clearly, being a listed entity, the company would have access to the debt market, and could raise debt for growth and expansion. “As an investor, you’d be buying a government bond at a decent yield – a good way of diversifying or gaining some exposure to property. But it would have to compete in the market as an investment vehicle that would be as effective as its management and board of directors. “The larger and more diverse the shareholder base, the better. The man in

the street should be the target – because this is how you ensure that property ownership is accessible to the masses, rather than just enriching individuals (which is what historically transpired in many property transactions involving the government). The government will effectively sign leases with a blackowned and black-controlled entity, and hopefully the majority of shareholders will be the people of South Africa – who will then own these property assets. “Such an initiative cannot be driven from the ground up. It would require intervention at senior levels of government to motivate and advance the process. The challenge will be that if the government were to overly complicate it with onerous procedures and regulations, it would probably never see the light of day. But it doesn’t have to be that way. All that is required is for the Department of Public Works to identify a portfolio of properties owned by, for example, national government, which could constitute the first such entity. As mentioned, there is no need to go through a tender process: a corporate finance company with listed property experience could advise and assist in putting together a team (the CEO, CFO and management), and advance the listing process. “As is the case with anything, you can make it complicated – but it really is relatively simple and straightforward. I am not minimising the work required or the complexity of the regulatory environment, but if you’ve followed how many listings there have been of property companies over the past 15 to 20 years, you have some idea of how relatively simple it is. Let’s not forget that those companies had a much bigger challenge, because they first had to aggregate a portfolio, raise capital, raise debt, secure shareholders… In this instance, there’s no need: all those elements are already taken care of. I would like to think of it as low-hanging fruit when it comes to transformation in the property sector.” SOUTH AFRICAN PROPERTY REVIEW

opinion

Listed property: Stress-tested and bearing up in a very tough market After a strong start to 2019, when listed property soared 9,2% in January, hopes for a strong recovery for the sector have been dampened. Recent company results have been disappointing, with growth in dividends slowing almost across the board, and even going backwards in many cases. However, on closer examination of the results to June 2019, it appears the underlying physical property is bearing up in what is a very tough market, and negative company earnings and disappointing growth numbers are largely due to once-off and non-recurring issues, or capital items that are not reflective of the underlying property performance By Liliane Barnard, CEO and Portfolio Manager at Metope Investment Managers

Liliane Barnard, CEO and Portfolio Manager at Metope Investment Managers

SOUTH AFRICAN PROPERTY REVIEW

roperty companies are clearing up their distributions, and excluding nonrecurring and non-property items such as profits on sales of assets, gains on cross-currency and interest rate derivatives, as well as other non-core items, such as transaction fee income. As a result, we have seen a number of companies rebase their earnings over the past few reporting periods, essentially eliminating these items. While this has resulted in a number of funds reducing their distribution growth in the short to medium term, it will allow them to grow distributions at a sustainable rate more in line with underlying net property income growth in the future. South African REITs are seeing modest growth in net property income of around 2,7% (calculated as the weighted average of the funds that report NPI growth, weighted by portfolio size) which, although below inflation, is commendable in the current economic environment. Where long-dated leases have escalated to above market levels, they may revert downwards on renewal, or with a new tenancy. While new leases are being signed at lower rentals, escalations of about six to eight percent per annum on remaining leases ensure that the effect of negative reversions in any one year on

the fundâ&#x20AC;&#x2122;s income growth is moderated, as not all leases expire at the same time. Gearing levels in the overall sector remain well-managed, with the average gearing of REITs at c. 37%. While there are a few companies whose gearing levels have reached higher levels, such as Rebosis (57% at February 2019) and Delta (45% at February 2019), the remainder of the sector is well managed in terms of debt and interest rate management. In addition, approximately 83% of the sectorâ&#x20AC;&#x2122;s debt is hedged against interest rate increases for an average of three years. Property asset valuations would still be able to decline by a further 42% before gearing reaches the 65% mark (at which level a company would lose its REIT status), showing that there is robustness in the sector. South African companies with offshore investments have been able to use crosscurrency interest rate swaps to partially hedge their asset exposure to currency fluctuations, as well as to reduce their average debt costs to c. 7,5% per annum (compared to about nine percent offered by South African banks). Offshore debt costs are typically lower than those achievable in South Africa; this provides the temptation for companies to increase offshore debt, lower local debt, and still maintain overall gearing levels. However,

opinion Chart 1: Year-on-year net property income (NPI) growth at last reporting period (up to June 2019)

Source: Company Financials

Chart 2: Rolling 12-month distribution growth (weighted by market cap) vs inflation

Source: SA REIT Association, IRESS, Metope Investment Managers

this strategy increases the gearing risk, and many companies now have offshore gearing greater than 60% of their offshore asset values. Companies investing in markets where there are downside risks to valuations (such as Brexit in the UK) are most at risk when adopting this strategy. In terms of companies’ ability to cover debt costs, we evaluated the sector on interest cover ratios, both on an earnings basis (using net property income before interest and tax) and a cash flow basis (using cash flow from property operations), and find it to be in a healthy position. On a cash flow basis, operating cash flows among the average of South African REITs are sufficient to cover interest payments by over five times, and cash flows could fall by more than 50% (through lower rentals or increased costs) before the interest

cover ratio falls below 1,6 times – a level which banks would view as worrying. Naturally, while it is useful to assess the sector as a whole to get an average perspective, there are companies that have a higher margin of safety in their gearing levels and interest cover ratios. For example, Equites has maintained conservative gearing at 27% and can withstand a 57% decrease in valuations before reaching 65% LTV. Its interest cover ratio is eight times on an earnings basis and more than 12 times based on cash flows, giving it a large buffer. In addition, we believe the yields in the sector are attractive as there are number of funds on track to deliver inflationbeating distribution growth. Many of these funds are exposed to the centraleastern Europe region, which is currently

experiencing high wage and consumerspending growth. NEPI Rockcastle, for example, is expected to deliver six percent growth in distributions for the 2019 financial year, while MAS has stated an intention to grow its dividend by a cumulative 30% over the next three years. Specialist logistics fund Equites, which has investments in South Africa and the UK, is forecasting a growth in dividends of eight to 10% per annum. One criticism levelled against the industry has been that properties are overvalued. We have seen Fortress REIT, Growthpoint and Emira, among others, selling off their office assets as they move to reposition their portfolios. Whether through a portfolio deal or single asset transactions, by and large these have been done at book value, thus giving confidence to the valuations. Another criticism has been that companies do not have enough cash to pay dividends. In general, we have found this not to be the case; however, there are notable company-specific issues, such as in the case of Rebosis. Other critics have focused on companies’ potential inability to roll over debt. Following Moody’s downgrade of NEPI Rockcastle and Hyprop due to concerns over the companies not being able to roll over their debt, NEPI Rockcastle placed a €500-million unsecured corporate bond, maturing in 2023 at 2,625%, and Hyprop successfully refinanced more than R4-billion of external debt. The sector has historically been able to refinance debt with little difficulty and, all things being equal, we are confident of its ability to do so going forward.

Conclusion The listed property sector has been through an exceptionally challenging period since the start of 2018. The sector has derated significantly over the past 18 months (from a forward yield of 6,2% in January 2018 to 9,3% currently).

SOUTH AFRICAN PROPERTY REVIEW

GLE expo

First Global Lift & Escalator Expo in Africa This year saw the opening of Africa’s very first Global Lift & Escalator Expo at the Sandton Convention Centre in Johannesburg. About 1 400 visitors and 63 exhibitors attended the exclusive event on 27 August By Mark Pettipher

Minister of Employment and Labour Thembelani Thulas Nxesi

he exclusive three-day exhibition and conference opened with the Minister of Employment and Labour, Thembelani Thulas Nxesi, outlining the importance of escalators and lifts in our daily life. He also emphasised the importance of maintenance and regulation of the industry as a whole. There followed a number of presentations – notably one by Jacob Malatse of the Department of Employment and Labour, and by Lexiang Zhang, Secretary of the China Elevator Association. Lynette Vermaak, Marketing Manager at Solutions For Elevating and a Quality Manager at the South African National Accreditation System, spoke about ways in which women in the lift industry 26

SOUTH AFRICAN PROPERTY REVIEW

are bringing a softer, more considered approach to it, and how important it is to keep up with trends in general, highlighting our use of technology and its disruption in the market leading up to the fourth industrial revolution. Henni Hudson, Manager at Projitech Consultants, ran presented an overview of the South African lift industry, stating that there are – according to the Department of Employment and Labour – an estimated 45 000 lifts and escalators in South Africa (goods only). Approximately 1 500 new units are being fitted per year. Ninety percent of the lift and escalator equipment in South Africa is imported from China. While there are a few local, independent companies,

on the whole, South Africa no longer manufactures lifts. The majority of manufacturing happens either in China or in Europe. Hudson warned that there are some issues with China’s compliance to South Africa’s “EN”, and that there is a need to be mindful of quality-control checks and expected backup on after-sales service. This is important, because South Africa’s requirement for a product life cycle is 20 to 25 years. When it comes to the new elevator market versus replacement of old units, there is a split of approximately 65% to 35%, with the maturity coming on stream from many of the CBDs (which were built in the 1970s). Hudson also highlighted local energysupply issues and emphasised the need to install surge controls to protect delicate equipment. Touching on the Department of Employment and Labour regulations, he pointed to the Occupational Health and Safety Bill of 2010, and explained the requirements of Annexure documents 1545 as part of the Bill. In another presentation, Dennis Lindeboom, International Account Manager at the Liftinstituut in the Netherlands, focused on the role of European regulations and standards in promoting innovation in the global lift industry. He told the delegates that the Liftinstituut – established in 1933 – is one of Europe’s leading certification organisations for lifts, escalator systems and sub-systems, and components.

GLE expo It has been a specialist body in the industry for more than 80 years, and has more than 15 years of experience in performance-based safety. As a Notified Body, the institute certifies lifts and safety components according to European Union (EU) safety codes and standards for lifts and related equipment. As an Accredited Elevator/ Escalator Certification Organization, it also certifies elevators, escalators and components for the North American market according to code ASME A17.7/ CSA B44.7. When it comes to innovation in lift technology, it’s important to remember that the mandatory specification at the moment is 2014/33/EU. The EN 81-20 and the EN 81-50 are voluntary, and allow for deviation and innovation. The European system enhances and stimulates innovation because the directives provide safety goals only and are performance-based. In the EU, manufacturers may choose to follow either the EN 81-20 or the EN 81-50, or include innovation in lift technologies, provided they are done within a risk assessment, which they themselves have to carry out. The conformity assessment of lifts and safety components for lifts has been assigned to independent Notified Bodies – such as the Liftinstituut – which are specifically appointed by the National Authority and recognised by the EU. To close out the day’s proceedings, we heard from Arno Nel, Project Manager for Lifta SA. The company provides mobility solutions for those who wish to remain independent in their familiar surroundings – in short, residential stair lifts and home lifts. Lifta has installed more than 130 000 units worldwide. Nel introduced an innovative mobility solution – a shaftless home lift that runs on normal 220V household electricity. It complies with European standards and is designed specifically for residential installations.

