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How to understand foreign ownership

21 Sep 2007
Australia does it. Singapore does it. Canada does it. And so do New Zealand, Brazil and the United States. But when South Africa suggests it might also like to use it as a policy instrument, the "banana republic" and "foreign investors flee" labels get hauled out. By Troye Lund, Finweek

International irrationality aside, there's no doubt that talk of banning or regulating foreign land ownership in SA is gorgeously convenient politics for leaders of the ruling party who are preparing to face their grassroots support base at the December conference - the place where they'll be re-elected, demoted or put out to pasture.

SA's deficient systems and databases add to the dramatics. There's no statistical base on which to pitch a debate or make informed policy choices. Aside from the emotion that this debate attracts, the two-year Government-commissioned investigation into foreign land ownership in SA is an interesting departure from earlier proposals. It's a significantly toned down version of the interim report, which called for a moratorium on all foreign-owned land. The shift is from prohibition to regulation.

While the moratorium word is very much part of the final report's list of recommendations, the freeze is limited to two years and to State-owned land. White South Africans would also be subject to that moratorium. However, the panel of 10 academics, legal and political experts who conducted the research do call for an outright ban on foreigners buying land with historical, strategic, cultural or security interests.

Cabinet advisers confirmed that Government is eager to strike a balance between keeping foreign investors happy while reassuring ANC supporters frustrated with the pace of land reform.

"There are definitely positive spin-offs to foreigners who buy land here. But Government needs to be aware of the complicating factors," says the Government adviser who confirmed that there are groups within the ANC that are very unhappy that the report doesn't go far enough.

The most opposition to the current report comes from the ANC's Communist and labour alliance partners in the Western Cape, especially Cosatu. They argue that foreign demand is pushing property prices up and ultimately jeopardising Government's ability to buy well-placed land for Government housing.

That goes to the heart of where Pam Golding CEO Andrew Golding's objections lie. "If a foreigner buys a house in Clifton it doesn't impact on the question of land reform. In fact, the foreign direct investment is creating more Rand to redistribute.

"That argument (foreigners drive up prices) presumes that foreigners are going to pay above current market value. Foreigners don't pay over the odds. They'll only pay more where they see value. The market is determined by locals but is fundamentally predicated on the basis of a free market economy," says Golding.

BJM's Elna Moolman says perhaps in some selected areas foreigners have pushed prices up but that's not so when you look at the bigger picture. Research she conducted last year confirms that foreigners didn't drive the recent 35% property boom.

However, ANC Western Cape chairman James Ngculu is in no doubt that foreign demand in that province is driving prices upward faster, making "the dispossessed" feel "like strangers" in their own country. He accepts the dangers of blanket moratoriums but welcomes any plans being adopted at the party's December conference to keep strict checks and balances concerning foreign ownership.

The report that's been presented to Cabinet concurs with Ngculu. It tracks residential property prices over six years (1999 to 2004) in the mid-market bracket and, because house prices in that sector increased far more dramatically than construction or building costs, concludes that increased demand from foreigners did push property prices up. That, says one of the panelists who conducted the research - Unisa Professor of Political Science Dirk Kotzé - is especially true for 2000 and 2001, when the Rand was weaker.

While critics of that proposition believe that the growth of the black middle-class and higher disposable income through tax breaks played more of a role, Kotzé says: "Foreign ownership has put pressure on land prices. From a land reform and redistribution point of view that does help make land for Government to buy unaffordable, especially because Government adheres to the willing buyer, willing seller principle. Expropriation may become necessary if that continues. Government doesn't own enough land. Private land is key to land reform."

Kotzé refers to the example of Singapore to make a point about how land is more than just a commodity - it also needs to be used to protect national heritage in all its forms. In Singapore, foreigners aren't allowed to buy residential homes, such as detached, semi-detached or terrace houses.

"That's ensured that properties have remained affordable for local people, especially young people. That policy has actually had the effect of stopping Singapore's brain drain problem," says Kotzé.

