Market Institutions and the future course of the SA Property Market

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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

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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.

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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

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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.

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Institutional Explanation of Property
Development( Keoch and Darcy 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

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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.

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BEE Institutional Hierarchy
Policy and Legislation 1955 Freedom Charter  
Policy and Legislation 1990 NAFCOC Black Economic Empowerment Programme Utilitarian Explanation
Policy and Legislation 1994 Elections and RDP Cost of system Transaction cost
Policy and Legislation 1996 GEAR Functional Explanation
Policy and Legislation 1999 Competition Act Developmental State Codification CSR
Policy and Legislation 2001 BEE Commission Developmental State Codification CSR
Policy and Legislation 2003 BBBEE Act Power Explanation
Sectoral / Market Institutions Property Transformation Charter (2000-2007) Black Capitalist Class Conglomerates
Sectoral / Market Institutions Codes of Good Practice Department of Trade and Industry Legitimisation Explanation
Property Organizations Procurement Policy State Support Lack of Spirit
Property Organizations BBBEE Companies State Support Lack of Spirit
Path Dependence / Sequencing
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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

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Property Sector Score Card
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
10
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
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
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Property Sector Score Card
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
Source Property Sector Transformation charter
(2007)
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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.

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The policy Dimension of the Hierachy of
institutions
The Institutional Framework / Legislation
The Sectoral Institutional Framework
The Organisational Institutional Framework
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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