FROM LEFT Anitha Raghunath, Director at Virgo Communications and Exhibitions (the organiser); Jacob Malatse, Director of Electrical Engineering at the Department of Education and Labour; Thembelani Nxesi, Minister of Employment and Labour; Anuj Gupta, India’s acting Consul General to South Africa; and Lexiang Zhang, Secretary of the China Elevator Association

SOUTH AFRICAN PROPERTY REVIEW

GLE expo

Day 2

ay 2 kicked off with Department of Public Works Deputy Director General for Facilities Management Nyeleti Makhubele, who outlined issues faced in the public sector. She said that by far the greatest challenge is an ageing infrastructure, which includes the condition of lifts in buildings. Bill Murphy, Managing Director of Projitech, a 38-year veteran of the lift industry, spoke about the responsibility of owning a lift. There is a legal obligation to ensure the safety of every single person who uses a lift, and an owner must be familiar with the legislation related to the installation and operation of a lift. Furthermore, an owner will have a responsibility towards a trapped passenger; as such, the owner must understand the life expectancy of the lift, the improvements and maintenance that can be carried out, and the timing of its eventual replacement. The owner is also responsible for keeping up with any changes in legislation, standards and codes of practice that may affect the lift. Guntram Begle, Senior Vice President of Schindler Ahead/Schindler Digital, presented a view of smart urban mobility, which included aspects of connectivity – not only through “smart” buildings, but by connecting people with buildings and through buildings by providing integrating mobility solutions. Safety and security have become an ever-increasing aspect to the solutions, and he spoke about access control and availability of escalators within a building. Schindler Ahead deals with digitisation of connecting people through information and knowledge base; and the Internet of Escalators and Elevators delivers new possibilities of equipment management, building operations and passenger convenience, linked closely to facilities management systems. Up next was Vally Padayachee, a strategic adviser to the Association of Municipal Electricity Utilities for southern Africa (AMEU). AMEU is an association

SOUTH AFRICAN PROPERTY REVIEW

that promotes quality of service and management excellence in electricity supply in southern Africa, and provides a platform for members to exchange ideas and information and develop solutions that meet the evolving electricity needs of today’s fast-moving society and industry. AMEU is one of the largest users of elevators and escalators in the country, and its body of members is a major contributor to delivering energy and making the sector run. He spoke about the need for better, greener, more energy-efficient elevators, and the use of sustainable, environmentally friendly materials in the manufacturing process. Andrew Klopper, National Facilities Manager at Redefine Properties, concluded the day’s sessions with an overview of artificial intelligence (AI) in the built environment. He outlined the seven areas of AI: machine learning, natural language processing, speech, vision, expert systems, planning and organising, and robotics, then focused on machine learning, from big data to

predictive analytics. As a background for the growth of AI, Klopper looked at four mega-trends affecting the its adoption, including: ●● Factors: economic growth, globalisation, demographic trends and sustainability; ●● Knowledge: technological development and increased knowledge; ●● Social: individualisation, commercialisation and a growing focus on health; ●● Trends and tendencies: natural catastrophes in densely populated urban areas, and new ways of working. He also examined where big data comes from, and how it is used in facilities management as predictive maintenance linked to machine learning patterns and data. Conference organiser Segren Reddy then announced the launch of Elevate Africa, an e-magazine that will keep lift and escalator stakeholders informed about trends in the industry.

GLE expo

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GLE expo

FROM LEFT Patrick Qwebe of SABS; Mohlakola Monyaki, Senior Manager at the Department of Employment and Labour; adjudicator Bill Murphy; LEA Chair Jackie Gokamilwe; Sanjeev Singh of the Lift Inspectors Association of South Africa; and Linda Grundlingh of SANAS

Day 3

n Day 3, the final session of the GLE Expo was opened by Tasneem Motara, the MEC at the Gauteng Department of Infrastructure Development, who championed the integration of women in the sector. Motara is mandated to deliver public social infrastructure, and pointed that most of the public touch points are located in high-rise buildings, inferring the importance of lifts and accessibility within those buildings (and with it the importance of developing skilled technicians and knowledge transfer). She also dwelled on the need for properly functioning lifts, and the safety and maintenance of them, alluding to the stronger enforcement of the Occupational Health and Safety Bill as a non-negotiable.

Panel discussion and resolutions Bill Murphy welcomed the panellists to the podium. The two-hour-long discussion looked at key areas that need to be addressed: manufacturing, installation, engineering, and standards and information. 30

SOUTH AFRICAN PROPERTY REVIEW

It is clear that, while there are bodies in South Africa that deal with certain aspects of the lift and escalator industry – including the Lift Engineering Association (LEA), the Independent Lift Association of South Africa, Lift Inspectors Association of South Africa, and the Lift Professionals Development Association – there is common ground among the associations, they all work within the National Guidelines as set out in Occupational Health and Safety Bill, and follow regulations governed by SANAS. The lack of qualified, skilled elevator and escalator technicians in the country is disturbing. Jackie Gokamilwe, Chairperson of LEA and Managing Director at Nqoba Lift Consultants, called for the larger lift companies to “stop working in silos”. Putting the call into context, she was the first woman in South Africa to qualify as a lift technician – and she pointed out that there are no young entrepreneurs coming through into the industry. “The skill of a lift technician has been identified by the Department of Trade

and Industry as a ‘rare skill’,” she said. “We have identified a need to train more lift technicians to ensure the sustainability of the industry as a whole. We help customers with large lift portfolios identify suitable candidates, and then mentor and coach them, and guide the training process, so they can be accredited as competent lift technicians capable of maintaining the lifts within the customer’s portfolio.” OTIS Training Manager Kurt Scholtz was among the delegates, and told the panel that OTIS trains learners through learnerships and apprenticeships, so they can undergo stringent trade tests and obtain NQFS certification. A certain number of learners will then be retained by OTIS; the remainder are free to work for other lift companies. Concern was also raised about equipment that is being imported into South Africa with inadequate instruction and maintenance procedures. In some cases, once the equipment has been installed, there is no knowledgeable personnel able to carry out continued care of the product.

GLE expo Important notes to came out of the discussions included the following: ●● When manufacturing lifts, the engineering of the lifts must comply with stringent standards and must be approved by a registered and accredited person. ●● The engineering/manufacturing of a lift must be designed with the understanding of how and where the lift is going to be used. ●● Installation of lifts must also be carried out by experienced and qualified personnel, and there should be a set of engineering drawings for the lift as well as assembly instructions. ●● The installer should be qualified, recognised and accredited. ●● Once an installation has been signed off, a maintenance service provider must carry out regular maintenance. This service provider should have proven skills to carry out the work required, and must be qualified, recognised and accredited. ●● Inspection of lifts is carried out by the Department of Employment and Labouraccredited personnel in association with SANAS. (The personnel must be regularly accredited.) ●● Through regular training and knowledge transfer, the industry can be made sustainable with cooperation through PPPs as well as the private and public sector. ●● More emphasis should be placed on training qualified technicians and encouraging transformation in the industry through skills development and entrepreneurship ●● A committee/task team needs to be set up to maintain quality control and standards, and regulate equipment entering South Africa.

Supporting the conference were 63 exhibitors from around the world. The success of the conference can be gauged by the support from the national government, which sent senior ministers to deliver keynote presentations, as well as by the number of registered visitors. It is reported that more than 1 400 visitors registered during the three days. Commenting about the expo, Anitha Raghunath, Director at Virgo Communications and Exhibition Pvt. Ltd, said that Virgo’s vision had been to create an ideal platform for the global escalator and elevator industry players to explore potential markets around the world. “Because we’ve had successful shows in India, Sri Lanka and Bangladesh, we have introduced the expo to the African market,” she said.

“The expo aimed to create opportunities for global lift, elevator and escalator companies to gain exposure to a growing African market,” said Segren Reddy, Managing Director, at Virgo Communications. “The potential to engage with prospective buyers is key to the success of this conference and exhibition. To ensure quality contacts, we arranged for key players in South Africa’s property industry to meet the exhibitors.” Virgo Communications has been in the exhibition industry for more than 14 years, and has organised 13 editions of E&E exhibitions and technical forums around the world. The company has also been involved in B2B exhibitions on power transmission, grinding technology and surface finishing. www.gleexpo.com

SOUTH AFRICAN PROPERTY REVIEW

recycling

Turning waste into cash How do you balance the responsibility to clean up the environment with the human need to make money? And how do you change waste management behaviour in households while teaching people that their waste has a value? The Polyolefin Responsibility Organisation, or Polyco, believes it has found a solution Interview by Mark Pettipher Words by David Steynberg

Mandy Naude, Polyco CEO

stablished in 2011 with a focus on reducing the amount of polyolefin waste going to landfill and ending plastic waste in the environment, Polyco has embarked on a number of campaigns that increase the sustainable collection, recycling, recovery and beatification of polyolefin plastics. Simply put, polyolefin materials are used in consumer goods, structural plastics, food packaging and industrial products. And unlike glass and paper products, which have enjoyed a wellsupported recycling value chain for many years, polyolefin plastics did not. What followed was a combination of entrepreneurial business creation, community support and responsible recycling practices. Polyco set up a mobile buy-back unit programme, Packa-Ching, where local community entrepreneurs are awarded trailers with all relevant equipment, such as the weighpayer, and go into communities to buy back recycling packaging materials, including paper, glass, metal and plastic. 32

SOUTH AFRICAN PROPERTY REVIEW

“It’s sorted, it gets weighed, and money is immediately paid into a community member’s e-wallet,” says Mandy Naude, CEO of Polyco. “With that e-wallet, they can either use a USSD code and actually buy airtime or transfer money to family members, or they can go to any of the merchants on the payment platform and use it as money. “The latest benefit that has been launched about a month ago is that they can go into any Shoprite, Usave or any Shoprite Group store, and actually withdraw cash. So the contents of the e-wallet can be converted into cash – it is the equivalent of withdrawing money from an ATM. The best part is, the payment doesn’t have to be done on a smartphone – it can be done on a basic feature phone too. You also don’t have to be a South African: any foreign

national can join. We just need a name and a cellphone number, and PackaChing can pay you.” The reason to go cashless was about ensuring the safety of those operating and running the mobile units as well as the sellers. “We couldn’t take a truck into a community on a set day every week to pay out large amounts of cash,” says Naude, noting that doing this would be equivalent of having a big sign over the person’s head. “The people who are really serious about trying to earn an income from something they’ve never done before are happy to be paid via an e-wallet. They can easily redeem it at a supermarket – spend it on food, and leave. It does what they need it to do.” The pilot project in Langa in the Western Cape proved successful and sustainable enough to be rolled out in

recycling

other parts of the country. Polyco has aspirations of increasing the rates of polyolefin collected for recycling from 44% to 54% in the next five years, in line with the Industry Waste Management Plan that has been submitted to the government. In order to achieve this goal, Polyco has expanded its mobile units to four, with the intention of rolling out at least five units per year for the next five years. “We aim to have 25 Packa-Ching units operating across South Africa in the next five years,” says Nicola Rowe, Brand Manager at Polyco. “PackaChing’s many benefits include growing entrepreneurship and creating job

opportunities, because every individual entrepreneur is responsible for running his or her own Packa-Ching unit, and for the employment of up to five staff per unit. Polyco manages the core system, which includes the payment system, and provides a supporting role for those entrepreneurs – but they are the ones who decide on things such as the prices for each material that the community sells to them.” Since its pilot launch towards the end of 2017, Packa-Ching has collected more than 632 200kg of used recyclable packaging from various communities, and has paid the community members involved a total of more than R591 000

for these recyclables. By increasing the number of units in operation, Polyco hopes to exponentially increase these figures, and to provide more incomeearning opportunities for communities and Packa-Ching entrepreneurs while cleaning up the environment. “The concept developed out of Polyco’s overall aim to end plastic waste in the environment,” says Rowe. “Our team did a lot of research into ways of encouraging people to recycle in South Africa – and it’s proved to be quite a difficult task. We realised that we needed the waste to have value. We needed to turn trash to cash.” As far as the entrepreneurs are concerned, Polyco wanted to assist them in breaking free from their reliance on donor funding, according to Naude. “That’s why, initially, the selected PackaChing entrepreneurs are supported with equipment and employee salaries, but we want them to be self-sustainable,” she says. “Our desire for each of them is that, after five years, as their volumes grow and they roll out to more areas, they will be able to support themselves once the sponsorship period lapses. And we do achieve that.” Going forward, Polyco is hoping the project not only assists in building up entrepreneurs and cleaning up the environment, but also helps to change communities’ perception of their waste. “Imagine getting to a point where kids start saying, ‘Hey! Here comes Packa-Ching! Mom and dad are taking our recyclables to Packa-Ching and getting money for them!’ Imagine they start associating their waste with real monetary value,” says Naude. “That’s what we’ve always wanted to do: change people’s perceptions about recycling. We want people to know that used packaging has actual value.”

