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SCI LIBRARY




























Foreign Control over Land in South Africa

Godfrey Dunkley



[A submission to the Department of Land Affairs on Foreign Ownership of Land in South Africa. Godfrey Dunkley is the past President and RSA Representative of the International Union for Land Value Taxation. December, 2004]


1. Introduction


1.1. General

Foreign ownership of land is a problem that cannot be effectively addressed in isolation from the overall land tenure problem. Where this has been attempted the results have invariably compounded the problem with unforeseen side effects. (Swaziland circ.1975)

Both written and verbal presentations by the public to the panel would have effectively highlighted the many problems arising from foreign investment in our land. Some of these problems will be touched on lightly here, but the emphasis of this report is on recommendations.

1.2. Underlying Principles

The Preamble to the Constitution of the Republic of South Africa states:

"We, the people of South Africa...

Believe that South Africa belongs to all who live in it, united in our diversity. "

All discussion, debate and eventual legislation should be aimed at either bringing about an equitable distribution of land and natural resources; or to the extent that this is not physically possible, a just distribution of the economic advantages arising from land ownership and tenure. Those who enjoy the most advantages arising from the monopoly of valuable land, including foreign owners, should contribute accordingly to:

  • Government Revenue and
  • The support of those denied access to these advantages

The above can be achieved by the State collecting the major portion of the Ricardian Rent as their main source of revenue. They can then reduce other punitive taxation and also redistribute a portion as a Basic Income Grant (BIG) to all citizens. This would solve many of our existing problems, particularly the extremes of wealth and poverty.

This fundamental change will apply to locals and foreigners. Thus those benefiting from prime land ownership will be ploughing back revenue into the community. The withholding of land would become uneconomical. This will assist significantly in making land available for redistribution.


Summary of Problems


1.3. Foreign Investment

Foreign investment in South African land has been aggravated by the favourable exchange rate in the last few years. This has encouraged foreign investment in holiday homes and productive land. The exchange rate has allowed locals to demand higher prices from foreigners. This in turn has had a ripple effect throughout the market, including the lower priced properties. The increased expectation of higher prices has encouraged further speculation and placed the price of land and housing beyond the reach of many families.

1.4. Holiday Homes

Many of the homes purchased by non-resident people become holiday accommodation that is occupied for relatively short periods of the year. This has a negative effect on the economy of the local community. Small time producers and business have a problem during the off-season where a high percentage of the property is used for holiday accommodation. Unemployment increases as a result.

1.5. Advanced Knowledge

At least one verbal presentation pointed out that both foreign and up-country buyers often had advanced or better knowledge of possible trends and future planning over twenty years or more. This may not be common knowledge to the average homeowner. What appear to be good offers can turn out to be under priced, and the sellers then find themselves priced out of the market.

Whole communities, previously stable and happy, find they are torn apart and many individuals are left in poverty whilst the speculators show a large profit. In effect, the wealthy are robbing the poor or uninformed.

1.6. Agricultural Land

Over the years prime agricultural land has been taken up by property speculators and withheld from use, until changes in consent use can be obtained and large profits taken. Much of this land, that formerly supplied the local produce market with fresh vegetables, becomes idle for long periods, resulting both in unemployment and increased produce prices.

About thirty years ago Johannesburg and adjoining towns lost most of their small market gardens to investment companies who withheld the land from use for their own financial gain; at a loss to the communities.

Frequently speculators pay partly in paper script, so that the previous owner not only looses his land at a low price but also finances the speculator.

1.7. Concentration of Ownership

For a long time a relatively small number of people have controlled; either directly or through corporations, a large proportion of the more valuable land. This applies to all types of land.

The extent of this concentration of ownership has not been officially recorded and there are no official figures. Even the percentage of foreign ownership is not known, nor the percentage of absentee owners.

Some years ago, two farmers controlled most of the prime maize farms in the Delmas area. It was like a checkerboard, where one farmer controlled most of the white squares and the other the black. This type of monopoly is not obvious from the Government statistics.

In this case, one of the farmers, as a member of parliament, was able to encourage subsides supposedly in the interests of the "poor" farmers; from which he mostly benefited.

The absence of reliable statistics on land ownership is a serious matter. Even the SA Revenue Services could benefit from good statistics.

