Land Expropriation Without Compensation, What's Next?

Through a rapid period of political transformation, South Africa has emerged from staring down the barrel to being one of the most exciting investment opportunities in the world. Despite this newfound optimism and Cyril Ramaphosa playing his cards to perfection, the major headline that people have focused on has been “Land expropriation without compensation”.

There has been much concern both locally and internationally about the recent adoption by the ANC of the principle of land expropriation without compensation (LEWC). Media and opposition parties have been quick to be alarmist when talking about LEWC, as this keeps viewers engaged and gains them political points. LEWC is the only tangible mark against Cyril Ramaphosa’s new regime. The misunderstanding and exacerbating negative connotations of the policy are the only points that both the opposition and non-Cyril supporters can validate their opposing stance on. We don’t believe that you run a flawless campaign to aggressively turn around South Africa’s fortunes and then leave a careless unplanned policy out there that could derail the positive momentum.
Whilst this is concerning we would like to highlight some mitigating factors which may reduce the negative effects of this policy.
In the ANC statement on LEWC, there is a follow-on sentence which we feel has been vitally overlooked.

‘This should be pursued without destabilising the agricultural sector, without endangering food security in our country and without undermining economic growth and job creation.’
Let’s analyse the statement in more detail.

The Ramaphosa-led government is looking to solve the issues of growth and unemployment as a matter of urgency. They realise that to solve these issues, they need to get confidence back into the country and economy. This entails market-friendly policies and dealing with issues. The replacement of state-owned enterprise (SOE) management and boards, state capture investigations resulting in ownership of wrongdoings in the past, and budgets that meet rating agencies’ requirements in order to avoid further downgrades, are all examples of the issues at hand.
By introducing a market-unfriendly LEWC, the President and his advisors recognise that this will be a major stumbling block to achieving these goals of growth and employment. The government is acutely aware of what would happen if it went about taking farms, homes, etc. without compensation. It has seen the results from other African countries, as well as the mining charter as examples of how policies that are not investor-friendly have the potential to curtail growth and employment.

A talking point is the expropriation of farms. This would cause the existing land owners to default on mortgages to the banks and create systemic risk in the banking sector which may cause a decline in foreign investment once again. We often forget that for a significant portion of property owners, banks are the ultimate owners until bonds are settled.

What could Government’s next steps involve?
A task team that includes Jeremy Cronin, Ronald Lamola and Tembeka Ngcukaitobi has been set up to look at the issue and provide clarity. Having observed state capture and corruption and how people can abuse power, they will attempt to ensure that the policies are sustainable and performed as intended, irrespective of the leader and government in power. Expropriation without compensation should only be done under definitive situations.
The task team identified some examples of this such as:
• Abandoned buildings
• Unutilised land and commercial property held unproductively and purely for speculative purposes
• Underutilised property owned by the state
• Land farmed by labour tenants with an absentee titleholder.

Once the frameworks have been set up, we believe there are millions of hectares of government land not being used that can distributed to communities to work and generate growth and employment.
Once that land has been distributed, the next step could be to look at land that is not being used correctly. Instead of expropriating the land, a possible land tax could be instituted. The country has material latent capacity and available potential in land that could be used to boost growth and employment, without destabilising the agricultural sector, without endangering food security in our country and without undermining economic growth
and job creation. These policies are in fact prevalent in other economies. China recently introduced taxes on second and third homes in order to reduce the speculative purchasing of properties which is driving prices higher, and beyond levels most people can afford. This would help to achieve the goals of the country.

We are always pessimistic around the policy of land distribution. How can land distribution work positively for South Africa?
We believe the policy of land distribution will be conducted in a responsible manner. This will involve the distribution of unused government land, potentially taxing underutilised, privately owned land and the distribution
of tribal land within communities. What are the unspoken positive connotations surrounding the distribution of land?
1. Government has already started the process of expropriating its own land for free and providing people with title deeds to Government-owned land in Pretoria. This empowering initiative does not negatively impact citizens but instead empowers the beneficiaries to participate in the property market.
2. By owning a title deed, citizens have easier access to credit/loans as they have a tangible asset behind their name. As the interest rate on mortgages is significantly lower than unsecured lending, this lowers the cost of borrowing, increases the deed owner’s ability to spend and potentially move higher up the LSM curve. They will also benefit from the increase in the value of their land, thereby increasing their personal balance sheets.
3. Government may place a tax on underutilised land, resulting in a “use it or lose it” policy. Should this unutilised land become productive by a new era of farmers, South Africa’s growth will benefit significantly from a growing agriculture sector. The second-round effects of a growing agricultural sector include increased employment and lower food inflation, thereby improving the lives of all South Africans.

Conclusion
While there are many unknowns and complexities relating to the LEWC issue, the market does appear to be focusing on the first line of the statement, while ignoring the prescriptive terms under which the expropriation
could take place. If one had to take a really bullish view, this policy could help unlock the growth potential and reduce unemployment in the country. Time will tell whether the LEWC will be positive or negative for South Africa.

May 07 2018 By Glacier by Sanlam: Matthew Auerbach and Seten Naidoo Financial Planning, Investing & Markets