SOUTH AFRICAN PROPERTY REVIEW

ASAQS

ASAQS addresses late and non-payment by national, provincial and municipal government A recent survey by the Association of South African Quantity Surveyors (ASAQS) shows that the majority of quantity surveyors experience late or non-payment of contractors on national, provincial and municipal projects. ASAQS President Christelle Bown presented the survey findings during a panel discussion at the 2019 Master Builders Annual Congress, which was held on 9 September in Johannesburg By Stephné du Toit

“M

ore than 140 ASAQS members participated in the survey, with the majority of respondents saying that they experience late and nonpayment on government projects,” says Bown. “The Minister of Public Works and Infrastructure Patricia de Lille recently said that her department had paid R106-million in outstanding invoices. While this is a step in the right direction, it is still only a drop in the ocean of the R6-billion of government debt that needs to be paid to contractors and professionals in the built environment.” The survey also highlighted that the Eastern Cape and Gauteng were the provinces where members experience the most payment-related problems from government entities. “The Department of Public Works and Infrastructure isn’t responsible for the entire R6-billion in outstanding payments,” says Bown. “Finding the sources of all the outstanding debt, and addressing it with the appropriate departments and implementing agents will require a collaborative approach from built-environment stakeholders.”

Accounting for violence and disruption on projects Another issue that was addressed during the panel discussion was how quantity surveyors should account for the community facilitation and safety measures that are needed to combat the ongoing violence and intimidation 34

SOUTH AFRICAN PROPERTY REVIEW

SAPOA CEO Neil Gopal was part of a panel discussion entitled “Government Support for Sustainable Construction Industry”, which consisted of (from left) ASAQS President Christelle Bown; MBSA Executive Director Roy Mnisi; Neil Gopal; Property Sector Charter Council CEO Portia Tau-Sekati; Peter Barnard, a partner at Cox Yeats; and Henk Serfontein, Director at the Department of Planning, Monitoring and Evaluation

that has plagued many infrastructure projects in the country. “There is a provision for a community liaison officer in the bill of quantities for government projects,” says Bown. “A possible solution could be the addition of a social and community facilitator. This would be a consulting role, and would be an additional cost to the client – but it could potentially minimise the cost of delays and damages from the construction mafia and other illegal activities on project sites.”

Closer collaboration needed On 1 August, the ASAQS and Master Builders South Africa (MBSA) signed a Memorandum of Understanding to work more closely together to address challenges in the local construction sector. The recent Congress cemented this sentiment, with members of the ASAQS and the MBSA committing to working more closely together in future.

“It is vitally important that the many stakeholders in the built environment continue with their current attitude of sincere and meaningful collaboration,” says Bown. “These engagements create a platform that allows us to address the diverse and multi-faceted issues that our industry faces from a position of commonality. By keeping each other informed, stakeholder engagements can prioritise the central issues that are common to us all, and simultaneously create action plans that deliver viable and sustainable solutions.” She concludes by encouraging ASAQS members to participate in upcoming surveys, and she compels other built environment professionals to do the same. “Input from different role-players can help shed light on the backlog of outstanding payments for government projects,” she says. “The ASAQS will continue to contribute to meaningful dialogue around these issues. We aim to make a change for the better.”

ASAQS

SOUTH AFRICAN PROPERTY REVIEW

state of city finances

Financing public transport City revenues appear to be quite resilient, growing at an average annual rate of about eight percent and with collection rates of about 95% – although most cities have increased their provisions for debt impairment. The rapid increase in bulk tariffs is squeezing out the surplus that cities have historically used to cross-subsidise other services, while cities are underspending on both repairs and maintenance and their capital budgets. Only with the 2017/2018 financial statements and audit reports will it be possible to assess the impact of the new administrations elected in the 2016 local government elections We extend our thanks to the South African Cities Network for the following extracts. Click on the cover image above to download the entire report. SACN. 2018. State of City Finances Report 2018. Johannesburg: SACN ISBN: 978-0-6399215-2-5. © 2018 by the South African Cities Network. The State of South African Cities Report is made available under a Creative Commons Attribution – Non-Commercial – Share-Alike 4.0 International Licence. To view a copy of this licence, visit creativecommons.org/licenses/by-nc-sa/4.0.

outh African cities face growing fiscal gaps and increasingly strained traditional revenue sources. Moreover, the taxes received are not dedicated to specific activities such as public transport, but fund the wide range of services provided by the government. As a result, public transport must compete for resources with other socially desirable public services (Ubbels et al., 2001; Ubbels & Nijkamp, 2002), and so cities need to identify alternative financing mechanisms specifically for public transport. Cities are burdened with public transport systems that require high levels of upfront capital investment in order to reach the necessary critical network density and scope. Although cities have invested heavily in public transport networks, ridership remains below capacity, fare-box revenues are inadequate, and operating costs are much higher than expected. As a result, the new public transport systems rely heavily on operating subsidies, but national government is reducing funding for public transport because of fiscal constraints (SACN, 2015). The Department of Transport (DoT) has recognised that this reliance on operating subsidies is not sustainable, and acknowledged the need to reduce state subsidies of

SOUTH AFRICAN PROPERTY REVIEW

transport operations in the long term (DoT, 2017). As the last State of City Finances report recognised, cities need to seize the challenge of funding public transport because “effective public transport systems contribute substantially to urban economic productivity” (SACN, 2015: 165). To meet their commitments to modernise public transport networks, cities need to develop additional sources of revenue that they can borrow against for capital expenditure in the short-to-medium term, and that they can use to subsidise operations in the long term. Cities also need to seek ways of incentivising commuters to continue using public transport into the future, or to switch from private vehicles to public transport, which can only work if an effective, viable alternative is available.

This is not the case in South African cities, where public transport is currently characterised by limited services and routes, providing the opportunity for minibus taxis to service parts of cities that are poorly served by public transport. However, as the services and routes improve, financed by revenue from private vehicle use charges, public transport may become an increasingly attractive alternative to private vehicle use. In this regard, improving the minibus taxi industry is a critical component of the overall improvement in the public transport system (SACN, 2014). Therefore, while alternative financing mechanisms should generate revenue for improving public transport infrastructure and services, a change in the policy posture towards public transport services is also needed.

Key messages The current public transport financing model in cities does not provide just and equitable or sustained financing for improving the travel experience of poorer public transport users. Private vehicle charges can provide a significant contribution to the costs associated with cities’ increasing public transport responsibilities, and ensure that these costs are not passed on to the users of public transport. Implementing parking or congestion charges and ringfencing the revenue is the most effective way in which cities can ensure the continuous improvement of public transport is sustainably financed.

The spatial, economic and political legacies of apartheid continue to influence transport in South Africa. The transport system comprises a private transport system, in which mainly wealthier residents use private vehicles, and a public transport system, in which mostly poorer residents travel by rail, bus, paratransit (minibus taxi) and non-motorised modes. This is clearly illustrated in Figure 60, which shows the modal choice of commuters by household income quintile.67 The majority of people rely on public transport, mainly minibus taxis, to get around (SACN, 2016).

state of city finances

The South African transport context The spatial, economic and political legacies of apartheid continue to influence transport in South Africa.

FIGURE 60: The share of transport mode by income quintile (2013) 66%

Percentage of households

70% 60% 50%

43%

42%

40% 30% 20% 10% 0%

25%

32%

28% 19%

34%

32%

27% 21%

18%

15%

10%

3 Income quintile

17% 8%

Source: Adapted from the 2013 National Household Travel Survey (Stats SA, 2014a)

The intent and focus of post-apartheid (White Paper on National Transport Policy of which have largely focused on improving The transport system comprises atransport private policy 1996) was to develop affordable and reliable public transport and non-motorised modes that had transport system, in which mainly conditions for vehicles (SACN, 2013). traditionally served poorer residents of South African cities. However, these goals have not been wealthier residents use private vehicles, Over the past decade, private vehicle realised. Private transport continues to dominate transport planning practices, which have largely use has Over beenthethe fastest growing mode and a public transport system, which focused on improving conditions for in vehicles (SACN, 2013). past decade, private vehicle of transport in urban areas, increasing mostly poorer residents travel by rail, use has been the fastest growing mode of transport in urban areas, increasing by 24% in the metros, whereasparatransit bus and rail travel has decreased These trends differ from thewhereas DoT’s desired 24% in the metros, busratio and bus, (minibus taxi) (Figure and 61).by of 20:80 for private transport public 2017).have decreased (Figure 61). rail(DoT, travel non-motorised modes. and This is transport clearly use illustrated in Figure 60, which shows These trends differ from the DoT’s the modal choice of commuters by desired ratio of 20:80 for private transport household income quantile. The majority and public transport use (DoT, 2017). Public transport remains expensive of people rely on public transport, mainly minibus taxis, to get around for lower-income users, with two-thirds of households from the lowest income (SACN, 2016). The intent and focus of post-apartheid quantile spending on average more than transport policy (White Paper on 20% of their disposable income on public National Transport Policy of 1996) was transport (Stats SA, 2015). In some metros, to develop affordable and reliable public this proportion can be as much as 60%. transport and non-motorised modes Public transport is considered affordable that had traditionally served poorer when commuters spend less than 10% of residents of South African cities. their disposable income on their travel. Yet for commuters, time – not cost – is However, these goals have not been realised. Private transport continues to the most important determining factor dominate transport planning practices, in their choice of transport mode. The

FIGURE 61: Transport mode used by households to go to work (2003 and 2013) 45% 38.4%

40%

Percentage of households

Sustainable financing of public transport requires two elements: generating revenue through the appropriate taxes and charges, and increasing the number of public transport users. More people using public transport will mean higher fare-box revenues, while fewer people using their private vehicles will result in road infrastructure and maintenance cost savings. Therefore, cities also need to find ways of encouraging citizens to shift from using private vehicles to travelling by public transport. In South African cities, private vehicle use is relatively high (on average about 40% of work trips), and so has the prerequisite revenue potential for capital investment and operational subsidies. It would be logical to ringfence these revenues for public transport investment, while the increased charges should discourage private vehicle use and facilitate a shift towards public transport. There is also an inherent fairness and transparency in generating revenues for financing public transport from within the transport system. This chapter explores the potential of private vehicle use charges to finance public transport in South African cities. After providing an overview of the South African transport context and reasons for financing public transport, the chapter examines the true cost of private vehicle use. The different types of private vehicle use charges are then described and assessed both generally and within the South African city context. Eight criteria are used to identify the charges best suited to the South African city context, and simulations are run to assess the potential of implementing these charges in a South African city, using the City of Johannesburg as a case study. After presenting the findings of the simulations, some recommendations are made.

32.0%

35% 30%

25.0%

25%

26.5%

23.0%

21.1%

20% 15% 10%

9.0% 7.6%

6.0% 5.0%

5% 0%

2003 share

2013 share

Source: adapted from the 2003 and 2013 National Household Travel Survey (DoT, 2005; Stats SA 2014a)

SOUTH AFRICAN PROPERTY REVIEW Public transport remains expensive for lower-income users, with two-thirds of households from 37 the lowest income quintile spending on average more than 20% of their disposable income on public

Public transport remains expensive for lower-income users, with two-thirds of households from the lowest income quintile spending on average more than 20% of their disposable income on public transport (Stats SA, 2015). In some metros, this proportion can be as much as 60%.68 Public transport is considered affordable when commuters spend less than 10% of their disposable income on their travel.

state of city finances

FIGURE 62: Households that spend more than 20% of their disposable income on public transport (2013) 80% Percentage of households

66.6% 60%

60%

FIGURE 63: Modal choice for travel to work relative to travel time and travel cost (2013) 41.9%

120% 40%

29.4%

100.0%

100%

15.6%

20%

67.6%

80%

41.4%

78.1% 2.9%

245.2%

Income quintile 26.5% Source: Adapted from the 2013 National Household Travel Survey (Stats SA,32.5% 2014a) 20% 7.6% 5.0%