1.8. Vacant Land and Leapfrog Development.

A relatively large amount of private and company owned land is deliberately withheld from use for speculative purpose. In Cape Town alone 10% of all rateable land is shown in the latest Municipal Valuation Roll under the category "Vacant Land".

Because of the latest Property Rates Act all municipalities will have to change from the more common system of Site Value Rating to Improved Value Rating. This favours owners of vacant land by an average factor of two thirds, because land makes up approximately one third of the total value and they have no improvements. In Cape Town alone the owners of vacant land will continue to enjoy a gift of R135 Million per annum at the expense of those who put their land to good use. In the case of Site Value Rating the same vacant land would pay three times as much.

The fact that there is only a very small holding cost on vacant land encourages speculation and withholding land from use. It also encourages holding out for ridiculously high selling prices when Government requires the land either for land restitution or distribution or for any other capital projects; i.e. roads, dams etc.

This also encourages leapfrog development with high infrastructure cost, whilst existing infrastructure is not fully utilised.

1.9. Amortisation of Capital Cost

In the past agricultural land was exempt from taxation; although the new Property Rates Act will change this. This has allowed farmers to price their land right out of the economically viable market.

An example will illustrate the seriousness of the problem caused by speculative greed. Some years ago a farm in Limpopo that was most suitable for cattle ranching and with a carrying capacity of approximately one adult animal per ten hectares, had an asking price of R250 per hectare. The average return per animal at that time was stated as R60 per annum gross. That gives say R6.00 per hectare per annum. Out of this came the cost of feeding, fencing and labour etc. If the net return was say R2 or even R3, how could one possibly amortise R250, or even a reduced price of say R50 per hectare?

The above is the type of unrealistic pricing of land that has slowed down the Government's programme of land redistribution.

If there were a tax on land according to the market price or the asking price there would be a total change in attitude towards land ownership, speculation and market pricing.

1.10. Municipal Property Rates Act

Last but not least of the problems now faced by the Department of Land Affairs is the new Municipal Property Rates Act. This could and should have become a major instrument in Government's policy of economic justice and land distribution.

All land in South Africa now falls under the administration of some municipality. The above Act could have paved the way for revised fiscal policies that would discourage both the hoarding of land and land speculation, and at the same time encourage land distribution. This opportunity to step towards economic justice has now been missed.

Had the Municipal Property Rates Bill placed before Parliament given an outright recommendation of collecting all rates from land values only, namely Site Value Rating, then the Act would have been a major step towards land distribution.

However, despite the fact that some seventy percent of all municipal rates collected in RSA came from cities on SVR and only ten percent from those on Improved Value Rating, the Act now stipulates the latter.

A survey, carried out on the 112 largest towns in RSA in 1984, showed that of the 48 largest towns only two were committed by default to the system now being mandated by law on the whole of South Africa. Of these, Cape Town decided to change to Site Value Rating (SVR) a few years ago and had almost completed a new valuation roll based on site values only, when other factors prevented its implementation.

Two rating surveys carried out by the writer showed that those cities on Site Value Rating enjoyed twice the percentage growth compared to those on Flat or Improved Value Rating over the same periods. (That All May Live; 1990, Chapter Fourteen)

Many case studies were presented in favour of taxing land values only, but the Portfolio Committee ignored this evidence. They in turn presented no concrete evidence in favour of Improved Value Rating


2. General Comments


2.1. Ownership

Who actually owns the land makes little difference to those denied access to land. What does make a big difference is the amount of land owned by a small number of individuals or corporations. By placing a ceiling on ownership, as was done in Taiwan, land distribution would be greatly accelerated. However the limit should be based on value rather than size.

There is a fundamental difference between foreign and local ownership of productive land or leased land in that the tangible profits would be exported rather than locally circulated. Are we not giving away our birthright?

2.2. Total Ownership

If South Africa were totally owned by foreigners and non-residents under the present system of taxation then the total population would be economic slaves.

However a change in taxation whereby the Ricardian Rent would be collected by the State would neutralise the power of the landlords, whether foreign or local.

Land monopoly is the mother of all monopolies!

2.3. Taxation and Marginal Land

It can be clearly shown that many of our present taxes, both in RSA and elsewhere, are a major cause of land becoming economically unproductive. Large tracts of land, that would be economically viable in the absence of taxes, are rendered sub-marginal by taxes that do not reduce to zero at the natural margin of production.

These same taxes are not a burden on foreign ownership and speculative ownership. They provide no encouragement to release the land for distribution to those who could put it to good use for subsistence farming.

