The absolute downside of EWC

Cyril Ramaphosa: driving land expropriation without compensation.

By Mario Pretorius

Let’s assume the State expropriates ALL land, farm, urban…the lot.  To reside as custodianship, in the same way that mineral rights are held at present.

The State now owns the land and it cannot be sold or purchased

All loans against the land are held by the borrower, not the land itself, and they need to be repaid to the lender.

In the worst case scenario, the lender may require new security for the loan, as the security of the land has evaporated.

In the worst case scenario, the State may allocate the land to another person and the previous owner may have to evacuate.

The expropriation of the land might not include the top structures.

In the worst case, the structures and improvement may be deemed fixed to the land and included in land expropriation.

In the UK, land is held by freehold (owned by the tenant) or it is leasehold – for a set and often renewable period, where the tenant builds on the land or leases the top structures. There is a small difference in the price in favour of the leasehold.

This leasehold can be sold as if the tenant owns the property, subject to the constraints and time-limit of the original leasehold.

This is what is happening in the Waterfall development – where the Muslim Trust insists on leasehold, and not freehold.

The Boschendal wine estate was sold on this basis by its Muslim owners, IFA.

Lenders readily finance the leasehold model. Periods of leasehold vary from 19 to 999 years.

In the best case scenario, the State grants a leasehold to the existing tenant/previous owner.

In the worst case scenario, the period is very short, not renewable and expensive.

In the sale of a building or house, the land is priced in the sale; it is nor sold or priced separately. The use or income of the improvements determines the price. Where the land generates income, it is the yield that is of value.

The best case scenario is that leasehold is determined on surface area, or by locality, irrespective of value or use, in a smallest common denominator method.

The worst case in determining a leasehold value is either in a bidding war or by an arbitrary highest common denominator value, irrespective of the use or income value – or some non-market related revenge value, calibrated differently for different bidders.  By race, nationality or an arbitrary method of political or some other affiliation.

The best case scenario is to farm at the normal yield on land without any purchase cost and with a long-term, low leasehold.

The worst case is the denial of existing farmers of leasehold on their own farms in favour of others

The best case scenario on a top structure is a long-term, low leasehold without owners’ rates and taxes

The worst case scenario has rates and taxes levied on the tenant, or denial of leasehold to previous owners.

The best case scenario will allow sub-lets – such as a forced BEE tenant that sub-lets at a reasonable price, and with a long, renewable lease.

The worst case scenario limits or prohibits sub-letting to the original owner or to designated hated groups – such as whites, or foreigners, or whatever takes the whim of the State.

The best case is a fair and orderly process of allocating leaseholds to productive use, free of favouritism, and on an economically sensible basis.

The worst case scenario is an unfair, unplanned and chaotic land grab – and subsequent warfare and strife that destroys the assets so squabbled over.

The best case is the exclusion of some of the provisions or at least a diligent, fair, consistent, timely and unchanging implementation that rolls out slowly over an extended period.

The worst case is a hasty, unfair, inconsistent, mass implementation – subject to local and personal frivolous decisions, fraught with corruption, favouritism, incorrect and malicious actions, including hostile, criminal and violent actions sanctioned by law-enforcement inaction.

There is thus a spectrum of outcomes, from hurtful to deadly.

The best case scenario is an aggregate of the best outcomes, implemented with compassion. At the other end, the worst outcome is a free-for-all, ending in civil war and the destruction of the property.

The best lending scenario is an orderly continuation of the existing use of assets by the borrower to pay off loans, and international acceptance and condonation of reasonable investor certainty.

The worst scenario is the imposition of country sanctions, the final downgrading of the Rand to local & international junk status, the bankruptcy of the State by loss of foreign forex investments, the widespread dumping of stock by investors cashing out of the economic system, the collapse of the lending system and its banks, the emergency bail-out by the IMF, and its imposition of wide structural reforms while permanently indebting the former sovereign Republic, and killing off its economy.

Perhaps that is what the ANC desires as a prequel to reforming ZA into the Marxist paradise it envisioned in its Freedom Charter and its National Democratic Revolution.

It is clear that both these fake Utopias will be at the cost of – and to the detriment of – the existing owners of property in its widest sense, in line with the Leninist maxim that any rich person would have exploited another for his riches.

Add to that an age-old lust for revenge in the name of inequality and it becomes questionable if any new beneficiaries will be the economic masters of the largesse in the worst case scenarios.

Viva?

Mario Pretorius is CEO of Valkyrie Capital

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