40%

55.4% 5 38.4%

Yet for commuters, time – not cost – is the most important determining factor in their choice of FIGURE 63: Modal choice for travel to work relative to travel time and travel cost (2013)

transport mode. The importance of travel time for commuters is a consequence of apartheid-era 120% spatial planning that relegated most commuters to homes situated a considerable distance from 100.0% 100.0% Travel time most important Travel cost most important their 100% places of work. The indirect relationship between travel time and travel cost revealed in Figure 63 indicates wouldTravel be willing to pay Source: Adapted from thethat 2013commuters National Household Survey (Stats SA,more 2014a)for the convenience of shorter 67.6% 78.1% 80% times. What is interesting is the inverse relationship between travel time and modal choice, i.e. travel the longer the average travel time for a transport mode, the less likely a commuter is to select that Between 2003 and 2013, the proportion of commuters for whom travel time was the most important 60% mode, regardless of travel cost. 55.4% 45.2% 17% to 32%. Travel time refers to the entire 41.4% almost doubled, from determining factor journey, from 38.4% 40% to destination (not just the time spent in the transport mode), and is affected by factors such origin 26.5% 32.5%and last-mile availability, and modal as network coverage, operating times and frequencies, first-mile 20% integration. The increased importance of travel time for commuters suggests that public transport 7.6% 5.0% services are worsening. Major problems identified by public transport users were bus availability, 0% infrequency of bus departures and excessive walking times to reach bus terminals (Stats SA, 2014a). In 2013, 11% of commuters in metros waited for more than 15 minutes for public transport, which time important Travel cost most is a marked increase fromTravel 6.1% in most 2003. This suggests a significant and important burgeoning problem with the provision and scope of public transport services in the metros, indicating a need for increased Source: Adapted from the 2013 National Household Travel Survey (Stats SA, 2014a) investment in the public transport system. Between 2003 andimportant 2013, the determining proportion of commuters for whom travel time(2003, was the most important FIGURE 64: Most factors in transport modal choice 2013) determining factor almost doubled, from 17% to 32%. Travel time refers to the entire journey, from 50% origin to destination (not just the time spent in the transport mode), and is affected by factors such as network coverage, operating times and frequencies, first-mile and last-mile availability, and modal 40% integration. The increased importance of travel time for commuters suggests that public transport services are worsening. Major problems identified by public transport users were bus availability, infrequency of bus departures and excessive walking times to reach bus terminals (Stats SA, 2014a). 30% In 2013, 11% of commuters in metros waited for more than 15 minutes for public transport, which is20% a marked increase from 6.1% in 2003. This suggests a significant and burgeoning problem with the provision and scope of public transport services in the metros, indicating a need for increased investment in the public transport system. 10%

FIGURE 64: Most important determining factors in transport modal choice (2003, 2013) 0% 50%

Safety

Time

Cost 2003

40%

Flexibility

2013

Source: Adapted from the 2013 National Household Travel Survey (Stats SA, 2014a) 30%

importance of travel time for commuters is20% a consequence of apartheid-era spatial planning that relegated most commuters 10% to homes situated a considerable distance from their places of work. The indirect 0%

SOUTH AFRICAN PROPERTY REVIEW Safety Time 2003

relationship between travel time and travel cost revealed in Figure 63 indicates that commuters would be willing to pay more for the convenience of shorter travel times. What is interesting is the Cost 2013

Flexibility

E R 6 – F IN A N C IN G P UBLIC TR A N SP O R T

Source: adapted from the 2003 and 2013 National Household Travel Survey (DoT, 2005; Stats SA 2014a)

inverse relationship between travel time and modal choice, i.e. the longer the average travel time for a transport mode, the less likely a commuter is to select that mode, regardless of travel cost. Between 2003 and 2013, the proportion of commuters for whom travel time was the most important determining factor almost doubled, from 17% to 32%. Travel time refers to the entire journey, from origin to destination (not just the time spent in 1 the transport mode), and is affected by factors2 such as network coverage, operating3 times and frequencies, firstmile and last-mile availability, and modal 4 integration. The increased importance of 5 travel time for commuters suggests that 6 public transport services are worsening. 7 Major problems identified by public transport 8users were bus availability, infrequency of bus departures and excessive walking times to reach bus terminals (Stats SA, 2014a). In 2013, 11% of commuters in metros waited for more than 15 minutes for public transport, which is a marked increase from 6,1% in 2003. This suggests a significant and growing problem with the provision and scope of public transport services in the metros, indicating a need for increased investment in the public transport system. Investment in the public transport system is typically through grants and loans for capital costs, and a combination of subsidies and fare-box revenues for operating costs. Throughout the world, subsidising public transport operating costs is fairly common, as complete cost recovery from fare-box revenues is rare. In most regions, the cost recovery is quite high, ranging from 56% in US cities to 91% in European cities, which means a relatively small gap between costs and revenues that requires subsidies. In contrast, in South Africa only the Gautrain has a cost recovery of above 40%, with municipal bus services as low as 22% (Figure 65). As a consequence, public transport systems in South African cities are heavily subsidised,

state of city finances

FIGURE 65: Average operating subsidy per passenger trip and operating cost recovery rates by public transport type

R60.03

Rands

38%

36%

R14.15

R13.44

Conventional

BRT

39%

40 30 20 10

22%

R20.56 R3.73

0 Municipal

Operating subsidy per passenger trip

Source: National Treasury (2014)

Gautrain

Although road pricing schemes aimed at private vehicle users have been designed and implemented around the world (Croci, 2016), formulating appropriate policies for taxing private road use is not straightforward because of social and external costs and intergovernmental relations (Smith, 2006). Ideally, an efficient road-user tax charges each private road user for their precise social or external cost, but in practice this cost can only be approximately reflected by the available tax instruments. In addition, without an accurate understanding of who will bear the cost of additional road use charges and taxes, poorer road users and commuters might be inadvertently burdened with the increased costs of road travel. Therefore, it is preferable to tax private vehicles, as poorer households

Metrorail

% of operating costs recovered

CH APT ER 6 – FINANCING P UBLIC TRANS PORT

57%

New commercial and residential developments, supported by substantial investment in freeways, have exacerbated urban sprawl (National Treasury, 2014). This sprawl intensifies public transport difficulties and results in more private vehicles, placing financial pressure on households, which grow increasingly dependent on private vehicle use to meet their mobility needs (ibid). The current road use charges do not reflect the actual marginal costs of drivers using the road (Bowerman, 2007). Apart from the economic costs of purchasing, maintaining and running a private vehicle, the use of private vehicles increases (Smith, 2006): ●● Environmental costs: local noise and air and aesthetic pollution (i.e. despoiled landscapes); ●● Accident costs: the costs of injuries and fatalities to individuals and property from road accidents, which are particularly high in South Africa; 145 ●● Congestion costs: overcrowded roads increase journey times; and ●● Road maintenance costs: vehicles cause physical degradation of, and damage to, roads.

The true cost of private vehicle use

PAR T B – TH E C ASE F OR F IS CAL TRANSF ORMAT ION

fares would have to be set at a price equal to the average cost per passenger. However, if prices are kept at the welfaremaximising level, the fare-box revenues will be less than the total cost of providing public transport (ibid), and so subsidies are needed to make up the difference. Reasons to EQUITY Subsidising public transport subsidise public transport Globally, local and national governments can be considered a form of income subsidise public transport because they redistribution, as poorer sections of the are motivated by social considerations South African population typically rely and the need to offer an alternative to on public transport and so benefit most private car use (Ubbels & Nijkamp, 2002). from the subsidy. The subsidisation of Public transport may collect revenues public transport is an implicit act of through fares but is considered a public redistribution when the service provider service and thus subsidised accordingly. passes on the subsidy relief to the The previous State of City Finances commuter through lower fares. POSITIVE EXTERNALITIES Increased Report (SACN, 2015) includes empirical evidence for subsidising public transport. use of public transport results in fewer Below are some of the arguments private vehicles on the road, and reduced congestion, travel time, noise and air for subsidisation: SOCIAL WELFARE When the price pollution, accidents and road maintenance. of goods or services is equal to their These positive externalities accrue to the marginal cost, social welfare is maximised benefit of all residents of the city, not just (Mattson & Ripplinger, 2011). Public public transport users (Ubbels et al., transport has high fixed costs and 2001; Ubbels & Nijkamp, 2002). Economic growth. Improved public relatively low variable costs, and Investment in the public transport system is typically through grants and loans for capital costs, transport increases toworld, the usually operates at less than capacity. and a combination of subsidies and fare-box revenues for operating costs.accessibility Throughout the market, leading to clustered Consequently, marginal costscostsper subsidising public transport operating is fairlylabour common, as complete cost recovery from farebox revenues(i.e. is rare. In most the cost is quite high, ranging from 56% US cities employment opportunities. A in study of passenger the cost regions, for adding anrecovery to 91% in European cities, which means a relatively small gap between costs and revenues that extra passenger to a trip) are far lower more than 300 metropolitan areas found requires contrast, in South Africa the Gautrain has apublic cost recovery of above 40%, expanding transport services than thesubsidies. averageIncost per passenger (i.e.onlythat with municipal bus services as low as 22% (Figure 65). As a consequence, public transport systems total cost of providing public transport resulted in increased employment, wages, in South African cities are heavily subsidised, by between R13.44 and R20.56 per passenger trip on divided by total number of passengers). labour productivity and economic growth typical bus modes. This level of subsidisation is considerably above the global average and is both (Chatman & Noland, 2014). For fare-box toforcover undesirable and revenues unsustainable South costs, African cities. by between R13,44 and R20,56 per passenger trip on typical bus modes. This level of subsidisation is considerably above the global average and is both undesirable and unsustainable for South African cities.

SOUTH AFRICAN PROPERTY REVIEW

state of city finances

S TATE O F C ITY F IN AN C E S 2 0 1 8

148

NEW CHARGES

EXISTING CHARGES

TABLE 43: Applicability of identified private vehicle use charges to local government administration #

CHARGE/ TAX

DESCRIPTION

National fuel levy

A general fuel levy (GFL) and a Road Accident Fund (RAF) levy on petrol and diesel sales. A fuel levy is easy to implement, has low administrative costs, little risk of evasion, and generates high revenues.

National Government. Current level: GFL R3.15/litre petrol, R3.00/litre diesel. RAF R1.63/litre.

Provincial Fuel levy

Each province would have the discretion to introduce a provincial levy in addition to the national GFL, after applying for permission from National Treasury. Revenue from the levy would go directly to the province.

Provincial Government. The Western Cape successfully applied for this levy but has not implemented it (nor have the other provinces).

CO2 tax on vehicle emissions

Introduced in 2010 and 2011, the tax’s main objective is to encourage the use of energy efficient and environmentally friendly motor vehicles. Added to the vehicle’s sale price, the tax can be absorbed in part by manufacturers/dealers.

National Government. Current level: Passenger vehicles R90 per g CO2/km above 120g CO2/ km. Double-cabs R125 per g CO2/km above 175g CO2/km.

Sales taxes levied on new vehicles include VAT and an ad valorem tax.

National Government. Current level: VAT is 15%. Ad valorem is [(0.00003 x A) – 0.75%], where A is the recommended retail price, excl. VAT and less 20%.

Customs duty and ad valorem customs duty are payable on permanent vehicle importations into South Africa.

National Government. Current level: Customs duty 36% of the market value of the car, 20% for cars older than 20 years. Ad valorem 0.75%–20%, depending on the value. SANRAL. Tolls are collected at toll plazas or via an electronic tag system Current level: Varies by class of vehicle and section of road.

Vehicle sales tax

Vehicle import duties

Road tolls

Tolls collected on a specific road are used to repay the loans that financed its building, upgrading or maintenance. Tolling is a “user‐pay” charge and equitable, as motorist only pays for the section of road used.

Vehicle registration and licensing

Vehicles must be registered with relevant authority, and motor vehicle registrations are recorded on the national traffic information system (eNaTIS). Each province determines its own registration and licence fees.

Provincial Government. Current level: fees levied based on tare weight of different vehicle types.

Parking charges (and fines)

Revenue from these mechanisms is not currently ringfenced for funding public transport, but there are successful international examples.

Local Government. Current level: Charges and fines vary according to area and duration of parking and offense committed.

Congestion charges

The approach depends largely on the spatial structure of congestion-prone areas: area pricing for monocentric/radial archetype cities, and value pricing for polycentric/grid-like cities.

International examples: Singapore, London, Rome, Stockholm and Milan.

Per km charges

To reduce traffic congestion, motorists are charged per km travelled in specific areas, with higher rates for rush hour and less fuel-efficient vehicles.

International examples: Germany (trucks only). Proposed but not implemented in the Netherlands and Belgium.

Pollution charges

The aim is to reduce pollution levels from private vehicles, by charges based either on distance travelled or the entering of a cordoned area.

International examples: London (in addition to the congestion charge).

Employer/ employee charges

All firms above a threshold level of employees pay a local payroll tax, unless employees are housed on the premises or provided with transport.

International examples: Paris (France) and Portland (USA).

Suitable for local government

IMPLEMENTATION

SOUTH AFRICAN PROPERTY REVIEW

Currently provincial/national but suitable for local government

Unsuitable for local government

state of city finances are more dependent on public transport (ibid), which is demonstrably true in South Africa (Figure 60).

