President Mbeki announced in his State of the Nation address that restrictions will be introduced on foreigners' property ownership in 2006, 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.
