LAND [Part 2]

From Biznews, 19 July 2019.

What a compliment to a man who has fought his fight in a team of fighters to retain the independence of the SARB. Thank you for the rate cut, Mr Governor, But even more so, Thank you for fighting for what is right….

“Lesetja Kganyago has had a tough time of it. With the economy tanking, some have been calling for a political takeover of the SA Reserve Bank (SARB) in order to, one assumes, print money in the hope of inflating our way to prosperity, or at the very least, tweak the central bank’s mandate to focus more on growth.
In his role as governor, Kganyago has been a powerful voice for SARB independence. That’s no small feat at a time when central banks are under political pressure from Turkey (where the governor of the central bank was summarily fired by the Erdogan) to the US (where Trump has been giving Powell a rough ride). SA is in the fortunate position of having an independent, technocratic central bank, and Kganyago is working hard to retain that.
Which brings us to yesterday’s rate cut. While some may see political pressure in the decision, the monetary policy statement clearly outlines a balanced and rational case for a cut. With the economy contra Best”
Felicity

The first Land read was interesting, hey? I mentioned Bulpin, the author, to my well-read, elderly neighbour and he said he certainly knew of him in his day; a good author he said. At least that gives me some comfort as to source.

Given that we are not going to debate who was where when, I’d like to unravel a little of the emotion around land. On the one hand, the owner of a unit on the 17th floor, The Michael Angelo, ultra-luxury apartments in Sandton, surely does not care about the value of the land? That problem was solved 10 years ago when the developer bought a plot and began building a high-rise. On the other hand, does the person who “owns” a piece of “heaven” on the beach along the Wild Coast where he has a rudimentary two bedroom house and a 3-cow herd of cattle and 15 chickens also doesn’t care about the land; he rents it from his tribal leader and never achieves value other than the subsistence farmer that he is? And what about the great 12000Ha farms in the Karoo that can sustain a herd of sheep and a few other animals in the vicinity of the homestead? And finally, the Top Road, Clifton owners who have multi-million homes with views to suit?

In order to do some justice to the effort, let’s divide the thoughts into:

Culture

Commercial

Capital.

CULTURE: [I need to declare my cultural heritage and the bias it brings. I am English speaking, over 60 years of age and first-generation South African with parents from the UK. Naturally, I have a view of the world that may not reflect all my readers’ and hence there may be bias for which I apologise.]

This topic is serious and emotional. It probably speaks to the heart of the Land issue in South Africa. The dispossessed now have protagonists of their cause – EFF and Black First Land First, as front-runners. Unlike Australia, New Zealand and the United States, for example, we had the word Apartheid applied by Europe (as I understand its source) as we made a science of social engineering. The demographics of apartheid and the grande design of separation-with-a-purpose, or separate development in homelands, was never going to make muster. It was hated, exploited and overcome after years of the struggle and we will never return to its indignity and spatial dynamics again. The dispossessed are aggrieved deep into their souls and the land-holders are threatened to the nth degree. But somehow, this matter needs to be resolved and we live in future imperfect as our President attempts to make inroads into the problem. No wonder he says one thing to one constituency and another thing to the next constituency – he probably, better than many of us reading this, truly knows how hard the task will be to keep everyone satisfied and the economy on an even keel at the same time. Our “right” to land was destroyed when strangers appeared from another continent and began to broke or force away our land. Like Israel and Palestine, that dispossession and its well-told stories have woven itself into our fokelore for the Ancient and our spatial demographics for the Modern.

Different peoples have different views culturally. In Joburg North, I really don’t care if my land is in Lonehill or Fourways Gardens. Culturally I have no sensitivity at all; it is simply a suburb preference. But for others, a plot in Magoebaskloof is vital for family continuity and memories; even spiritual for millions of people. I’ll never forget learning about a culture of our Black people that if a relative dies away from home a ceremony takes place using a Buffulo Thorn branch at the scene of death. The branch is brushed over the ground in order to “catch up” the spirit of the deceased. The branch is then returned to their home and placed, say, in their room so that their spirit may settle in again. That may sound unusual to me, but how strange it is to see crosses and flowers at scenes of road accidents remembering a loved one’s place of death. On Saturday I went past such a shrine which has been there for years on the Hartebeespoort road and the large printed photo of the deceased is now pale and worn by the elements. Perhaps those left behind have moved on but even the road workers don’t clear the memorial.

So Land carries enormous cultural significance. Perhaps the best we can do is understand that the plot at Magoesbaskloof means the same to someone as the family home in Plettenberg Bay to another person. And the point is, millions are aggrieved by what is deemed to be dispossession and I’m not sure where the fight is going to end in the final analysis.

As a boy in Natal, I watched as the Whites were removed from Isipingo and replaced by Indians, there and others relocated to Chatsworth. At the same time, homelands were being boundaried and funded at great cost along tribal lines as best the government of the day understood it. As a consequence, we had upset Whites moving into the suburb where we stayed, Indians getting “prime land near the sea” and the strange so-called independent state of Bophuthatswana fragmented into many little “states”. Frankly, what a mess! But as a result today, we have Black First Land First and others, like our Hermanus Land First, making mayhem in our country.