Private vehicle use charges and taxes Public transport financing mechanisms should ideally generate revenues from within the transport system, and send appropriate pricing signals aimed at moving consumers away from private vehicle use to public transport (Ubbels et al., 2001; Ubbels & Nijkamp, 2002). Charging road users is logical for cities, as it captures the costs that private vehicle use places on cities, the environment and other road users, thereby reflecting more accurately the true cost of using the road (Bowerman, 2007). Theoretically, drivers unwilling to pay the price can either change their travel patterns or shift transport modes. And, as more people shift from private vehicles to public transport, fare-box revenues will increase, thus reducing the reliance on subsidies and making the public transport system more sustainable.

Charging private vehicle users can have several fiscal benefits for cities:

STAT E O F C IT Y FI NA NCE S 20 18

Sufficient revenue can be generated to justify borrowing to cover the capital costs of expanding bus networks and 150 services, instead of having to rely on grant funding. ●● In the long term, a sustainable revenue stream is generated that subsidises public transport operating costs. ●● The costs recovered better reflect the costs associated with private vehicle use. ●● The shift away from private vehicle use to public transport increases ridership and revenue from fares. The primary goal of private vehicle use charges should be to generate revenue for improving public transport infrastructure and services, but the

secondary goal (and long-term impact) the three spheres of government, of these charges would be the change in which makes coordination difficult attitude and behaviour towards public (National Treasury, 2014; Thomas, 2016). transport services. National government provides overall Table 43 analyses the suitability of 12 guidance through legislation and setting potential private vehicle use charges, policy, while provincial governments some existing and some proposed new are responsible for the “legacy” bus charges, as identified in the literature service (the provincially subsidised bus and South African policy and legislation: services) and for regulating public a national fuel levy, a provincial fuel levy, transport, including the minibus taxi CO2 tax, vehicle sales tax, vehicle import sector. Local governments are duties, road tolls, vehicle registration and responsible for transport planning, licensing, parking charges, congestion municipal bus services, managing charges, per-kilometre charges, pollution ranks and the new bus rapid transit Assessment of Private Vehicle Usetaxi Charges charges and employer/employee charges. (BRT) projects (National Treasury, 2014). Each proposed private vehicle use charge is assessed according to criteria that are based on Ubbels As Table 43 shows, transport and In assessing possible private vehicle and Nijkamp (2002) and Ubbels et al. (2001), adapted to the South African city context (see Table 44). travel-related taxes and charges are use charges, thosecan that are within A full breakdown of these criteria, including their measurement andonly weighting, be found in the collected Annexure. (and resources allocated) at the purview of cities are included. different levels of government. This Therefore, the assessment did not The proposed private use charges using eight criteria: revenue-generating fragmentation is vehicle reflected in were the assessed include charges 1-5 in Table 43, as these potential, behaviour change potential, public/political acceptability, flexibility, complexity, institutional arrangements, with public are implemented at the national or redistributive alignment, legislative environment and policy alignment. Details of these criteria are transport functions being split across provincial level. given in the Annexure.

TABLE 44: Assessment of the applicability of private vehicle use charges to South African cities CHARGES 

ROAD TOLLS

CRITERIA 

VEHICLE REGISTRATION & LICENSING

PARKING CHARGES

CONGESTION CHARGES

PER KM CHARGES

POLLUTION CHARGES

EMPLOYER CHARGES

Revenue generation Behaviour change Public/political acceptability Flexibility Complexity Redistributive alignment Legislative environment Policy alignment favourable

neutral

unfavourable

TABLE 45: Decision scorecard for selecting charges for modelling

Next, the suitability of each charge to South African cities was determined by assigning a score for VEHICLEthe criteria: favourable = 3 points, neutral = 2 points, and each of CHARGES the charges in theROAD matrix across  CONGESTION PER KM POLLUTION EMPLOYER REGISTRATION PARKING TOLLS CHARGES CHARGES CRITERIA & LICENSING unfavourable = 1 point. These scores were thenCHARGES adjusted according toCHARGES the weighting givenCHARGES to each ofRevenue the assessment criteria (see Annexure): heavy weighting = multiply score by three, moderate generation 9 6 9 9 9 3 6 weighting = multiply score by two, light weighting = multiply score by one. Table 45 shows the scores Behaviour change 4 2 4 6 6 4 2 and ranking. In addition, the charges were assessed based on their variance from the average score Public/political acceptability 6 half a standard 9 6 above the 3 mean were 6 6 (of 34.5) – those with a score3more than deviation considered Flexibility most suitable for the South African city3 context (Table 45). 3 9

Complexity

Redistributive alignment

Legislative environment

Policy alignment

Total score

Rank

most suitable

neutral

least suitable

SOUTH AFRICAN PROPERTY REVIEW

state of city finances Assessment of private vehicle use charges

STATE O F CITY F IN AN CE S 2018

Each proposed private vehicle use charge is assessed according to criteria that are based on Ubbels and Nijkamp (2002) and Ubbels et al. (2001), adapted to the South African city context (see Table 44). A full breakdown of these criteria, including their measurement and weighting, can be found in the Annexure. The proposed private vehicle use charges were assessed using eight criteria: revenue-generating potential, behaviour change potential, public/ political acceptability, flexibility, complexity, redistributive alignment, legislative environment and policy alignment. Details of these criteria are given in the Annexure. 152 Next, the suitability of each charge to South African cities was determined by assigning a score for each of the charges in the matrix across the criteria: favourable = 3 points, neutral = 2 points, and unfavourable = 1 point. These scores were then adjusted according to the weighting given to each of the assessment criteria (see Annexure): heavy weighting = multiply score by three; moderate weighting = multiply score by two; light weighting = multiply score by one. Table 45 shows the scores and ranking. In addition, the charges were assessed based on their variance from the average score (of 34,5) â&#x20AC;&#x201C; those with a score more than half a standard deviation above the mean were considered most suitable for the South African city context (Table 45).

Parking charges and congestion charges: A case study Parking charges and congestion charges were ranked the highest (1 and 2). To assess the impact of these charges on a South African city, a Monte Carlo-style simulation was carried out, using Johannesburg as a case study. The City of Johannesburg was selected 42

SOUTH AFRICAN PROPERTY REVIEW

based on the availability of data. Congestion charges and parking charges can take varying form, as described below.

Congestion charges CORDON CHARGES Road users are charged every time they pass through a defined cordon area around a city centre, e.g. Singapore. AREA CHARGES Road users pay a daily charge for driving through and within a cordon, regardless of time spent or number of times passed, e.g. London and other European cities. SINGLE FACILITY CHARGES Road users are charged for access to specific facilities on the road, such as specific lanes, corridors or routes. For example, several US cities charge private vehicles to use high-occupancy vehicle lanes.

Parking charges PARKING FEES AND FINES Road users are charged a fee for parking in municipal parking spaces, typically within the central business district (CBD), e.g. many South African cities. PARKING SALES TAXES Additional tax is levied on all existing parking transactions, e.g. several cities in the US. PARKING LEVIES Owners of nonresidential parking spaces are charged an annual fee for each parking space that they own, e.g. many Australian cities. For the simulation, charges were selected based on their suitability to the city-specific context â&#x20AC;&#x201C; in this case Johannesburg, a polycentric city. Single facility-type charges are best suited to polycentric cities, whereas area-type charges are best suited to monocentric cities (e.g. Cape Town). Therefore, the

TABLE 46: Impact of low-level private vehicle use charges in the City of Joburg HYPOTHETICAL RATE CHARGED

POTENTIAL DIRECT REVENUES (R-millions)

POTENTIAL DECREASE IN CAR USE

POTENTIAL INCREASE IN BUS USE

POTENTIAL INCREASE IN FARE-BOX REVENUES (R-millions)

Single facility congestion charge

R4.03 per trip

543.7 [542.7, 544.6]

4.52% [4.38%, 4.67%]

19.47% [19.32%, 19.62%]

253.0 [251.0, 255.0]

Parking sales tax

7.5% ad valorem tax

277.1 [276.9, 277.1]

0.20% [0.20%, 0.21%]

5.23% [5.19%, 5.27%]

68.0 [67.5, 68.5]

Parking levy

R750 annually per parking space

1,367.8 [1,365.6, 1,370.0]

2.48% [2.38%, 2.57%]

25.82% [25.63%, 26.02%]

335.6 [333.0, 338.2]

Note: 95% confidence intervals in square brackets

TABLE 47: Impact of standard-level private vehicle use charges in the City of Joburg HYPOTHETICAL RATE CHARGED

Single facility congestion charge

R8.05 per trip

Parking sales tax

15% ad valorem tax

Parking levy

R1,500 annually per parking space

POTENTIAL DIRECT REVENUES (R-millions)

POTENTIAL DECREASE IN CAR USE

POTENTIAL INCREASE IN BUS USE

POTENTIAL INCREASE IN FARE-BOX REVENUES (R-millions)

1,033.5 [1,030.0, 1037.1]

8.96% [8.68%, 9.25%]

36.67% [36.37%, 36.97%]

476.6 [472.6, 480.5]

551.9 [551.4, 552.5]

0.41% [0.39%, 0.42%]

10.34% [10.26%, 10.42%]

134.4 [133.3, 135.4]

2,619.1 [2,611.4, 2,626.8]

4.93% [4.74%, 5.13%]

49.04% [48.65%, 49.43%]

637.3 [632.2, 642.3]

Note: 95% confidence intervals in square brackets

TABLE 48: Impact of high-level private vehicle use charges in the City of Joburg HYPOTHETICAL RATE CHARGED

Single facility congestion charge

R 12.08 per trip

Parking sales tax

22.5% ad valorem tax

Parking levy

R2,250 annually per parking space

POTENTIAL DIRECT REVENUES (R-millions)

POTENTIAL DECREASE IN CAR USE

1,472.2 13.29% [1,464.5, 1,480.0] [12.87%, 13.72%]

POTENTIAL INCREASE IN BUS USE

POTENTIAL INCREASE IN FARE-BOX REVENUES (R-millions)

52.92% [52.51%, 53.32%]

687.7 [682.4, 693.0]

825.0 [824.1, 825.8]

0.61% [0.58%, 0.63%]

15.53% [15.41%, 15.65%]

201.8 [200.2, 203.4]

3,760.3 [3,743.4, 3,777.1]

7.39% [7.10%, 7.68%]

70.85% [70.29%, 71.41%]

920.8 [913.4, 928.1]

Note: 95% confidence intervals in square brackets

In terms of behaviour change, the single facility congestion charge has the largest impact on car use, which is consistent with the aim of such a charge, i.e. to reduce the number of private vehicle

state of city finances area-type congestion charges were excluded from the hypothetical model. Also excluded from the model were parking fines and fees, as these already exist in Johannesburg. The model interrogated the implications of three private vehicle use charges on the City of Johannesburg: a single facility congestion charge, a parking sales tax and a parking levy.

Data, assumptions and modelling process Data came from a variety of sources and, in the absence of required empirical data, several proxies and assumptions were used. The National Household Travel Survey: Gauteng Profile (Stats SA, 2014b) provided updated data on current transport costs, revenues, modal choice and ridership levels within the City of Johannesburg. GIS data from the City of Johannesburg on property types and areas was used to calculate the number of parking spaces, as well as DoT parking policies. Data on transport elasticities came from a meta-analysis of transport impact studies, which provided a distribution of results for various types of transportrelated elasticities – these were used as a proxy for possible transport elasticities in the City of Johannesburg. Data on charge compliance was drawn from international case studies of the implementation of the modelled charges – these were used as a proxy for possible charge compliance in the City of Johannesburg. Data on charge levels relative to total trip costs was drawn from international case studies of the implementation of the modelled charges – these were used as an indicator for the potential relative charge level in the City of Johannesburg. The Monte Carlo-style simulation was run at various charge levels: a standard charge level, which was most closely aligned to the international average; a high charge level, which

represents a higher bound of implementation; and a low charge level, which represents a more conservative implementation.

