Secure property title is key to creating black capital
June 22, 2008
 By Vuyo Jack
The capital formation strategies of black people need to be interrogated in order to ensure that they are integrated into the mainstream economy rapidly.
The latest research by Lightstone Risk Management, released in the Financial Mail and using data from the homeowner register at the deeds office, shows that more than half of those who have bought their first house since 1997 are black.
On the surface, this is encouraging, but further analysis is required to unpack the implications of this rise in numbers.
Property ownership patterns among black people (Africans) resemble a pyramid.
At the base, consisting of registered homes in the townships, they represent 90 percent; in the next layer, comprising affordable houses priced at less than R250 000, they stand at 51 percent; in the mid-value market up to R750 000, they make up 16 percent; in the upper-middle sector costing less than R1.5 million, they represent 7 percent; and at the apex of luxury they constitute only 3.5 percent.
Research by Finmark Trust divides township property into four sub-markets: informal shacks, incremental or state-subsidised low-cost housing, old township houses and privately built homes.
The township market is estimated to be worth more than R68 billion. Can these houses be used as a catalyst to create capital?
Peruvian economist Hernando de Soto's theory on capital creation focuses on how to transform dead capital into realisable wealth. His key assertion is that poor people in the poorest countries have assets, but they cannot turn the assets into capital. He points out that they need legal ownership rights in order to achieve this.
In the developed West, property titles, deeds and other ownership documents allow houses to function as capital. But in most cases poor people cannot use their shacks as collateral for bank loans. De Soto's solution is that the poor need ways to represent their property as capital.
Without secure title, a secondary market cannot develop, so capital cannot be created.
The key factor contributing to capital creation in this market is registration of ownership, but informal settlement titles are not registered with deeds offices. On the next rungs up, the registration of incremental housing and old township houses is either delayed or very poor. For privately developed houses, the process is good.
Other factors influencing the secondary market include the supply of new stock, quality of information, proportion of willing buyers to willing sellers, ease of transaction and availability of purchase finance.
An evaluation of these factors reveals that there is a reasonable secondary market in privately developed township houses. The banks can finance such houses easily due to the demand and supply balance.
However, this market is very thinly traded due to limited stock. The reality is that the secondary markets in township properties are somewhat dysfunctional, making it difficult to have capital creation for black people in such a way that would have a multiplier effect on the economy.
The other option for assisting capital creation is for black people to expand out of the township market into the middle to upper tiers of the broader housing market. The value created between the price of the house and the amount owing on the bond can provide some potential collateral.
However, this approach is constrained. In the upper tiers the high property prices relative to the income earned by black people make it unsustainable for many to participate meaningfully in those markets.
Research shows that black people, especially at the low end of township markets, do not use credit to buy houses, but pay up to 75 percent of the purchase price from savings. This is changing for the top end where more black people are using bonds.
Other race groups, particularly white people, use bonds and the equity built therein to acquire other assets that may have high returns. This is a classic leveraging strategy that can yield good returns.
In summation, there are opportunities for capital creation in the housing market, but with very muted returns. A long time is needed to reverse the trends noted above.
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