Market Institutions and the future course of the SA Property Market

( Prof) Francois Viruly

School of construction Economics and Management – Johannesburg

ERES CONFERENCE 2009 STOCKHOLM

The research focus;

• The application of the principles of institutional economics to explain the course transformation in the South African property sector.

• An analysis of how public sector interventions have attempted to influence the path of institutional change.

• The success and failure of the policy approach adopted in South Africa.

The Theoretical background;• The institutional approach ( North 1990)

– That market transaction occur within an institutional framework;

– Institutions ( or the rules of the game ) are of a formal and informal nature;

– Economic institutions result in certain market outcomes and behaviour;

– The Path of institutional change has been explained in numerous ways ( Mahoney 2000);

• Utility/ Increasing Returns explanations ( North 1990)• The functional Approach – system approach • The Power centered approach

The theoretical background – the policy perspective

• Policy makers need to understand that the path to institutional change is influenced by – Path Dependence– Institutional “ Lock in”

• The interest to retain a particular institutional arrangement ( that may be inefficient) can have economic as well as political dimensions

• Changing the path of institutional change can be difficult and requires interventions at different levels of the institutional hierarchy.

• It is equally important to understand the linkages that exist between institutions.

Institutional Explanation of Property Development( Keoch and D’arcy 1999)

The Institutional Environment

- political institutions - social institutions

- legal institutions - economic institutions

The Property Market as Institution

-market (and non-market aspects) - decentralised and informal

-legal and conventional aspects of - legal and conventional property rights aspects of land use and development

Property Market Organisations

-users - investors

-specialist developers constructors - property service providers

- financial services providers - professional bodies

- governmental and non-governmental agencies

The Historical Back ground to Black economic Empowerment and Institutions in the SA Property

Market • Apartheid Years and Institutions

– Volkskapitalism – Legislation was used to provide opportunities for whites and the

exclusion of blacks ( 1913 land Act , Group areas Act 1958)– By the 1980 , A breaking point is reached and the utility , functional

and power centered basis for the existing institutional arrangements is weakened.

• The Post Apartheid Period;– By 1994 the ANC initiates its transformation policies with GEAR / RDP

policies – This is followed in 2001 with the BEE commission and the 2003 BBBEE

Act - this sets for the mandate of sectoral transformation charters – More recently the shift has moved to a procurement policy and

supporting of organisations in the property sector.

BEE Institutional Hierarchy

Policy and Legislation

1955 Freedom Charter 1990 NAFCOC Black Economic Empowerment Programme

Utilitarian Explanation

1994 Elections and RDPCost of system Transaction cost

1996 GEAR Functional Explanation1999 Competition Act Developmental State

Codification CSR

2001 BEE Commission

2003 BBBEE Act Power Explanation

Sectoral / Market Institutions

Property Transformation Charter (2000-2007)

Black Capitalist Class Conglomerates

Codes of Good Practice Department of Trade and Industry

Legitimisation Explanation

Property OrganizationsProcurement Policy State Support

Lack of Spirit

BBBEE Companies

Path Dependence / Sequencing

BBBEE and the Property transformation charter ( PTC)

• The PTC was primarily influenced by the BBBEE act , which encouraged voluntary sectoral transformation initiatives

• It emphasizes that - “Despite legislative interventions , the transformation of the sector has generally been slow;

• It included broad consultation within the sector;• It includes;

– A charter council ( of a supervisory nature) – A scorecard incorporating certain benchmarks

• These appropriate code of good practice has now been adopted by the department of trade and Industry and are being proposed as a norm for future charters and the benchmark that government departments should use in their procurement activities

Property Sector Score Card

1. Employment Equity (Target) 5 Year Target

Black People in senior Management 30%

Black Women in senior Management 15%

Black people in Middle Management 37.5%

Black Women in Middle Management 20%

Black people in Junior Management 40%

Black women in Junior Management 20%

2. Skills Development

% of payroll per annum on skills development 1.5%

% of staff learnerships for black people 2.5%

% of staff in mentorships for black people 2.5%

Compliance with the skills Development Act No. 97 of 1998

3. Procurement

Eligible procurement spend on BBEE 70%

Eligible procurement spend on property services enterprises with a

BBBEE status level one to level four 40%

Property Sector Score Card

4. Enterprise Development

% of net profit before tax on monetary enterprise development 3%

% of profit before taxation on non –monetary enterprise development 2%

% disposal to level one to level four BBBEE enterprises over a five year period 35%

5. % Economic Interests held by black people and 25% plus one vote

participation by black people in voting rights

economic interests held by black women and participation by black women

in voting rights

10%

participation in ownership by broad based ownership schemes 2.5%

6. Control

black people at board level 40%

of black women at board level 20%

black people at top management level 40%

Property Sector Score Card

Source: Property Sector Transformation charter (2007)

7. Development

Development investment in under –resourced areas as a % of total annual investments.

10%

8. Corporate Social Responsibility

Spending on:-Education-Environment -Arts and Culture -Health care ( HIV and AIDS awareness) -Sport-Job Creation

1% of net profit to be spent on

CSI.

9. Gender Transformation- Devise appropriate Programmes - Target skills development

The more recent developments… • Dissatisfaction with the pace of process;• There is a growing sentiment that the sector is

not transforming at an acceptable rate• Government is starting to become more

aggressive with its procurement ( length of leases , property management and facility management)

• The creation of the property transformation coalition.

• The creation of a South African National Property empowerment Company.

The policy Dimension of the Hierachy of institutions

The Institutional Framework / Legislation

The Sectoral Institutional Framework

The Organisational Institutional Framework

Concluding remarks • The SA property market provides an interesting case study of the difficulties that

arise when attempting to shift the path of institutional change.• Policies need to understand and apply policies that can address the issues that

cause path dependence and institutional lack in.• Interventions primarily based on a top down approach ( starting with legislation) ,

may not necessary result in significant change at the institutional and organizational institutional levels.

• Yet institutional change at the higher echelons of the institutional Hierarchy may be required to promote changes at different levels.

• The paper illustrates that when instruments are undertaken consideration should be given to;

– Sequencing – Timing – and the type of interventions.

• Failure in achieving results with a top down approach; means that a bottom-up approach driven by organizations and not the state becomes significant