Results and discussion It is important to note that these simulations are based on hypothetical implementations and proxy data. Therefore, the results are intended to illustrate the potential impact of private vehicle use charges in a South African city and encourage discussion on the potential role of such charges in cities. Tables 46-48 present the results of the simulation at the low, standard and high charge levels respectively. Tables 46-48 show that these charges could raise significant revenues for public transport, even when set at lower levels. A parking levy produces the highest level of revenues, followed by a single facility congestion charge and a parking sales tax, which is consistent with international studies of alternative public transport financing mechanisms (Irwin & Bevan, 2010). In terms of behavioural change, the single facility congestion charge has the largest impact on car use, which is consistent with the aim of such a charge, i.e. to reduce the number of private vehicle trips and vehicle kilometres along the facility in question. This confirms the literature’s finding of congestion charges being “one of the most effective demand management measures in the industrialised world” (Rivasplata, 2013: 56). Parking levies tend to have less of an effect than the congestion charge because the full costs are not borne by the road user, while the parking sales tax would have a negligible impact due to the relatively small per-trip cost. Parking levies result in the highest increase in bus use and fare-box revenues, followed by single facility congestion charges and parking sales tax. This is largely due to the increased funding for public transport that accrues from the revenues generated

by these charges, and the associated increase in ridership, which would accrue from improved and expanded public transport facilities. The high increases in bus use relative to the decreases in private car use are due to modal shift from other forms of transport – taxis, trains and non-motorised modes – which will occur with the improvements to the bus system. It is worth noting that increases in bus use relative to tax revenues generated are highest for single facility congestion charges because such charges will see the highest proportion of private vehicle users shift to buses, in addition to the modal shift from other forms. Fares currently contribute just 20% of the total Integrated Rapid Public Transport Network (IRPTN) operating costs in the City of Johannesburg, with the balance covered by the city (through revenue support) and the DoT (through the Public Transport Network Operating Grant). For each of the charges modelled, the resulting potential fare-box revenue increases and direct revenues generated would cover the entire annual operating costs of the IRPTN. Moreover, the charges modelled would provide sufficient additional revenues to allow the city to support capital expenditure on the IRPTN. This suggests that introducing these private vehicle use charges would go a long way towards subsidising current and expanded operations and contribute significantly to the cost of expanding the public transport network.

Conclusion In most South African cities, transport remains divided between a public transport system used by the majority of mostly poorer residents, and private vehicles driven by mainly wealthier residents. Although the policy intent is for affordable and reliable public transport, transport planning practices have largely focused on improving conditions for vehicles. Over the past SOUTH AFRICAN PROPERTY REVIEW

state of city finances

Effective and sustainable public transport systems are key to assisting cities in achieving their goals of economic growth and compact, inclusive development, and underpin the devolution of the transport function to local government. However, devolving this responsibility has cost implications for cities decade, despite significant capital investment in new IPTNs in some cities, ridership is declining, while the use of private vehicles has continued to climb – private vehicle use is currently the fastest-growing mode of transport. The growth in private vehicle use at the expense of public transport has significant social costs and is contrary to city spatial planning and growth objectives, driving sprawl, reducing labour mobility and entrenching the economic inequalities that exist across South African cities. Effective and sustainable public transport systems are key to assisting cities in achieving their goals of economic growth and compact, inclusive development, and underpin the devolution of the transport function to local government. However, devolving this responsibility has cost implications for cities. The current public transport systems are plagued by limited services, decreasing ridership and unsustainably high subsidies, while notably minibus taxi use is also increasing across most cities. Sustainable financing of public 44

SOUTH AFRICAN PROPERTY REVIEW

transport requires generating revenue through taxes/charges (which are then ringfenced for public transport expenditure) and increasing the number of public transport users, so fare-box revenues increase. Private vehicle charges are the most logical alternative source of funding for public transport. Charging private vehicle users for the full cost of their road use addresses the privatepublic imbalances that currently exist in the transport system at large. Improving the transport service (including minibus taxi services) for the benefit of those who rely on public transport has to be at the heart of transport investment. While disincentivising private vehicle use through road pricing is challenging, increasing ridership might be possible, as existing users remain public transport users (increasingly out of choice rather than necessity), and growing urban populations choose to use public transport. Generating revenues for financing public transport from within the transport system is both fair and logical. Seven potential charges that fall within the purview of cities were assessed against eight criteria: revenue generation, behaviour change, public/ political acceptability, flexibility, complexity, redistribute alignment, legislative environment and policy alignment, and ranked according to their suitability for South African cities. The impact of the two top-ranking charges – that is, parking charges and congestion charges – was then assessed through a Monte Carlo-style

Private vehicle charges are the most logical alternative source of funding for public transport

simulation using Johannesburg as a case study. The charges most suitable for a polycentric city like Johannesburg were the single facility congestion charge, parking sales tax and parking levy. The simulations found that all three charges could raise significant revenues for public transport, and that the single congestion charge would have the largest impact on car use. A parking levy would result in the highest revenues and the highest increase in bus use and fare-box revenues. Each of the charges would lead to sufficient additional revenue (through fare-box revenues and private vehicle use charges) to subsidise current operations and contribute to capital expenditure of Johannesburg’s integrated rapid public transport network.

Limitations Although the evaluation criteria used to assess this universe of charges and arrive at a set of charges for modelling were robust and rigorously applied, the process was defined for the purpose of this chapter, and the exclusion of any charges from further interrogation should not be seen as prescriptive. Further research into the viability of these charges, in terms of generating revenue and promoting a modal shift in South African cities, is required and encouraged. Similarly, this chapter sought to interrogate the private vehicle use charges most applicable for financing public transport. While these charges are the most logical and practical means for financing public transport, and while they also address the existing imbalance, the chapter does allude to alternative finance mechanisms, external to the transport system at large, which could be used to raise revenues for financing public transport. These should also be interrogated further to potentially identify less conventional finance mechanisms that may be suitable for South African cities.

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Cape Town CCID

Cape Town CBD sustains high investor confidence, CCID report reveals

THE STATE OF CAPE TOWN CENTRAL CITY REPORT 2018

THIS PUBLICATION IS BROUGHT TO YOU BY THE

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New property developments worth in excess of R950-million in Cape Town central have been reported this year in spite of a tight economy and huge economic pressure

A YEAR IN REVIEW

COVER PHOTOGRAPHS: Herman Strydom

Text supplied

his is the key finding of the latest edition of “The State of Cape Town Central City Report 2018 – A Year in Review” (SCCR), released in July by the Cape Town Central City Improvement District (CCID). The report, presented to the Cape Town business community at a breakfast in the Central City recently, reflects on the economic climate prevalent in the CBD in the preceding year. When the report was launched, it was revealed that the value of property in the Central City had soared by nearly 40%, from R30,628-billion in 2016/2017 to R42,860-billion in 2018/ 2019, with a total of 39 individual new developments (worth in excess of R13,5-billion) either recently completed, under construction or in the pipeline. And in 2019 thus far, six new developments worth more than R968million have been reported, says SCCR researcher and economic research analyst Sandra Gordon. Three of the six new developments are hotels that are already open and operational – the two five-star luxury hotels Gorgeous George and Labotessa, and one three-star property, the Signature Lux hotel on the Foreshore. The three venues add 196 new rooms to the city’s hotel pool. 46

SOUTH AFRICAN PROPERTY REVIEW

Two further new developments – the Duke and Fleetway House – are residential, while Foreshore Place will be a mixed-use development with both commercial and residential space. The three developments are scheduled to add an additional 416 residential units to the Central City. Adding these new developments (and including an estimated R130million for City Park, which was not included in the SCCR 2018 estimate) to the estimate of recently completed, under construction, planned and proposed developments increases the total to R14,679-billion. Data in the seventh edition of the annual report, which is indispensable to investors, developers and retailers seeking to invest in a dynamic city centre, shows sustained confidence in the development potential of the Central City, says CCID Board Chairman Rob Kane.

Some of the key findings of the report are that: ●● While vacancy rates for commercial office space rose in the last year, with 30 000m2 of new office space coming onto the market over an 18-month period (14 000m² in 2018), Cape Town continues

to have the lowest office vacancy rates of South Africa’s five largest metropolitan centres; ●● The retail sector serving workers and residents in the downtown area has remained stable, despite lagging economic conditions, with a steady 93% retail occupancy rate and an increase of more than a third in the number of restaurants in the CBD (from 114 in 2017 to 153 in 2018); and ●● Cape Town has affirmed its status as the leading digital city in Africa, recognised as a hub for technology development and innovation and providing more than 40 000 jobs in the sector – significantly higher than other tech hubs such as Johannesburg (20 000), Lagos (9 000) and Nairobi (7 000). The most significant indicator of investor confidence in the Cape Town Central City is the growth in property value of more than R12,2-billion from 2016/2017 to R42,860-billion. Kane notes that while the overall value of properties is likely to change with the adjudication of objections in the City of Cape Town’s current round of updating the General Valuation Roll, “We are heartened by the increase in

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DEFINING THE CAPE TOWN CENTRAL CITY For the purposes of this report, the Central City’s geographical boundaries mirror the operational boundaries of the Cape Town Central City Improvement District (CCID) – a not-for-profit company mandated to manage and promote the Central City. The 1,62km2 area is marked out by the yellow line on the map. The area is bordered to the northeast by Table Bay Harbour (the Port of Cape Town), including the V&A Waterfront; to the northwest by the largely residential suburbs known as the Atlantic the City to designed the west andso south; District Six This Seaboard; publication hasBowl been thatand readers and Woodstock to the southeast. can easily “find their way” around the Central City, as The area is divided into four precincts: text often indicates in which of the four precincts Precinct the 1 – described as the conferencing, hospitality and financial precinct; make toCBD; P4) certain activities fall. Precinct that 2 – the retail up hubthe andCBD heart (P1 of the Precinct Opening 3 – the legalthe andfront parliamentary precinct;and and having the map cover entirely Precinct 4 – referred to as East City. exposed while reading will enable quick referencing All main road and rail transportation links in the Western Province begin and orientation, and District a better understanding of N1 thehighway in the Cape Town Central Business (CBD). These include the economic activities in the different “regions” to Gauteng, and the N2, which travels along the southern coast of South Africa to KwaZulu-Natal and beyond. Cape Town International lies on the N2, of our downtown, as contained in thisAirport report. just 19km from the Central City.

LEAVE THIS MAP OPEN AS YOU BROWSE THROUGH THIS REPORT

HATFIELD

PRECINCT 1 (CONFERENCING, HOSPITALITY, FINANCIAL) PRECINCT 2 (RETAIL HUB/ HEART OF THE CBD) PRECINCT 3 (LEGAL/GOVERNMENT) PRECINCT 4 (EAST CITY)

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SOUTH AFRICAN PROPERTY REVIEW

Cape Town CCID

SOUTH AFRICAN PROPERTY REVIEW

Cape Town CCID

SOUTH AFRICAN PROPERTY REVIEW

usiness of doing business in the start-ups on the continent. The BPO ape Town CBD. sector supports call centres for global The report analyses the state of the companies and online retailers, Cape Town CCID entral City, from property values to with a steady pipeline of call-centre he diverse range of commercial employees. ectors gross that have always supported Despite positives, Town’s valuation for the Cape Townitsof the five largest these metropolitan TheCape remaining 15% own their property Central Business District. Combined municipalities, despite a 50 basis-point and rent it out to tenants. Former conomy. It also considers other trends. success hinges on the city’s ability the developments under way or increase during the last quarter of 2018. commercial buildings in the CBD that Cape with Town is a recognised tourism to prepare for, and guard against, proposed, the overall picture shows “In terms of office rentals, rates have have been converted to residential nd eventing destination, a magnet impact of says climate andinclude its confidence in the and development remained the largely stable," Kane.change buildings Triangle House potential in the Central City.” "Stronger attendant drivers areconsequences. required to and the former Nedbank building on or businesses operating across the In its assessment of the commercial demand, and to improve the Foreshore, etail spectrum. It has an active legal support future Most notably, Cape Town learnedrecently launched as sector, the report notes that vacancy the vacancy rate and asking rental the Onyx. raternity, a well-serviced financial some significant lessons during the rates rose during 2017 and 2018, growth. These drivers include growth ervicesprimarily sectorasand is aofcreative drought. a result 30 000m2 of new in capital 2018 investment and employment, Other interesting office space coming onto the market. and renewedCapetonians business optimism a the features in the entre for the communications rosein to challenge, New developments include 16 000m2 at changing political landscape.” report include: nd design businesses that operate averting Day Zero with globally KPMG’s The Halyard, 6 500m2 at the ENS The report also suggests a revealing ●● Breakdowns of all the within the CBD. success. Businesses alsoin the building and 3 000m2 in the upgrade of trend in recognised terms of home ownership. businessare sectors the Maserati of city own their Central City, including In recent years,building, Cape among Townothers. has also Nearly 60% taking stepsdwellers to manage resources Nevertheless, Cape Town continues their properties, while nearly 25% focus on specific sectors egun to make its mark as a digital more effectively. to have the lowest office vacancy rates

SOUTH AFRICAN PROPERTY REVIEW

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properties.

such as business process

insurance insurance&& banking banking

197 197 MOTE WORKING 161 161 1717

Medical Medical

94 94

44 44

96 96 168 038 68

117 117 44 44 52 52

Employment Employment &&recruitment recruitment agencies agencies

Industrial Industrialcouncils councils ICT ICT&& BREAKDOWN OF BUSINESS IN THE CENTRAL CITY

outsourcing, arts, retail and co-workingAccommodation sector; Accommodation e ●● An in-depth look at the &&travel travel conferencing, eventing and a recognised technology, visitor economy of the Central City; s process outsourcing (BPO) ● ● A property investment map Co-working Co-working mmerce hub, with reliable ucture, fast internet speeds detailing thespaces 39 locations spaces mmitment to ofsupporting current construction sites workforce. as well as those of planned/ ty is home to the most tech proposed s on the continent. The projects; BPO ●●centres A review the effects of upports call forof global the 2018 drought and the ies and online retailers, teady pipeline of call-centre implications for the overall ees. resilience of Cape Town; and te these positives, Cape Town’s ●● Highlights from the CCID hinges on the city’s ability annual online residential re for, and guard against, retail surveys. act of climateand change and its

nt consequences. notably, Cape Town learned nificant lessons during the ought. onians rose to the challenge, Day Zero with globally ed success. Businesses are also teps to manage their resources ectively.