A change in the form of taxation would restore this land to productive use and reduce the incidence of unemployment. This would also have a large positive effect on the National Gross Domestic Product and land distribution.

2.4. Taxation and Marginal Labour

Present taxes introduce another problem that was not addressed by the Classical Economists, as it was not particularly significant in their time. Taxes on marginally productive land were recognised as a cause of unemployment as the land went out of production. However present taxes act as a wedge between labour and production even on prime land. This has been particularly noticeable even within the span of our lifetime.

Labour becomes too expensive to employ, not because of their effective wages but because of the additional cost added by taxation. A common ratio is that it costs the employer three to four times as much to employ a person compared to their effective purchasing power. Thus there is a wedge of half to three quarters of the cost of employing a worker that effectively tells the employer to replace the worker by a machine. But what is the cost to society of looking after the worker who is rendered unemployable?

Foreign speculative withholding of land reduces the GDP and tax base thus forcing higher tax rates.

2.5. 99 Year Leases

The concept of a 99-year lease dates back to colonialism and is totally outdated. If land leases are to be sold by government they should not exceed twenty to twenty five years. Beyond that they have almost no present day value. At an interest rate of 10% the 26th year has a Discounted Cash Flow current value of only 8%. If investors are looking for a 15% return then twenty years is the cut off. Beyond that it has little current value. So why give away an additional 75 years of the people's rights for nothing?

2.6. Land Definition and Value

For the purpose of these discussions land is considered to be everything provided by nature. This includes the surface of the land, physical features, land quality and climate. Land also includes all mineral deposits and natural resources.

The advantages of land tenure and thus annual "economic value" of any piece of land come from natural factors, plus what the community has built up in infrastructure and markets, plus what they continue to provide in labour, technology and buying power. Locality plays a major part. The economic advantages of any site are independent of improvements supplied by the owner. In a free market the advantages are quantified in annual rental value of the land or, more commonly, annual rent capitalised in market price or land value.

However, the "market value" of land comprises the "economic value" and an additional factor, namely, the speculative value based on expectations of future unearned profits.

Foreign investment at favourable exchange rates increases the speculative 'value'.

2.7. Panel Mandate

The Panel Mandate should be extended from merely investigating foreign ownership of property to investigating the whole land problem. The Panel should and could become the keystone in bridging the gap between the extremes of poverty and wealth: a gap that was aggravated in the past by the Apartheid system. However the demise of Apartheid has not done away with the basic causes of poverty, nor has it restored economic justice.

These are not problems peculiar to South Africa but also exist in nations where democracy has long been practiced whilst economic injustices are firmly entrenched. We cannot look to other countries to show us the way out of our problems; in fact we could become the world leaders.


3. Recommendations - First Step


3.1. National Land Register

It is essential for the State to establish a National Land Register for all land. Registers of mineral and natural resources would also be advisable.

The Land Register could be an extension of the Municipal Valuations provided they keep a record of site values separate from improvements. This should be summarised by province and a total for Central Government.

A two-year implementation deadline should be established for the initial register with regular updating and refining every two years.

3.2. Details of Land Register

The Land Register should be a comprehensive record of the following details:

  • Identity of land as per town planning maps, cadastral maps, farm registrations etc.
  • Size of land and boundary definition
  • Zoning and permitted use. In the case of agricultural land, the percentage suitable for different usage and the percentage that is unusable, i.e. mountains, swamps, conservation areas etc.
  • Current use.
  • Ownership including ID Numbers, or Passport Numbers and nationality of foreigners foreign owners, as well as main country of domicile.
  • Joint ownership to include percentage holding of each member or shareholder.
  • In the case of public companies the full identity of all shareholders with a holding of more than say 5%
  • Estimated market value of land separate from improvements, at a stipulated valuation date. Much of this should be available from Municipal Valuation Rolls. Where this is not available, in the interim period, self-evaluation should be permitted on condition that owners would be prepared to sell to any tier of government at that price if so required. Actual expropriation should allow for any changes in the economy and market from the date of valuation.
  • Any bonds or loans registered against the land and their current value.


4. Recommendations - Second Step


4.1 Collect Rent of Land

Most property owners are already paying rent on the land portion of their fixed property. This rent is, however, being paid to the wrong receivers. Where there is a mortgage bond or any other form of loan on the property then the land portion of that loan is the last portion to be paid off. For the major period of that loan interest is being paid on the land portion at about 10% per annum. This interest can be considered as a form of land rent being paid to the lenders instead of to government.