The debate on balancing prohibition with regulation and politics with economic sense is one thing, but getting to a point where any degree of control can be implemented is quite another.

First, the problem in SA is that nobody really knows what percentage of urban and rural properties foreigners actually own. The research conducted on foreign ownership presented to Cabinet by the panel of 10 concludes that 1% of residential urban properties countrywide are foreign-owned. While the panel believes that percentage is higher (up to 10%) in some urban areas of the Western Cape and KwaZulu-Natal, estate agents argue there's no meaningful historical data to confirm that.

"If you take the total inventory of properties that are sold in a year, less than 1% is sold to foreigners (defined as people who live outside SA) countrywide. If you're talking about the Western Cape alone, the number may approach the 1% but not 8%. Our (Pam Golding) sales to foreigners are around 6%," Golding says.

Enter corporate-owned properties. There's also no way of finding out how many of those are foreign-owned. Statistics suggest that corporate ownership is where most of the foreign ownership is lurking. For example, 27,5% of farms are owned by companies (no way of knowing how many of those are foreign-owned). Those represent 78% of the total value of SA's farmland.

The report, which will be released for public comment, states: "The number of owners is not as significant as the value of property. It means mainly properties in the prime market, which will therefore have a high speculative value. The impact of corporate ownership on the South African economy can therefore not be discarded and requires close monitoring."

Anecdotal evidence suggests that foreign corporate ownership is significant, if not substantial.

There are also instances where foreign corporations establish wholly owned subsidiaries registered as SA companies. For example, Utrechtse Beheer Maatschappij "Catherine" BV, which owns Marakele Park, CCG088 Investments and CCG 108 Investments. Those corporations have substantial holdings in and around the Marakele National Park in Limpopo. A significant number of foreign corporate owners have also invested in wine farms.

Other considerable foreign investments over the past few years include:
- French owner Anne Cointreau-Huchon, of the liqueur and Cognac family, has made huge investments in the Morgenhof Estate.
- Italian Count Ricardo Agusta invested around R17m in revamping the Agusta Wines' cellar in Franschhoek.
- A Bahaman-US-SA wine partnership established BoweJoubert Vineyards & Winery in 2001.
- Dornier Wines represents a R100m investment by its Swiss owner.
- Chateau Pichon-Longueville-Lalande has recently bought a 310-acre estate, Glen Elly, in Simonsberg.

Golding is convinced that the impact on farmland is confined to wineland areas, such as Stellenbosch, Paarl and Franschhoek.

"In areas like Franschhoek that may be accurate (prices of land driven up by foreigners), but the level of foreign land ownership on SA's commercial farms isn't significant - almost non-existent." But Golding welcomes the report's "significant" proposal to start collecting data that will give statistical insight into who is buying what and to what extent.

"Asking those details is in line with international best practice. It's not to pinpoint individuals, it's for general statistics. Those reporting or disclosure measures are used for a range of planning and governance purposes, including taxation and security issues, by countries including Mexico, Canada, Australia, New Zealand and Thailand," says Kotzé, who says there should be penalties for failure to disclose. Among the options Cabinet could consider is a fine of 20% of a property's value, plus a block on transfer.

Collecting and co-ordinating details of new property sales to foreigners may be more simple than getting a grip on what foreigners already own. For one thing, that would entail tying up the information on various databases, including Home Affairs, Foreign Affairs and the SA Revenue Service.

Then there's the question of how a moratorium on State land is going to affect lucrative commercial property deals, such as the recent R7bn sale of the V&A Waterfront in Cape Town. While those could be covered by the proposal in the report that outlines leasehold options for foreigners, some argue that's not a way to attract huge commercial deals.

The path to regulation is clearly not an overnight one. Ultimately, the question is whether Government's new, toned-down stance will indeed succeed in being all things to all people.

If it doesn't, the question is what's more dangerous long term: making foreign investors look skittish or disappointing voters that populist political rhetoric would have them see foreign playboys who buy pads in Bantry Bay as the reason they haven't yet got a home of their own - 13 years after freedom.

