/ 5 August 2003

Inner cities need more than just tax breaks

Only brave property developers are inclined to attempt new developments, or redevelopments, in economically decaying city centres. This is likely

to be the case in South Africa, despite the government’s recently announced incentives to property owners and developers.

In an effort to halt the urban decay found in nearly all our cities, Minister of Finance Trevor Manuel has offered the property sector a boost by allowing qualifying developers and owners in specified areas an opportunity to write-off the refurbishment costs of obsolescent buildings over five years, and the development costs of new properties over 17 years.

The efforts of such developers will, however, have to be matched by those of the police or private security companies, and by local authorities, as the areas targeted for economic rejuvenation comprise those that are regarded as the most dangerous in the country.

Furthermore, the specified areas, which include parts of Ekurhuleni (greater Germiston), Johannesburg, Tshwane, Cape Town, Durban, Welkom and Witbank, probably suffer from general urban decay, including poor facilities, altered commuter patterns, and a marked decline in the economic activity normally associated with CBDs.

All this suggests that the committees proposed by the minister’s financial plan will have to devise infrastructural, ecological and population development plans to make the initial cash investment required of developers a viable investment.

Previously the economic hubs of their respective regions, these areas have suffered long periods of decline since 1970 as decentralisation, economic slow down and changes in the demand for commodities prompted the flight of original tenants and capital. 

This first wave of decentralisation, (primarily in Johannesburg and Durban) and slow down in general economic activity (in Welkom, Witbank and Port Elizabeth) was followed by a second. This was fuelled by a perceived increase in crime, physical decline of the buildings and infrastructure, general disinvestment in city centres, trade re-orientation to middle- and low-income sectors and a move towards technology-based office practice and outsourcing.

One consequence of urban decay the government wants addressed is that inner cities have become home to a high number of the country’s poor, while the buildings are often inhabited by people who will not pay rent but require proper housing.

If developers are to rejuvenate these nodes, the needs of such residents will have to be considered.

This is not to say rejuvenation projects can’t work — Johannesburg’s Newtown and London’s Canary Wharf are recent success stories.

But careful thinking will be required to mix the right cocktail. Both these projects were the result of combined public-private efforts, and both have had a positive impact on unemployment and crime, while serving as reminders of the history of the areas concerned.

The challenge for the government and private developers is that renewal demands innovative capital investment, infrastructural and social improvement. The government and property investors have to cooperate, probably through mechanisms used during the implementation of business improvement districts, but with more emphasis on social planning at provincial and national levels.

Local spatial development frameworks have also created an opportunity for joint ventures in the property sector tailored for urban renewal. These strategic initiatives have seen the drafting of macroeconomic plans for provinces and regions being translated into nodal rejuvenation projects.

The rejuvenation of the business district next to the Cape Town Waterfront, for example, drew extensively on a model developed and used in Adelaide, Australia, during the early 1990s. It could be amplified to include the social interventions that were necessary when Darwin was substantially destroyed by Typhoon Tracy in 1974, requiring the rebuilding of the city almost from scratch.

All this points to the need for the government to acknow-ledge the extensive risk that profit-driven property investors face in the targeted nodes. Developers can only justify their financial commitment — and often that of their bankers — if they are reasonably assured of a sustained return.

This means that government needs to provide the security of lower crime, a stable environment and sound infrastructure if the tax incentives are to be exploited by investors in a sector that has seen many property owners bruised by nodal decay in the past decade.

Tax incentives are not enough to draw developers into the nodes that the government is targeting. Their bravery needs to be supported by the other state functions, so that money, time and effort invested is not subjected to the same write-offs that occurred in the Eighties and Nineties.

Strategies to reverse urban decay often attract foreign investors. This has already started in South Africa, as investment in rand-priced property opportunities revealed an attractive long-term upside in the right circumstances.

Coincidentally, the rand’s recent strength vis-à-vis other major currencies has, and will continue to benefit foreign investors in the property market.

Property returns comprise income and capital return components. Besides profiting from enhanced income return as the rand improved, capital growth will allow developers’ total return to significantly out-perform property investments in many other countries.

Jonathan Smith is a director of property strategy company Courtwell Consulting