Culture and Land intersect in agriculture. There’s something about the dry soil running through their hands that makes farmers love their Land. I think the same applies whatever race or nationality you belong to. Farming goes hand in hand with Food and therein lies the rub for all those who threaten and even attempt to kill off farmers; take the Land and you cull the production. Cull the production and you’d better get used to the feeling of sand running through your fingers because, frankly, that’s the only worth that land has.

If ever a Loser existed, Zimbabwe takes the trophy. Venezuela is too far away for any other than CNN to convey the mess, but our Northern neighbour is on our doorstep. Economically, southern Africa’s own Syria in which millions of people have suffered, the rich and skilled have emigrated and the poor have migrated. Tragic social engineering of a different kind; Land capture by a threatened, greedy State. God help us if we sink into land-for-pals’-votes in such a grotesque manner. Culture and votes drove the dispossession for the people, but hatred and assault drove the farmers away. With them went the food, sustenance and foreign currency of a nation – how stupid can you be! And we are not immune, Culture is the pretext for much of the Land political rhetoric but whether the politicians have a point or not, the end result is scorched earth. The notion that you can “take back the land” and not do inexorable damage to the nation is far-fetched. Just ask the estate agents who are now “stocked up” by sellers longing to sell at a reasonable price and not even getting any offers. And the politicians need to understand that the “end justifies the means” is nonsense when it comes to destroying for the sake of rebuilding. In my humble opinion, only war carries that logic as would be indicated in Germany who had the Marshall Plan to help restore it, and Japan who took Hiroshima from rubble to skyscrapers in 25 years in what was a display of intense national pride. Unfortunately, all we have managed to do in this country is take a grand old airline like SAA and bankrupt it while getting its baby brother, SAExpress, grounded. A very different intent and purpose. Land in Zimbabwe was given to the least deserving, ala Grace Mugabe, while the locals who received plots continued to live in un-supported, un-serviced squalor.

Culture is a prime driver of the value of land. It may not add much to its value commercially but it certainly drives peoples to want it or defend it, either even with their lives.

COMMERCIAL: This is the application of Land that many of us understand well. For the sake of it, this land comprises all land zoned Commercial or invariably, that land and buildings which houses factories and office space. The point is that this land derives its value from its rental income and rental contracts. For our benefit, we will include buy-to-let apartment units.

I remember when I first learned the word “Opportunities”. It took care of the Michaelangelo Towers example above. Essentially, an opportunity was the total cost of the land and the building divided by the total square meterage of the saleable floor space. The selling price then included a profit margin for the investor and/or developer. 100 units were 100 opportunities for sale.

This formula of total cost divided by floor space allows for a return on capital which is acceptable to those who have taken risk for the development. If all sold, the opportunities yielded many a handsome profit for developers. However, not too many developments have been plain sailing. I remember when Summercon developments came to a halt as electricity could not be guaranteed. Nobody offered an offset for development loan interest or the time cost of delay; those developments just “hung” as vacant land or part-finished properties. Very costly indeed. Then there is the development risk ie sales are not enough to cover costs and bonds and serious damage can occur. Fortunately, the banks understand the cashflow risk of developments and tend to nurse the developer through. Sometimes they will have taken equity in the hope of upside in which case they make themselves part of the solution.

Apart from capital profits – build 100, sell 100 – the primary form of returns is rental. This is where things really get interesting over long periods of time. The amount of the lease, the term of the lease and the quality of the tenant then play a huge role in the value of the property. Now its land and building cost is just that and only its value of the lease agreements give it any value whatsoever. After all, who wants to own an empty building in Claremont with crippling costs pumping through every month? The discounted cashflow of the net rentals becomes the source of value. That present value, after all operating and financial expenditure is the only value worth talking about. Of course, right now you may like Checkers as the anchor tenant but you may also be focussed around an Edgars as well. Better the former, for sure! We have a building in Hermanus with both and I often wonder what would happen if Edgars finally gives up the ghost. Of course in similar vein, it’s also interesting that the new Whale Coast mall has a flagship Checkers [Whitey Basson lives just down the road] and thus the mall store obviously cannibalises the village store. We often now hear of renegotiations of lease costs by major tenants in order to meet low economic activity. Each time, the owner of the complex takes a knock in their value. Vacancies also play havoc with these values over time.

Point is that commercial property has no “land” value per se. Only the net flows of income matter when it comes to determining the saleable value of the property.

But to see Culture and Commercialism come together roughly, we need look no further that the same Whale Coast mall. The locals believed that the land was earmarked for affordable housing and I have no reason from some Press articles of the time to deny their understanding. But the mall was built after an 8 year approval process. Needless to say, the mall was targeted and threated by marchers during the protests in no uncertain terms. I’m not sure what this underlying, unresolved issue will do to the mall’s value in the long-term; time will tell.

We will leave CAPITAL for next time……….

Yours in Property.

Jack Trevena

Jack Trevena

With over 30 years of experience in the banking and home loan industry, my hope it is share what I have learnt over the years with my blogging community, inspire conversation around the subject and in the process discover unique insights into this ever changing environment.
Jack Trevena

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