Spot the corporate foreigner
The panelists who conducted Government's study into foreign property ownership have proposed lowering the 50% +1 shareholding by a non-resident as constituting a foreign-owned entity.

For trusts, information on the citizenship and residence of both the trustees and the beneficiaries should be obtained, says the panel. The same goes for partnerships and joint ownership by individuals, some of whom may be non-citizens and/or non-residents.

Report proposals at a glance
- Compulsory disclosure of all personal and corporate details, including nationality, race, gender, residency status.
- Special approval from the relevant minister for certain rezonings.
- Establish permanent and specialised Government oversight committee to monitor foreign land ownership.
- Outright prohibition of private ownership of land by foreigners (and in some cases, South African citizens) on grounds of national interest: national key points, coastal areas, conservation areas, water catchment areas and land along borders.
- Limited moratorium on sale of State land to foreigners and South Africans who don't qualify for redress.
- All laws affecting land use and planning to be brought into sync through overarching national legislation.
- Lease hold for future acquisition less controversial than full ownership rights, even though they still exclude citizens from ownership.
- An omnibus of legislative amendments.

Foreign lands - who does what where?
The majority of countries have either or both restrictions concerning ownership/acquisition of land and reporting requirements of the ownership/acquisition of land by non-citizens.

Australia: Full disclosure required. Specific restrictions on foreign investment are in force, especially in more sensitive sectors, such as the media and developed residential real estate. The screening process provides a clear and simple mechanism for reviewing the operations of foreign investors in Australia whenever they seek to establish or acquire new business interests or buy additional properties.

Government is then able to put pressure on foreign investors to operate in Australia as good corporate citizens if they want to extend their activities in Australia. By far the largest number of foreign investment proposals involves buying real estate.

Government's aim is to ensure foreign investment in residential real estate increases the supply of residences and isn't speculative. Foreign investment policy seeks to channel foreign investment in the housing sector into activity that directly increases the supply of new housing (i.e. new developments - house and land, home units, townhouses, etc.) and brings benefits to the local building industry and their suppliers.

Chile: Virtually no regulations regarding the sale of land to foreigners, except in respect of border and coastal areas. Nationals of Peru, Argentina and Bolivia can't acquire land in a 10km buffer zone between the boundaries of those countries. Furthermore, the very long western coast isn't transferable but only granted under concession.

About 35% of Chile's land surface is state-owned, of which 15% falls under the jurisdiction of the Ministry of National Property and 20% is protected land and falls under the Forestry Department. About 65% is under private ownership. The sale of public property is only allowed in the event that a ministry declares a piece of land as non-essential to the proper functioning of the state. The transfer of state property is conducted by open and public tender.

There are two mechanisms for foreign investment. First, there's a mechanism to register all foreign investment. Second, there's an optional mechanism through which the investor signs a contract with the state. That provides special conditions for investors, such as the right to transfer capital, to repatriate profits, guarantee of non-discrimination against foreigners, the right to participate in any form of investment, tax stability and to hold assets indefinitely.

Singapore: About 90% of the land is state-controlled and 8% of housing stock is privately owned. For both citizens and foreigners land is held either free hold or lease hold. Land can be leased for up to 30 years, renewable for industrial purposes, while state land can be leased for 99 years.

Ownership of land and property is regulated by laws that restrict foreign ownership of landed residential property, such as detached, semi-detached or terrace houses. Foreigners can freely buy non-residential and non-restricted residential properties.

Indonesia: Indonesia belongs only to Indonesians and the right of land ownership is limited and regulated. But there's no differentiation between Indonesian citizens and foreigners resident in Indonesia, except that foreigners can't have free hold title. There are also legal criteria that restrict foreign ownership. For example, they may only own one house, townhouse or flat.

Foreign legal entities founded according to Indonesian law and domiciled in Indonesia can acquire the right to cultivate land owned by the state. Indonesia restricts the size on which that right can be exercised to 5 hectares in densely populated areas and 70 hectares in less densely populated areas. - Troye Lund, Finweek

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