Measuring the size of dead capital in Johannesburg Metropolitan Municipality and determining its relationship to poverty levels

ISIbalo Symposium on evidence based decision makingFree State Province

10th-11th October 2013

Presented by: Dr. Mahlape Mohale

1. Introduction 2. Methods 3. Approaches to property markets valuation4. The City of Johannesburg in brief 5. Results 6. Analysis 7. Challenges in measuring dead capital in the

CoJ8. Conclusion

OUTLINE

Majority of the people in the world live in very poor conditions yet there are enough resources to support all the people on this planet. The world's poor control a vast storehouse of assets and resources, which combined with their proven entrepreneurial spirit, can be unleashed to enter the prosperous mainstream economy and eradicate poverty (de Soto, 2001).

1. Introduction

The burden of poverty in developing countries along with the imbalances between demand and supply of houses in urban areas has forced the urban poor to devise their own survival strategies and determine their own spaces in cities. By so doing the urban poor redefined urban space uses and became important role players in the property market that no government in developing countries can ignore (UNHABITAT, 2003).

What is dead capital?De Soto (2000) defines “dead capital” as assets that cannot be used effectively for economic transactions, guarantees, contributions or compensation.

Why the concern about dead capital? Informal dwellings in urban areas regardless of their low quality

are economic goods that have market value They serve large population estimated to be 1billion world- wide Important indicator of inequality in society Residential markets drive wealth generation in a country (UN-

HABITAT, 2009)

Hence measuring the size of dead capital in urban areas and determining its relationship to poverty levels in order to devise strategies to convert it into life capital is necessary.

1. Introduction Cont.

de Soto introduced the “dead capital” debate in 1980s Ddeveloping countries hold vast amounts assets Poverty the result of the inability of actors in the informal economy to optimally utilise

capital goods

Contributing factors include: Dysfunctional property and financial markets and information asymmetry Inability of the state to efficiently and cost-effectively establish property rights

Dead capital is generally linked to informal housing and business Will enable people in the informal sector to enter the formal economy Will mobilise dead capital and provide security of tenure Will bring about market-led land reform and the provision of basic services

Proponents and opponents of dead capital concept Reinforce inequitable land ownership financial exploitation of new property owners Loss of traditional, ingrained forms of tenure Benefits only a few de Soto’s central argument remains uncontested

1. Introduction Cont.

Japan & China

Leveraging land resources for development (de Soto, 2001)“The Western World successfully revolutionized their legal systems, property

laws, and developed the modern corporation that led to high living standards”

“Japan and China instituted private property laws and business reforms resulting in economic development and growth of the middle classes”

“ Assets in the hands of the poor in Europe, Latin America and Asia are estimated to be about US$9trillion”

“Africa has a large and rapidly growing informal residential property market” however there is very little literature on informal residential market in Africa and SA in particular.

1. Introduction cont. International experience

Latin AmericaRevolution Western

World

Africa?

The demand for an inclusive economic participation by the poor is a global phenomenon

Three developmental states of residential market in the CoJ where the assets exist in many forms:

Stage 1: DEAD CAPITALHousing assets that are only used for shelter

Stage 2: HYBRID (DORMANT/SLEEPING) CAPITALHousing assets that are used for shelter and to supplement income for subsistence. The income derived from rentals is used to support the households and keep them just above the poverty line.

Stage 3: LIVE CAPITALWhen housing assets are used for other purposes beyond shelter and subsistence, such as financing enterprise development. The sources of credit for this come from both formal and informal financial sectors.

1. Introduction Cont.

The City of Johannesburg (CoJ)

Formal residential houses – Soweto

Figure 1: Types of housing settlements in CoJ

The changing face of black residential market in CoJ

Figure 2: Residential flats in the CBD – Hybrid residential market

Mixed use flat, Low income group flat and gentrified flats in Hillbrow

How do the poor respond to the urban environments

Alexandra near Sandton City Johannesburg

Figure 3: Types of housing settlements in CoJ

2.1 Study area: Black residential areas in the City of Johannesburg (Black & Coloured)

2.2 Sources of data a) Secondary: The CoJ Valuation Register Roll

update 2004Stats SA -Censuses, LCS, IES and Poverty Measurement

b) Primary data – 1100 DU from 33 sub-place names 2.3 Analysis

Qualitative and quantitative methods

2. Methods

Figure 4: City of Johannesburg - main place

Figure 5: City of Johannesburg - Settlement types

Source: Stats SA, Census 2011 results 2012

Figure 6: The location of black residential areas in the CoJ relative to the CBD

Different methods for formal and informal property valuation USA -uses the Cost, the Sales Comparison and the Income approaches. The United Kingdom uses Comparative, Investment, Residual Profit and Cost methods Germany according to Schulz (2002) Net Present Value (NPV) and Capitalization method Other approaches especially in mass appraisals of homogeneous settlements are Automated Valuation Models (AVM) that

uses statistical models such as multiple regression analysis or geographical information systems. AVM may not be appropriate for estimation of property values in informal settlements because they are heterogeneous in terms of plot sizes, dwelling unit sizes and construction material used.

