Restricting foreigners' property ownership
President Thabo Mbeki’s recent announcement that restrictions will be introduced on foreigner’s property ownership this year sparked fresh debate around the possible impact they could have on the South African economy, especially general foreign investment.

At first glance, this proposal may appear investor-unfriendly, but such restrictions are actually relatively common globally.

The extent and types of restrictions on foreigners’ land ownership differ markedly across countries. For example, Mexico and Chile don’t allow foreigners to buy property near their borders. Only foreigners living in Indonesia, and whose presence is seen as beneficial to national development, can own property there and they cannot own more than one property. Singapore has similar restrictions.

In Thailand, foreigners buying vacant land must invest $1m (excluding the purchase price) for a minimum of five years in Thai government-authorised investments (such as government bonds). In 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. In 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 property 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 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”.

The government’s generally business-friendly track record, however, does suggest a pragmatic approach may ultimately be adopted. Critically also, 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 desire to be an investment-friendly economy increases the importance of decisions and perceptions surrounding foreigners’ property ownership, including:

  • The status of permanent (non-South African) residents: 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.
  • Careful 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.
  • 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.

Article by: Elna Moolman and Gina Schoeman - www.moneyweb.co.za