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The case for developing black industrialists in the property sector

MONEYWEB / 17 AUGUST 2018 - 13.25 / SEABELO THELEDI

Property ownership is one of the best ways of radically transforming ownership patterns.

Government launched the Black Industrialists Scheme (BIS) in 2016, with the goal of providing financial assistance to 100 black industrialists. Having achieved this goal, it has since undertaken to provide finance for an additional 100 black industrialists over the next two years.

An overwhelming majority of black South Africans have never in the history of their families experienced formal property ownership and its wealth creation benefits. Picture: Shutterstock

The Department of Trade & Industry’s (dti) R2 billion contribution is estimated to have promoted investment of an additional R8 billion, and to have created 18 400 jobs.

The fact that black industrialists have to be assisted is indisputable. Not only is the dti making it possible for black entrepreneurs to establish sustainable businesses, but it is also driving the process of economic transformation in a way that is producing tangible results.

One sector that deserves greater focus and investment from the BIS is undoubtedly property development.

As succinctly articulated in the Property Charter, black people in South Africa were denied access to land through the Native Land Act of 1913 and subsequent discriminatory policy and legislation. Black people could not own property nor could they effectively trade on properties. In many cases, land was (and still is) held by Tribal Trusts, which precluded people living on tribal land from obtaining title deeds.

An overwhelming majority of black South Africans have never in the history of their families experienced formal property ownership and its wealth creation benefits. This has had a fundamental impact on the economic potential of South Africa in general, and the socio-economic situation of black people in particular.

Property ownership is one of the best ways of radically transforming the ownership patterns of our economy. If tens of billions of rands in BBBEE deals have to date been done using nothing other than company shares as security, then it should be easier to fund a far greater number of truly transformative BBBEE transactions using the immovable property as security. The property sector should be playing a leading role in radically transforming the South African economy. However, it is lagging significantly behind other major industries.

Black property players continue to be excluded by prohibitive loan-to-value (LTV) requirements by banks. The LTV is basically the requested loan amount expressed as a percentage of the development value. When it comes to financing for projects like rural and peri-urban shopping centre developments, the banks assess loan applications in terms of the sustainability of future income. Lack of experience in retail development by many applicants makes it difficult to grant funding.

When applying for finance for this type of development, the bank expects developers to have the capital available. This is why support from the dtiwould be most welcome – both government and the private sector need to pull together to reduce the debt burden for property developers.

The property sector is dominated by a handful of big players that are not adequately incentivised, or required, to open the space up to emerging companies. The stronger players often cite lack of track record as a reason for not backing new players or collaborating with them. This is true for both the public and private sectors. Yet the demand for commercial property development remains high.

In Gauteng alone, the housing unit backlog is now at over a million and continuing to grow. South Africans have been promised homes by governmentfor decades, but they are still waiting for dignified and adequate housing. Nationally, the backlog of low-cost homes is an estimated 2.1 million and shows no sign of improving. In addition, many people live on sites that are often poorly maintained and without proper water and sanitation services. There is also a severe shortage of student housing in South Africa.

Infrastructure development an economic imperative

Property development goes hand in hand with infrastructure development.

According to a recent G20 Global Infrastructure Hub (GI Hub) report, covering infrastructure investment needs globally for 50 countries, South Africa needs to invest $464 billion (R6 trillion) by 2040 in the water and electricity sectors to plug its infrastructure investment gap and address economic and population growth between now and 2040.

But over and above that, we need to keeptopof mind the fact that the one thing that affects people’s lives in the most fundamental way is access to basic infrastructure. Sometimes it is easy to forget what an essential need this is. Think about the role that running water, electricity and good roads play in getting people to work every day, and in getting children to school.

Property development and jobs go hand-in-hand

South Africa’s unemployment rate came in at 26.7% in the first quarter of 2018, according to Stats SA. That means we have 5, 98 million unemployed. With the support of government, a vibrant construction sector, property development underlying commercial activities could help to absorb millions of low- and medium-skilled workers – those people who are at the centre of our unemployment crisis.

Rob Davies, Minister of Trade and Industry, has said that financial support for black industrialists has to go to projects that have expansion potential and to new businesses with the ability to grow fast in a relatively short time. There is a strong argument to be made for a sizeable proportionof that support to go towards the commercial property development sector. It’s a sector dependent on external financing, and one which has much to contribute to poverty alleviation and the restoration of dignity.

Seabelo (Herbert) Theledi is Chief Executive Officer of Nthwese Developments.

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LINK : https://www.moneyweb.co.za/investing/property/the-case-for-developing-black-industrialists-in-the-property-sector/

Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER

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