Land value calculation is flawed
South Africa’s valuer general, an office created under the Property Valuation Act, will receive public comments until June 21 about its proposed methodology to calculate the value of land identified for land reform.
The Act mandates the valuer general to set a value, not based on the market, that is just and equitable, as stipulated in section 25(3) of the Constitution, when calculating compensation for expropriation.
The framework for a just and equitable settlement outlined by the Constitution allows the courts to be flexible when arriving at a value, but the draft regulations prescribed by the valuer general provide a fixed formula, which is: value = current use value + market value divided by 2 minus historical acquisition benefits and state subsidies.
“Current use value” is not calculated in the same manner as productive value and is defined as the net present value of cash inflows or other benefits that the property generates for the owner under lawful use.
In other words, the “value” will largely be based on the difference between market value and the income the property generates for the owner.
This formulation poses a number of serious questions: Is this fair to landowners who acquired their land at market value? And what about bondholders who extended loans on the basis of market value?
These are legitimate questions, which deserve thorough investigation and debate, but an additional risk is that the nature of the land itself and what is sustainable could be overlooked in the process.
If the current use value plays the central role in determining the value of land, it could result in the bizarre situation in which agricultural landowners are rewarded for the short-term exploitation of the soil to maximise profits.
In the proposed regulations, both the definition of “current use value” and “net present value” are linked to the amount of money that the land is generating at the time of valuation. In other words, if an owner is aware that the state may be preparing to value their land to acquire it for land reform (as would be the case, for instance, where a land claim is nearing finalisation), it would be in landowner’s best interests to maximise the profit being generated by the land, because it would naturally result in a higher valuation.
This could have long-term adverse effects on soil fertility or veld condition, a problem that the land reform beneficiary will then inherit. This result will affect the long-term sustainability of the agricultural enterprise on the farm.
Generally speaking, South Africa is not well endowed with agricultural resources; only 13% is suitable for tillage and much of the remaining grazing land is considered marginal. For this reason a heavy emphasis is placed on preserving and conserving the soil so that it can retain its ability to provide food and fibre sustainably for future generations.
Farmers also play a leading role in soil and veld conservation by rotating crops and other measures to improve the soil — and even refraining from planting at all in some seasons to allow the soil to recover.
Likewise, pastoralists need to manage the veld carefully and reduce grazing intensity at times to prevent pastures from becoming overgrazed. Farmers thus forgo short-term productivity in favour of long-term sustainability.
This should not be seen as landowners not using their land productively but rather as treating it as a long-term, sustainable investment. Sustainable use plays such a central role in agriculture that the state has even enacted legislation to promote sustainable use.
But if “current use value” is to play such a major part in valuations, farmers may well be forced to abandon sustainable practices to ensure they receive a fair valuation for their land.
Not only would this endanger the long-term prospects of the agri-food sector but it would also flout legislation such as the Conservation of Agricultural Resources Act and the draft Preservation and Development of Agricultural Land Bill drawn up by the department of agriculture, forestry and fisheries.
Ironically, the net effect of this approach could be to undermine land reform, because beneficiaries could be handicapped by receiving land that has been severely degraded or overgrazed by intensive use, which should be avoided at all costs.
Theo Boshoff is the manager of legal intelligence at the Agricultural Business Chamber