If all the land rent now being paid into private hands were to be paid to government there would be little need for most of the more destructive taxes.

Those who hire land or fixed property also pay a form of rent on the land portion. This again is paid to the landlord instead of to government.

In both cases a portion of the money paid should be paid to the Government, increasing over a period of time.

4.2 Capitalised Rent

Traditionally, in the case of farming land, the annual land rent of a hired farm was capitalised over twenty years to establish the selling price. More recent studies presented at local conferences have shown fairly similar ratios. (More details available)

The above line of thought can be extended to all uses of land; so on average annual rent would be about 5% of land value. Allowance should be made for inflation but the difference between the inflation and interest rate remains near to 5%, allowing time for market adjustments.

4.3. Arguments if Favour of a Land Tax

Collecting the annual value of land provides the only just and morally legitimate source of government financing. The landlords; who society favours most with unearned privileges, would be forced to subsides the poor masses deprived of access to basic human requirements.

Traditionally peasants and farmers paid the rent to the landlords according to the land's productive value. The landlords in turn contributed to government in proportion to the annual rental value of their estates, not according to the improvements thereon. In effect, governments drew their revenue from land rent. History is full of examples.

Today the highest land values are in the cities; these include business, industrial and residential land, where a portion of a hectare is worth more than a large farm. Size for size the ratio can be of the order of a million to one. The market value of land is a measure of the potential economic benefits available. This arises from many factors provided both by nature and society, irrespective of anything that the landowner may do.

Collecting both revenue from land values or rates from site values; excluding improvements, discourages the withholding of land from use in order to obtain an unearned profit. This applies in both urban and rural localities. On the other hand the experience both in RSA and overseas has shown that any rates or taxes on improvements instead of on land, encourages slum-lording and leapfrog development: For example the slums at Muizenberg Surfers Corner. Rating land only would soon put a stop to this type of anti-social behaviour.

Wealthy landlords will always try to find ways to sidestep their duty to support the poor via location dues or land rent. Their support of universities and seats of learning in the past has made it possible to divert attention from the fundamental aspects of economics.

The economic success of Hong Kong in the past was based on the fact that most of their revenue came from land values via periodic auction of leases and annual rent. Taiwan and Singapore also capture a large portion of land rent for government revenue. (Ref. "Land Value Taxation Around the World" Edited by Robert V. Andelson, Publisher Robert Schalkenbach Foundation)

The Scottish Parliament has just voted in favour of investigating land value taxation as a means of solving their land problem. Unemployment is high. A new report in "Land and Liberty" shows 1252 landowners own 66% of the privately owned land in rural Scotland, resulting in an ongoing mental crippling of young people. Male suicide rate is double that of England and Wales. Does this have a message for us?

London Transport is now looking for ways of capturing some of the large increases in land prices that result from the new installation of additional underground subway stations. A survey by Don Riley, a property developer, showed that land prices are increasing by nearly four times the cost of the Jubilee Line extension. A large portion of this increase could be captured by Site Value Rating, but not by Improved Value Rating.

4.4. Amount Of Rent /Land Tax

Speculation increases market value of all types of land beyond their capitalised economic value. The annual Municipal Rates Account and the interest rate on money will have a marked effect on the ratio between market value and economic value. To set the initial recommended annual tax on land becomes a bit of a juggling act. As the tax increases so the market value will decrease.

The object would be to phase in a tax on land in a way that will have minimal negative impact on productive enterprises and maximum impact on speculation.

A land tax should not be an additional tax on production but should be offset against existing taxes, particularly those that do not go to zero at the margin of production.

The first choice would be to offset the total amount collected against an equivalent amount of VAT. There are many advantages to be gained from such a move.

It is suggested that, in the early stages, the land tax should be based on registered land values and at a rate of either 2% or 3% per annum. It can then be increased in stages as other taxes are abolished. VAT, which is a direct cause of unemployment, should be totally abolished. However it may need to be done in stages.

There are numerous other taxes that impinge on the margin of production and should be phased out as soon as possible in order to bring large amounts of marginal land back into production.

In time, almost every form of taxation that is phased out will increase total national land rent by an equivalent amount and can be captured by a land tax. The results will be most significant in bringing unemployed and idle labour together with undeveloped and under developed land, thereby stimulating Gross Domestic Production.