The formal market a) NPV is the ratio of benefit to cost, derived by subtracting costs from benefits in money terms. Usually used

for capital investments and less so in real estate investments.

Where: - C0 = Initial investment

• C = Cash flow r = Discounted rate

T = Time

b) Cost capitalization method uses a calculated rate to determine current value of property based on income.

CR = expressed as a ratio or percentage

where CR is cost capitalization rate sale price is the most recent sold price of a property Net income is rental income less expenses

3. Approaches to property markets valuation

c) Owner valuation method for informal property market & poverty estimates The Informal market valuation

Steps in calculating dead capital i) Average CoJ Registrar Roll value (A) = ii) Average owner estimated value (B) =iii) Establish the extend of the difference between average value of property and

average annual income (C) = (A)-(B)iii) Determine % difference (D) = (C)/(A)iv) Absolute value of differences (E)v) Absolute value of differences as a % of mean Register value(F) = (E)/(A)vi) Pearson correlation coefficient vii) Sample size (N) for all settlement types

Dead capital Q = E x the number of DUs NoteCalculate the vale according to settlement type

3. Approaches to property markets valuation cont.

4. The City of Johannesburg in brief Biggest city in SA with 4 434 827people (37.5% of Gauteng)

Area = 1645km2

Most densely populated city in SA at 2696people /Km2 (all) however for blacks the pop. density is 10 329people/km2

Economic hub of South Africa contributing the biggest share of Gauteng’s 36.4% GDP 130 wards of which 82 are mainly black residential areas Occupying 352km2 (20.4%)

of the CoJ’s 1645km2 land mass. Majority of black people resides >20km away from the CBD. Only a small percentage

stay in CBD 1 434 856 households - 1 173 562 in formal residential areas and 249 823 in the

informal residential areas. Blacks and coloured households make up 81.3% (1 166736) & the average household

size is 3.18people No. of DUs in formal backyards (90 587 formal structures & 122 869 Informal )

Black coloured Indian/Asian white Other Total

3 388 208 247 463 216420 544 597 37 696 4 434 827

76.4% 5.58% 4.88% 12.28% 0.85% 100%

Qualitative CoJ a classical apartheid city No transformation in settlement patterns

in the CoJ. Blacks still stay on the periphery of the city

- poorly serviced areas in some parts. Almost every former apartheid era house

in Soweto has been upgraded Mixed social classes coexist in harmony in

black areas as illustrated below.

5. Results

Apartheid era government houses in Mapetla SOWETO

5. Results cont.

Figure 7: Mixed social class housing in Soweto

Apartheid era house not upgraded but with a new perimeter wall

Upper middle class houseLower middle class house

High income group houseEntire street with middle class houses

Legal framework - a mixture of both de juro and de facto Political support for the urban poor is strong Distance from the CBD residential areas are located > 20km form CBD Settlement types- Formal and informal, single sex hostels and in the

formal areas there is mixed social classes in all areas, informal houses in both formal and informal settlements

Characteristics of houses- Same size of stands, same valuation by CoJ regardless of upgrades and backyard structure

Economic activities •Income levels are low•Economic structure dominated by informal sector mainly trading in food staff

and soft goods; property rentals; construction; services, metal works and transport (taxis)

•Transport system Environmental care• SOWETO is surrounded by mine dumps that release a lot of dust to

residential – high prevalence of Asthma and respiratory diseases• Sporadic green parks and public gardens in the formal areas and none in the

informal.

5. Results cont. Qualitative results

Black Coloured Indian/Asian White Other Total0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1107232

59504 57079

202904

8136

1434856

857409

57355 56648

202297

6901

1180610

245395

2149 338607

1235

249724

Total

Formal

Informal

Source: Census 2011

Figure 8: Settlement type by race in City of Johannesburg

Quantitative results 5. Results cont.