Educational Educational institutions institutions resources resources Cape&& Town CCID &&NGOs/NPOs NGOs/NPOs

telecoms telecoms

The following is an overall breakdown of the 3 090 businesses to be found in the Central City, as at the time of publication of this report.

639 201

General General Retail venues corporate/ corporate/ head headoffi offi ces ces Legal

110 101

Finance, investment, insurance & banking

Architecture, engineering & surveying

Artistic Artistic Property & real estate studios studios

56 59 Specialised Specialised

Freight, customs Communications, brokering, media & shipping & advertising import/export services services

94 GROWTH DESPITE DESPITESLUGGISH SLUGGISHECONOMIC ECONOMIC GROWTH44 RATES RATES AND ANDRISING RISINGCOSTS, COSTS,THE THECENTRAL CENTRALCITY’S CITY’S 197 96 117 OCCUPANCY OCCUPANCY RATEHAS HASREMAINED REMAINEDSTEADY STEADY 161 RATE 68 44 17 52 Educational institutions & resources

Employment & recruitment agencies

Industrial councils & NGOs/NPOs

ICT & telecoms

General corporate/ head offices

Artistic studios

Medical

Accommodation & travel

Co-working spaces

Th hi to

As bu an bu res

Specialised services

DESPITE SLUGGISH ECONOMIC GROWTH RATES AND RISING COSTS, THE CENTRAL CITY’S OCCUPANCY RATE HAS REMAINED STEADY

to pro To su res co the red see

ke en the U t P D w c

1 038 11038 038

RETAIL RETAIL RETAIL VENUES VENUES VENUES Retail is big business Retail Retailisisbig big business business in Cape Town: out of the 3 090 private ininCape CapeTown: Town: out out ofofformal enterprises in the CBD, the the3 3090 090private privateformal formal 1 038 were classified as in retailers. enterprises enterprises inthe theCBD, CBD, 1 1038 038were wereclassifi classifi ed ed asasretailers. retailers. 7

SOUTH AFRICAN PROPERTY REVIEW

the for ren Ind en fai uti na To mo

report back

SAIBPP Convention The South African Institute of Black Property Practitioners held its 23rd annual convention, under the banner “Funding the Future” at the Durban International Convention Centre between 11 and 13 September Report back by Nicola Jenvey

Former Deputy Minister of Finance Mcebisi Jonas

Keynote address: former Deputy Minister of Finance Mcebisi Jonas Author and former Deputy Finance Minister Mcebisi Jonas painted a bleak picture of the South African economic landscape, reflecting how inequality and the inability of ordinary citizens to grow their wealth from assets was constraining growth. Delivering the keynote address to the South African Institute of Black Property Professionals (SAIBPP) Convention in Durban, Jonas said the country’s Gini coefficient (the statistical distribution gauging economic inequality) was now the world’s highest. One reason was that the majority existed on wages without the ability to growth their wealth through assets, including property. Citing French economist Thomas Piketty, Jonas reflected capitalism is essentially unequal, and in South Africa skilled employees earn twice the rate of return on their income of unskilled labour because they are not reliant on wages for wealth creation. 52

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The changing technological environment intensifies the situation, while the current education system fails to impart the necessary skills to break the cycle. The imbalance is “creating a fertile ground for popularism”. “What happens in property mirrors the economy, and black professionals are particularly vulnerable,” Jonas said. “Black entrepreneurs and youth have had their tenders ignored because they have not adhered to (certain unwritten and corrupt criteria).” A coherent economy is a key solution, but replacing white with black is not transformation. The solution demands high levels of maturity among trade unions, business, government and labour – a situation Jonas said currently does not exist. He stressed that indigenisation models across Africa and South America had failed, and that corporate South Africa must recognise that it is part of the problem and the solution in forging black ownership and participation. There are some indications the economy is clawing back. Gross domestic product (GDP) growth for the second quarter of 2019 was 3,1%, and there was “a steady appreciation” in property. “However, there is little room for excitement,” said Jonas. “The South African Chamber of Business reported its lowest business confidence level since 1985, and confidence in the civil engineering sector has reached an all-time low.” A simple reflection of the severity facing South Africa is a comparison with China in terms of foreign direct investment as a percentage of GDP. Whereas South Africa only achieved one percent in the quarter to March 2019, China consistently achieves an annual average of 42%. South Africa now ranks 142nd globally in terms of its ability to attract and retain foreign direct investment, and has fallen from second to sixth position in Africa. “The country is not projecting confidence to the global market and its potential investors, and is now deemed the 82nd-best option for doing business – at a time when Rwanda ranks 41st!” Jonas said.

Outgoing President of the South African Institute of Black Property Practitioners Nkuli Bogopa The property sector has not sufficiently transformed, with industry players failing to meet the outlined targets and aiming to achieve minimum levels rather than considering transformation as an inclusive process.

report back Delivering her departure speech during the 23rd annual SAIBPP Convention, outgoing President Nkuli Bogopa slammed the lack of change in the industry, specifically in line with access to opportunities available for black professionals. She also called on the government to eradicate corruption and implement policies that would deliver on promises for transformation. Indicating that property was an essential economic driver, Bogopa urged the organisation to “work tirelessly” to ensure the Property Charter promoted transformation. The Institute would call for a round-table meeting with the Minister of Trade and Industry in the next few weeks. Ithala Development Finance Corporation property executive Xolani Mkhize questioned whether the government was working adequately and sufficiently to overcome the built environment challenges within its fiscal constraints, and called on the private sector to help design the appropriate solutions. “The property industry can bring solutions to the government and the market that will close the everwidening economic gap currently plaguing the country,” he said to the delegates gathered at the conference. “We urgently need to find the game-changing solutions for South Africa.” Bogopa called on members to play an active role in keeping the government accountable for its actions, and to create an environment that’s conducive to growth in an industry capable of generating employment opportunities. She outlined social housing as a critical area in which the property industry could assist in eradicating poverty and promoting potential home-ownership among a greater number of South Africans. Ithala’s Senior Account Manager Nathi Dlamini said the organisation has the capability to offer wholly funded loans on property developments – and to provide working capital to further boost the role that black property entrepreneurs could play in the industry. “There are substantial opportunities to work with black professionals, and to ensure their increased participation in the industry,” Dlamini said. “Our approach to access to finance is radical.”

Speaker: ACSA Head of Infrastructure and Property Khanyisile Nene Airports Company South Africa (ACSA) will actively seek partnerships with black-owned entities as the national transport group looks to capitalise on the 1 000 hectares of commercial real estate it has available for development, and to grow its footprint outside the country. Addressing the SAIBPP Convention delegates, ACSA Head of Infrastructure and Property Khanyisile Nene outlined a host of multimillion-rand projects in the pipeline across South Africa’s airport sites, for which the organisation would seek partnerships. “Be ready when the opportunities come to light as we want to work with black companies and professionals,” she said. “ACSA is committed to transforming the property sector – and prepared to have its policies challenged in court, even in the Constitutional Court, to ensure that transformation happens in the sector.” Projects on the cards include a 180 000m2 mixed-use commercial space being developed at OR Tambo International Airport’s western precinct, as well as a midfield terminal complex and midfield cargo facility for the same airport (both still in the planning stage). The mixed commercial space would be rolled out over seven phases, while the midfield projects would see ACSA building a new terminal between the two existing runways, with construction expected to begin in 2024. In Cape Town, tender documents for Terminal 2 expansion project were issued to the market in August, while ACSA also plans to realign the city’s runway. The company also has a variety of projects scheduled for the King Shaka International Airport in Durban, including a hotel development, office park and a terminal expansion; in addition, development plans exist for the country’s regional airports, including an expanded departure lounge for East London. Nene said deal options open to successful entrepreneurs include 40-year leases on the properties – development leases where ACSA funds the top structure and joint venture initiatives. However, she cautioned delegates about making unsolicited bids for property development because the laws governing state-owned enterprises demand transparency in the bidding and appointment processes.

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report back

Deputy City Manager for Economic Development and Planning, Phillip Sithole

eThekwini Municipality Deputy City Manager for Economic Development and Planning, Phillip Sithole In unlocking the billions of rand worth of development potential, eThekwini Municipality would have to leverage public-private partnership deals, particularly driven by transformation principles. Deputy City Manager for Economic Development and Planning Phillip Sithole told the delegates at the South African Institute of Black Property Professionals (SAIBPP)

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Convention in September that there were various private sector-driven catalytic projects under way across the city, and called specifically for black African professionals and blackowned companies to bid for available opportunities. He encouraged participants to find innovative solutions to issues around access to finance. “Transformation is the key, and that means partnerships. Working with black professionals is a ‘low-hanging fruit’ way of boosting black participation,” he said. Pipeline projects include the Dube TradePort, where the municipality facilitates infrastructure and provides a single entry point for private sector partnerships. Bulk earthworks for the R13-billion two-phase trade zone are under way, with Sithole stressing the project must include black professionals. Thirty percent of neighbouring Cornubia is either under development or completed, with social housing, the business hub and town centre projects well under way. The project is being rolled out over 30 years, and public sector funding will contribute R10-billion to the estimated R25-billion investment. Sithole said the city will be calling for partnerships in the business hub, housing and industrial property developments over the next 12 to 24 months. In April, the municipality announced the Midway Crossing Shopping Centre. eThekwini will provide bulk infrastructure, including the Go!Durban public bus and train initiative; Sithole estimates the project will demand a R400-million public sector investment, and R1,5-billion from corporates. In May, the city confirmed that construction would be commencing on the Rivertown Precinct, situated between the International Convention Centre and the beachfront, as

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part of inner-city rejuvenation plans. The city has earmarked R40-million, predominantly for paving, street lighting, kerbing, landscaping and storm water systems. Sithole said that the city was also seeking private sector opportunities for redeveloping the 10-hectare Virginia Airport site, which must include black participation. Conceptual designs for the mixed-used development estimate an investment of R6-billion. In the west, Tongaat Hulett Developments will convert sugarcane farmland near Shongweni, creating an 85â&#x20AC;&#x2030;â&#x20AC;&#x2030;000m2 shopping centre, business park and logistics hub, and 20â&#x20AC;&#x2030;â&#x20AC;&#x2030;000 housing opportunities. eThekwini will provide the bulk infrastructure for this R28-billion initiative. Further west, the municipality will invest R350-million into the R6,5-billion Keystone light industrial warehousing and logistics park thatâ&#x20AC;&#x2122;s currently under construction; while in the south, the planned Toyota automotive supply park project will inject R30-billion into the local economy. Public sector funding will be around the R1-billion mark.

