‘Land reform’ property to be valued at half of market value – and sometimes at zero

The ANC has found a way to bring compensation for property down to 50% of market value in many instances – and zero in some circumstances – ahead of the drafting of legislation to allow expropriation without compensation (EWC).

Parliament’s endorsement of the Joint Constitutional Review Committee’s recommendation that Section 25 of the Constitution be amended to allow EWC paves the way for the establishment of an ad hoc committee to draft an amendment bill before the May 2019 election.

In the interim, however – probably unbeknownst to most South Africans – the ANC now has another way of slashing compensation for property intended for ‘land reform’.

This has been done via newly gazetted regulations under the Property Valuation Act of 2014. This Act gives a state official, the Valuer General, the power to value any ‘property which has been identified for purposes of land reform’. Such property may include farming, mining, industrial, commercial, and residential land, along with any movable assets on such land which the state also wishes to acquire for land reform.

How the Valuer General is to proceed has been set down in Regulations gazetted on 30 November and which came into effect on that date.

Say a municipality decides that it needs sections of both a suburb and a township area for new housing for people living in informal settlements. According to the Regulations, it must approach the Valuer General to put a value on the houses in both areas, which are needed for ‘land reform’.

The Regulations say the Valuer General must start with the market value of each house and add to this its ‘current use value’, defined as the ‘net present value’, which in turn is defined as the difference between cash inflows and outflows on ‘the date of valuation’.

This is a perversion of the usual meaning of net present value, which generally measures the profitability of an undertaking by subtracting cash outflows from cash inflows over a period of time (often 20 years). The Regulations make it clear that, in general, it is only the overall inflow or outflow on a single day, the date of valuation, that is relevant.

(As one exception to this general rule, ‘relevant cash flows’ from capital expenditure that has not yet yielded its full effects on the date of valuation may also be taken into account. Another exception applies to ‘mining property’, and allows ‘imputed cash flows arising from mineral stockpiles’ on the property to be taken into account.)

This limited definition of ‘current use value’ has great practical significance – for the Regulations go on to say that the Valuer General must add current use value to market value and then divide this total by two to reach his valuation.

How this will work in practice is best illustrated by an example. Say a house targeted for land reform has a market value of R1 million. However, the house has a net present value, in terms of cash inflows and outflows on the valuation date, of R0. This then is its ‘current use value’. This amount must be added to its market value of R1m and the total must be divided by two. Under this formula, the house must thus be valued R500 000, which is half its market value.

If movables on the property (stove, fridge, furniture, TV, and other appliances) are not needed for land reform, then their value must be deducted from current use value in the first stage of the process. If these movables are not ‘sellable’, then their value must be computed on the basis of their ‘replacement cost less accumulated depreciation’. Assume, for argument’s sake, that this figure in our example comes to R50 000. This sum must be subtracted from the current use value of R0, yielding a negative amount of minus R50 000. This must then be added to market value of R1m and the resulting total (R950 000) must again divided by two. This would bring the relevant value of the house down to R475 000.

Say, however, that the home owner did not buy the house, but rather inherited it ten years earlier, when its market value was R400 000. Under the Regulations, provided this ‘acquisition benefit’ was ‘aided by’ past discriminatory laws, then her R400 000 acquisition benefit must seemingly be taken into account and ‘escalated’ to the valuation date, ‘using an appropriate cost or price index’. Assuming that inflation would have brought the house’s market value from R400 000 to R1m over this decade, then R1m is the relevant ‘acquisition benefit’.

Under the Regulations, this acquisition benefit must be ‘subtracted’ from the value as previously calculated. So, whereas the value of the house without the movables previously stood at R475 000, now the acquisition benefit of R1m must be subtracted from this amount. That yields a negative value of minus R525 000.

Any white home owner who has inherited her house – and whose acquisition benefit is seen as having been ‘aided’ by past discriminatory laws – is likely to be hit particularly hard. Had she bought the house ten years before and paid its market value at the time, the relevant value would still be R475 000.

Under the formula laid down in the Regulations, the value of property targeted for land reform will generally be about half of market value. Sometimes that value will be zero.

If the municipality in our example then decides to expropriate all the houses in issue, their values as determined by the Valuer General will presumably – though both the Regulations and the Act are coy about making the link so direct – be the ‘just and equitable’ compensation that will be payable.

Is this formula constitutional? There is no reference in the Constitution to ‘current use value’. Rather, the Constitution refers to the ‘current use of the property’ as a factor to be taken into account in deciding on ‘just and equitable’ compensation on expropriation. The ‘current use of the property’ is also a factor to be taken into account under the Act in making valuations.

However, ‘current use value’ is not the same as the ‘current use of the property’. The reference to ‘current use value’ in the Regulations is thus inconsistent with the Constitution and ultra vires the Act.

This was pointed out in IRR (and other) submissions on the draft regulations. These unconstitutional and unlawful provisions should clearly have been deleted. Instead, they have been retained and brought into operation as from the end of last month.

There is also no reference in the Constitution to ‘acquisition benefits’, as envisaged in the Regulations. The Constitution identifies ‘the history of the acquisition and use of the property’ as a factor to be taken into account in deciding what compensation is ‘just and equitable’. The Act also identifies this factor as relevant to the valuation process.

This phrase was included in the Constitution largely because of the apartheid era forced removals which had witnessed, among other things, the eviction of some 1m black people from so-called ‘black spots’ in supposedly ‘white’ rural areas. The idea was that, if the government later expropriated a farm, for example, from which people had been forcibly removed, this ‘history of the acquisition’ of the property would be taken into account in deciding what compensation would be ‘just and equitable’ overall. However, it was never intended that a benefit from private inheritance should also be taken into account.

The subtraction of ‘acquisition benefits’ from the value of a property is thus also inconsistent with the Constitution and ultra vires the Act. Again, these unconstitutional and unlawful provisions, as flagged by the IRR and others, should have been deleted. Yet, they have been given the force of law instead.

The ANC is trying to reassure South Africans that its EWC constitutional amendment will have nothing but positive effects. These unconstitutional Regulations are a timely reminder that the organisation – whose real agenda is to cripple the market economy, rather than redress past wrongs – should not be taken at its word.

Dr Anthea Jeffery is Head of Policy Research at the IRR, a think tank promoting political and economic freedom. If you agree with what you have just read, SMS your name to 32823. Each SMS costs R1. Ts and Cs apply.