Restricting foreigners’ ownership of residential property

Private Property South Africa
Elna Moolman and Gina Schoeman

President Mbeki announced in his State of the Nation address that

restrictions will be introduced on foreigners' property ownership this year,

which sparked fresh debate around the possible impact this could have on the

South African economy, especially foreign investment. At first glance, this

proposal may appear investor-unfriendly, but given the global prevalence of

restrictions on foreign land ownership, the mere introduction of such rules in

South Africa should not diminish the country's relative attractiveness as an

investment destination. The detail of the restrictions and the implementation

process will be of immense importance, especially insofar as confidence in

application of the rule of law and property rights is untainted.

The wide range of restrictions imposed on foreigners' property ownership

globally makes it somewhat difficult to definitively capture the state

president's remark that the local restrictions will be "in line with

international norms and practices". International examples include:

  • Mexico and Chile: foreigners are not allowed to buy property near

    borders;

  • Indonesia: only foreigners living in the country, and whose presence is

    seen as beneficial to national development, can own property and they cannot

    own more than one property. Singapore has similar restrictions;

  • Thailand: foreigners buying vacant land must invest $1 million

    (excluding the purchase price) for a minimum of five years in Thai

    government-authorised investments (such as government bonds);

  • Switzerland: foreigners generally cannot buy more than one property;

    their ownership is restricted in tourist areas and large cities; and they

    are subject to higher legal and transfer costs; and

  • Australia: foreigners buying vacant land have to begin construction

    within 12 months, and they cannot buy commercial property valued more than

    AU$50m.

The limitations depend to a large extent on the countries' motivations for

imposing the restrictions. The reasons vary from promoting social stability to

managing foreign direct investment and immigration. For example, Peru restricts

foreigners' land ownership near government installations and military bases.

Some countries, such as Morocco, restrict foreign ownership of agricultural

land.

In South Africa, a central motivation for considering restrictions on

foreigners' land ownership appears to stem from the concern that they may be

pushing up domestic property prices, thereby making it less affordable to South

Africans. This is particularly important in support of the land reform programme

and the broader transformation process.

The best available estimates based on Deeds Office data suggest that foreign

individuals own only about 0.1% of South African property by area, which equates

to about 0.8% of the total value of property. These national aggregates,

however, mask the far greater concentration of foreign ownership of assets in

prime property locations and could underestimate the participation by foreigners

concealed by ownership through corporate structures. Nonetheless, this data

indicates that foreigners are unlikely to have played a meaningful role in

pushing up national property prices during the recent surge, and hence the

restrictions are not likely to influence the buoyancy of house prices generally.

However, foreigners may have had a bigger impact on property prices in select

prime locations, such as popular tourist destinations. Therefore, insofar as

there is a socio-political desire to keep, for example, coastal areas affordable

and accessible to South Africans, constraints on foreigners' purchases in these

areas may be plausible. Further, by only imposing restrictions in such areas,

the South African authorities would substantially temper fears that they are

unreceptive to foreign capital more generally and, indeed, property ownership

would not be to the total exclusion of foreigners. However, this should be

weighed against the additional administrative and regulatory burden of more

complex legislation and oversight mechanisms.

Residential property purchases by foreign individuals by province (2003)

Source: Deeds Office, Standard Bank Group

The desire to be an investment-friendly economy increases the importance of

decisions and perceptions surrounding foreigners' property ownership. There are

at least three considerations of critical importance. First, the status of

permanent (non-South African) residents needs to be determined carefully. In

support of the Accelerated and Shared Growth Initiative of South Africa (ASGISA),

the government has identified imported labour as an essential component of its

skills expansion programme. Outright restrictions on the ability to own property

could serve as a deterrent for workers to come to South Africa. Second,

consideration should be given to the distinction between residential and

commercial property. Again, this is of particular relevance given the desire to

attract foreign direct investment (FDI), which may be accompanied by skilled

workers - one of the key benefits of FDI - who may want to own residential

property. Third, a distinction could be made between vacant land and that with

buildings on it. In many countries, such as Australia, foreigners that buy

vacant land have to develop it within a specific period, which ensures that it

is associated with additional fixed investment and a boost to construction and

employment. Other issues that need to be considered include the regulatory

burden and the potential negative impact on tourism.

Pre-empting the government's decision, the restrictions to be announced are

likely to include limitations on the ownership of land earmarked for land

reform; agricultural land; and strategic areas such as coastal areas and

environmentally protected areas. There may be additional quantitative

restrictions on general land purchases by foreigners that limit the size of

their ownership.

Gina Schoeman

Home Loans Product Development

Elna Moolman

Group Economics

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