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networking

WPN reveals SA Women in Property Awards finalists The Women’s Property Network (WPN) has announced the finalists of the South African Women in Property Awards, marking a celebration of female excellence in the local commercial property sector

ast month, the regional rounds of the South African Women in Property Awards 2019 took place in KwaZuluNatal, the Western Cape and Gauteng. The nominees in each category were recognised and the regional winners, who are now national finalists, were announced. “The South African Women in Property Awards, sponsored by Airports Company South Africa (ACSA), is a platform that was established by the WPN to recognise and celebrate the achievements of women in various segments of the South African property sector,” says Nonhlanhla Mayisela, National Chair of the WPN and CEO of Izandla Property. “The awards recognise outstanding leadership, commitment and success in individuals and organisations that have stepped up and shaped women’s roles in the private and public sphere of the sector. This includes CEOs, executives and leaders in corporate South Africa, SMMEs, government departments and agencies, as well as entrepreneurs.” This year’s awards categories include four individual awards: Young Achiever, Entrepreneur of the Year, Professional of the Year (Private Sector) and Professional of the Year (Public Sector). ACSA is the principal sponsor of this year’s awards, and the support has been vital in assisting the WPN in once again shaping a meaningful, high-quality event that acknowledges female property professionals who are making an impact in the industry. “ACSA’s vision is to be the most sought-after partner in the world for the provision of airport management solutions by 2025,” says Khanyisile Nene,

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Senior Manager for Infrastructure & Development at ACSA. “To achieve this, the ACSA commercial division launched ‘Commercial Vision 2025’, which is focused on increasing commercial revenue and airport real estate business development. “We are actively looking for partners to work with, within all spheres of the real estate industry in South Africa. Transformation is at the top of our agenda, and we are unapologetic about our determination to ensure racial and gender equality. We are proud to support the WPN as our goals are aligned, and we truly value the organisation’s positive contribution to transformation in South Africa’s property industry.” The WPN is also pleased to have the supporting sponsorship of FNB (the primary supporting sponsor), Excellerate JHI and the Colosseum Luxury Hotel.

THE 2019 AWARDS FINALISTS Young Achiever Award ●● Clare Comins – Professional architect, SNAPP Architects (Western Cape) ●● Palesa Moloi – Co-founder and CEO, ParkUpp (Gauteng) ●● Nompumelelo Xulu – Founder and Managing Director, NS Xulu Attorneys Conveyancers (KwaZulu-Natal)

Entrepreneur of the Year Award ●● Jutta Berns-Mumbi – Founder and Managing Director, Ecocentric (Gauteng) ●● Michelle Michael – Director, Dlamini Michael Inc (KwaZulu-Natal) There were no nominees from the Western Cape in this category.

Professional of the Year Award – Private Sector ●● Susan Turner – Co-founder and Director, Knight Frank South Africa (Western Cape) ●● Tia Kanakakis – Partner, MDS Architecture (Gauteng) ●● Saloshini Gounder – Executive: Real Estate, Massdiscounters (KwaZulu-Natal)

Professional of the Year Award – Public Sector ●● Kathy Michell – Associate professor and Head of Department: Construction Economics & Management, University of Cape Town (Western Cape) ●● Lerato Peu – Executive Director: Economic Development, Merafong City Local Municipality (Gauteng) ●● Fathima Khan – Senior Manager, eThekwini Real Estate

The South African Women in Property Awards ceremony and gala dinner 2019 The 2019 awards and gala dinner – hosted by the WPN and ACSA – will take place on 9 October at Summer Place in Hyde Park, Johannesburg. The winners of the 2019 South African Women in Property Awards will be announced at this event. All proceeds of the seat and table sales will go towards the WPN Educational Trust, which awards annual bursaries to women who want to pursue property-related studies. For more information about the WPN Educational Trust, email info@wpn.co.za.

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KwaZulu-Natal regional winners: Nompumelelo Xulu, Michelle Michael, Saloshini Gounder and Fathima Khan

Western Cape regional winners: Clare Comins, Susan Turner and Kathy Michell

Gauteng regional winners: Palesa Moloi, Jutta Berns-Mumbi, Tia Kanakakis and Lerato Peu

Khanyisile Nene (Senior Manager for Infrastructure & Development at ACSA) and Nonhlanhla Mayisela (National Chair of the WPN and CEO of Izandla Property)

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social

Getting on par at the SAPOA Port Elizabeth Golf Day Gorgeous greens, a slight breeze, sunny skies and SAPOA flags all over the course lent themselves to a fine round of amateur golf at the Port Elizabeth Golf Club in Mill Park

Colin Meyer (Makana Brick)

Just Commercial fourball: Ian Knott, Brett Weddell, Rhett Thompson and David Martin

Fifty-two players took to the fairways on a fourball alliance, 2 scores to count with a scramble drive, which made for an interesting finish. First prize was awarded to Kaplan Blumberg Attorneys, second prize to Alpha Omega, and third prize to Makana Brick.

We would like to thank our sponsors for their support in making the day a success: ●● Makana Brick (Main sponsor) ●● SVA International (Halfway House sponsor) ●● Kaplan Blumberg Attorneys (putting green) ●● Master Builders Association (14th hole) ●● Securitas RSA (12th hole and winner’s prize for the marshmallow game held on the tee) ●● Nelson Mandela Metropolitan University (17th hole, with prizes for the top four nearest the pin of their choice) ●● Nedbank (various prizes) 58

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Halfway House sponsors SVA

SAPOA Committee members PJ Duffy and Catherine Ossher

Students from the Nelson Mandela Bay University, who manned the 17th hole Thank you to our sponsors

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The first-placed Kaplan Blumberg fourball: Grant Longworth, Justin Milne, Craig Gardiner and Cathy Ossher

Longest drive winner Justin Milne

The second-placed Alpha Omega fourball, with prizes sponsored by Makana Brick

Lucky draw winner Wesley Norris

The third-placed Makana Brick fourball

Nearest the pin: Grant Longworth The fourth-placed Grindstone Properties fourball, with prizes sponsored by MBA and Makana Brick

Nearest the pin: Rhett Thompson

The fifth-placed BMI fourball, with prizes sponsored by Kaplan Blumberg SOUTH AFRICAN PROPERTY REVIEW

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.

136 311 ●●Interactive reading and rich media

6592

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

00:10:12

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

July 2018 / July 2019 Total page views Total sessions

Average time spent (minutes)

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. South African Property Review’s average read time per month is 10min 27s, 2.5 times the average online retention rate.

howmuch.net

Where does plastic come from? Have you ever wondered where your plastic comes from? You may assume it comes from previously recycled waste, but it turns out that less than 10% of the world’s plastic is actually recycled. Far more of it is discarded, and often shipped overseas. But policy changes in recipient countries are making waves in the global waste-management market By Raul – howmuch.net/articles/plastic-trade-around-the-world

f so little of the world’s plastic is recycled, then where does it end up? Just five countries export more than half of the world’s plastic items: China, the US, and three western European countries. In fact, China itself makes up nearly a quarter of the export market. But as early as 2016, China imported two-thirds of the world’s plastic waste exports.

So, what changed? In early 2018, to fight pollution and overfilled trash sites, China banned plastic waste imports – a defining moment in the shifting plastic waste exports industry. And it seems that other industrialising countries are beginning to follow suit in cutting back on plastic waste: for example, India recently passed a sweeping ban on single-use plastics. It has already banned plastic waste imports. Industrialised countries are also cutting down on plastic waste: plastic bans exist across the US, and Canada is set to impose a ban on single-use plastics by 2021. All the same, the world currently uses millions of tons of plastic, and it all has to go somewhere. Unfortunately, many of the developing countries that accept plastic imports, especially in the wake of China’s ban, do not have strict regulations on ways of dealing deal with this waste – and, as a result, much of it ends up in the ocean. Overwhelmed by the influx of plastic, these countries do not have the infrastructure that would enable them to process it. To curb the possibility of irresponsible overseas plastic disposal, Australia has begun to ban plastic waste exports, and Canada may be set to follow. On top of that, 180 nations agreed on a new UN accord to regulate the export of plastic waste.

●● Global plastic item exports were valued at US$79-billion in 2018. ●● The top four countries in exports alone (China, Germany, the US and Italy) make up more than half the plastic exports. ●● Countries are scrambling to find places to ship plastic as China, a traditional recipient, has banned further imports. ●● Regulatory changes worldwide have spurred changes in the plastic management market.

Where does that leave the plastic waste management? Large corporate consumers are looking to innovate away from the use of plastic altogether: for example, McDonald’s is testing plastic-free stores. There is a push to incentivise innovations in plastic management, such as clean incineration: for example, National Geographic teamed up with impact investment fund Sky Ocean Ventures to launch a competition in plastic recycling innovations. Teams could win more than a million dollars as part of the competition. And if this article has gripped you to get involved, that’s not a bad incentive.

Top 10 exporters of plastic items 1. China: US$19,54-billion (24,73%) 2. Germany: US$9,89-billion (12,51%) 3. The US: US$7,23-billion (9,15%) 4. Italy: US$3,32-billion (4,2%) 5. France: US$3-billion (3,79%) 6. Poland: US$2,29-billion (2,9%) 7. Netherlands: US$2,17-billion (2,75%) 8. Japan: US$2,17-billion (2,74%) 9. Czech Republic: US$1,97-billion (2,49%) 10. Mexico: US$1,96-billion (2,48%)

Where does the plastic come from?

The data from the International Trade Centre shows the total market value of plastic item exports for 2018 in US dollars. The map is a visualisation of this global market, with countries drawn to scale according to their exports. A darker shade of blue also indicates a higher export value. Only countries with more than US$10-million in exports are mapped. SOUTH AFRICAN PROPERTY REVIEW

off the wall

Imagine your dream workspace… A popular article in Men’s Health cited a study in the journal Medicine & Science In Sports & Exercise that will make any desk jockey wince. Examining the lifestyle of more than 17 000 men and women over 13 years, the report found that those who sit for most of the day were 54% more likely to die of a heart attack. According to Men's Health, that statistic is true even for the people in the study who were non-smokers and regular exercisers Compiled by Tshepo Tshabalala

nother report cited in a recent New York Times Magazine story tracked 123 000 Americans, and found the death rate for those who spent six or more hours a day sitting was 20% higher than for men who sat for three hours or less. For women, the difference was 40%. No-one’s sure exactly why that’s the case. You certainly burn fewer calories sitting than you do standing and moving around, but weight gain isn’t necessarily the primary reason that sitting is so bad for you.

What’s the alternative? Aside from switching occupations, your best bet could be an Altwork work station. With Altwork’s innovative offering, you could sit, stand, recline into a focus position to tackle your toughest work challenges, or even work in a zero gravity position, all while maintaining ergonomic integrity and being comfortable so you can be more productive. Altwork’s engineers, designers, and technologists believe that your work can flow more freely when your computer moves as you do throughout your work day.

Glide into reclined focus The Altwork Station supports your body and your work by seamlessly conforming your keyboard, desk, mouse and monitor to your body. This allows you to create a massive selection of working positions with your computer, so you can work the right way for the right task. The unique focus position allows high-intensity 62

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computer users to eliminate the discomfort of standard tables and chairs so that they can focus for longer on complex tasks. Perhaps it’s time to move beyond outmoded furniture, and create a new way to work for digital professionals – be it a gentle recline or zero gravity.

Get in and get it done Traditional desks and chairs treat you like an old typewriter. Everything in the modern workspace has evolved except for the way in which you interface with your computer. Desks and chairs are essentially what they’ve always been – you conform to them, instead of them working with you. Altwork has designed a better way.

Sit down – or stand up The Altwork Station features integrated

push-button controls that deliver smooth, seamless interaction between your body and your computer. Studies show that changing positions throughout the day is better for us, so sit, stand, collaborate or focus/recline – it’s your choice.

Call a meeting at your station Whether you’re sitting down, standing up or collaborating with your team by swinging the screen around so everyone can see it, presentations are a breeze. It’s more than a desk, a chair or a cubicle: flexible, mobile and cool, it’s unlike any other workstation.

Linked articles

Men’s Health – bit.ly/2IfkCib Acsm.org – bit.ly/2m08HiX Journals.llw.com – bit.ly/2lj4QND

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

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

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