Ultimately, a stage could be reached where most of the rent of land could be collected and all except sin taxes abolished. This will give government an over abundance of revenue and allow for a substantial Basic Income Grant to be paid to every citizen.

4.5. Considerations

The whole process should be applied within a limited time span of ten years, so that it does not loose momentum nor get sidetracked by vested interests.

A baseline rebate should be given, off the tax payable, to every owner-occupier of residential property including agricultural holdings or farms. This should be a fixed amount and not a percentage of value or rent. This will encourage home ownership.

In Denmark home ownership increased from 30% to 50% during the period 1956 to 1960 directly because of a land tax. ( Ref. "Economic Liberalism" by Knud Tholstrup 1973 )

A number of totally different problems will be encountered during the process and will need to be dealt with in different ways. A few of the problems and possible solutions are outlined below.


Farm Land Recommendations:


  • Farmers should be allowed to deduct an amount equivalent to VAT (14%) of their wage bill, from the land tax payable on that particular farm. If the farm is not productive there will be no deduction. The deduction mentioned should not be transferable between farms and there will be only one per family, namely the farm that they occupy. This comes after the baseline rebate.
  • Where there is a bond or Land Bank loan over the farm, the land portion of the interest should be allowed as an additional deduction for a limited period.
  • Where farmers provide suitable accommodation to their workers they should be encouraged to give sectional title to them and, for a predetermined period, enjoy the baseline rebate mentioned above on each house. This together with the first-time buyers grant would help to pay for the houses.
  • Some parcels of unproductive land may be very difficult to assess and the owners may also have a problem in paying the land tax. In this case they should be given the option of surrendering to government or National Parks an equivalent portion of the land.
  • All the above should apply irrespective of foreign ownership


Residential Land Problems:


This poses different problems as it is not normally income generating. Land values arise from desirability rather than from commercial activity. House prices are largely influenced by land prices that in turn are based mainly on locality in relation to economic and social facilities and services. Any tax on land values would be in addition to existing municipal rates: Therefore there should be some relief from other taxes or charges.

Most homeowners are saddled with a bond over their property: at different stages of re-payment. The land portion of the bond could be anywhere between say 40 to 100% of the bond depending on when the property was purchased. New buyers will be hardest hit by the introduction of a land tax.


Residential Land Recommendations:


  • The first offset against the introduction of a land tax could be a reduction in prime lending rates and thus bond interest rates. The reduction could be set at about half the percentage of land tax since part of the bond covers improvements.
  • Let the first R20 000 of the land value be exempt from taxation. This will cater for the poor who have property worth less than say R60 000. This is effectively a baseline rebate and should apply to all homeowners.
  • Let the amount paid in land tax, after rebate, be deducted from income assessed for income tax purpose. Business already enjoys this deduction.
  • Where pensioner homeowners are property rich and cash flow poor, allow the land tax to accrue as a bond or second bond, payable upon transfer of the property together with interest. Special cases will require additional legislation.


5. Conclusion


In view of the government's concern with the high level of unemployment and poverty in the country and the threat of increasing foreign ownership of land, the time is now ripe for a significant change in both land tenure and taxation.

The two main requirements are:

  • To reduce and eventually eliminate all taxes that result in unemployment.
  • Introduce a land tax at a level that will raise at least an equivalent amount of revenue.

Wealthy landlords of the West have continuously looked for ways of evading their duties to the community by shifting the tax burden from themselves onto the middle class and poor. They have been successful in getting academia on their side by supporting universities and other seats of learning.

Today large vested interest and land speculators, particularly in USA and Europe, fear both Land Value Taxation and Site Value Rating. They are fearful that the successful rating system that RSA has enjoyed in the last century could spill over into their areas.

Many academics from USA have visited RSA in the last twenty years, or sponsored visits to USA. They have shown an unreasonable bias against land value taxation for central government revenue and in favour of Improved Value Rating at local government level. In spite of this, there has already been a fair measure of success in favour of a land tax. Where USA cities have taken a step away from Improved Value Rating to what they call the Two-Rate system these cities have shown a marked increase in new building activity.

The wealthy foreign investors are purely an extension of the wealthy landlords that are buying up land and withholding it from our unemployed poor. The issues of foreign investment cannot be solved in isolation; the bigger picture must be taken into account.