Figure 9: Household tenure status for Blacks and coloureds

Rented Owned but not yet paid off

Occupied rent free Owned and fully paid off0

100000

200000

300000

400000

500000

600000

509874

221831

148942

293377

39720

9041

6395942103

549594

230872212901

335480

Tenure status for black households in JMM

BlackColouredTotal

Source: Census 2011 results

5. Quantitative results Table 1: Average valuations by settlement type

Table 2: Summary statistics

Settlement type

Range of the Register Roll Valuation(R’ )

Ave. Register Roll valuation (R’)

Range owner’s valuation (R’)

Ave. owner’s valuation (R’)

Ave. owners rent value p.m. (R)

Ave. No. backyard DUs per stand

Formal houses

80000 to 300000

158 000 150000 to 600000

350 000 2 300 3 @ R300/unit

Flats 80000 to 300000

158 000 110000 to 300000

250 000 2 300 0

RPD houses 0 to 75 000 75 000 75 000 75 000 1 200 2 @ R300/unit

Slum/ Alex 0 to 1 350 000

Data is not consistent therefore cannot be used 25

Informal 0 0 2100 to 12500 6 000 300 2@ R150/unit

Settlement type

No. of DUs (A) (B) (C) (D) (E) = (E1 +E2)

Formal 914 764 158 000 350 000 -192000 -121.5 (E1 )192000

Informal 247 544 0 6 000 -6 000 0 (E2) 6 000

5. Results cont. To estimate the value of dead capital in CoJ the absolute value of the difference (E) is multiplied by the number of households that are not participating in the formal property market. Let (R) be number of informal DUs = 124 675

(S) = 230 872 be the number of formal DUs that are Owned but not yet paid off (meaning they are bonded) and

(T) = 470 433 be the number of formal households not participating in the formal property market less backyard DUs where the No. of formal DUs in the backyard = 90 587

and the no. of informal DUs backyard = 122 869therefore T = 683889- 90 587- 122869 = 470 433

E1 = The absolute value of the difference for the formal houses and

E2 = the absolute value for the informal houses (stands) Then

The total number of DUs that form dead capital are (P) = (R) + (T) = 124 675 + 470 433 = 593 103Where (q1) is the value for the formal housing (q1) = (E1) x (T), which is

= R192 000 x 470 433 = R90.323trillionand (q2) is the value of the informal housing (q2) = (E2) x (R), which is

= R6 000 x 124 675 = R0.748 billionTherefore (Q) The value of dead capital = (q!) + (q2)

= R0.748billion + R90.323trillion

= R91.071trillion

Black residential areas most compacted >10 000people /sq.km High rental stock – rental market vibrant (44.3%) stay in rented DUs There is security of tenure in black areas both de jure and de facto

yet poverty levels remain high Assets held by blacks are undervalued by authorities and the market Participation of blacks in formal property market remain low (20%) Information asymmetry is one of the factors contributing to market

distortion Informal housing -

The property and rental values of the structures are underestimated by owners. Prices covered only construction material thus excluding labour cost, land, services provided.

Alexandra is a slum proximal to one of the most prime areas in the CoJ. With huge potential to be transformed into a high market residential area for blacks provided they do it for themselves.

6. Analysis of Results

7. Challenges in measuring dead capital in the CoJ Gaps in literature Lack of direct measurements of dead capital. The form of SA cities - the legacy of apartheid and

lack of transformation in land use. Complexity of the informal residential sector and

emerging global issues beyond. formalization- inclusivity, consultative, and participation in decision making .

The asymmetry of information. Unavailability of data at small areas’ level. The continuous flux of the informal sector.

Dead capital - storage of value and wealth for the poor in JHB, GP and SA

Poverty in CoJ is much lower than other parts of the country The current economic model remains the main stumbling

block in unlocking potential for HIDs to prosper The Western world system’s failure to fully understand and

recognise the operations of social systems and economic dynamics in the developing world has locked out of the main stream economy the value of assets that are in the hands of the poor. As de Soto (2001) puts it: “extending the benefits of the market economy to those

living in the informal world will require an understanding of the underlying causes of informality in order for nations to adopt comprehensive and inclusive policies”

From dead capital to live Capital Capitalizing the assets and resources that are in the hands of the poor can unshackle the urban poor from the chains of poverty.

8. Conclusion

From dead capital to live capital Formalization of tenure Alternative legal system that combines the African land

tenure system (traditional/customary law) with the Western world property law.

Institutional transformation Social capital developmental approach to poverty

reduction Environmental protection for sustainable development. Developing credit facilities for informal property market

What is the situation in the Free State?

From dead capital to live Capital

8. Conclusion cont.

Mangaung Metropolitan Municipality

Source: N. Chobokoane ISIbalo presentation

Compactness

Source: N. Chobokoane ISIbalo presentation

Density

Source: N. Chobokoane ISIbalo presentation

THANK YOU

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West and Fails Everywhere Else. 1st Ed. New York Books. Pp20-80.2. http://digitalcommons.liberty.edu/gov_fac_pubs/173 Samson, S.A. (2004) HERNANDO DE

SOTO: CITADELS OF DEAD CAPITAL, STUDY GUIDE, 2004. Accessed 08/07/2012. 3. http://digitalcommons.liberty.edu/gov_fac_pubs/173 Samson, S.A. (2004) HERNANDO DE

SOTO: CITADELS OF DEAD CAPITAL, STUDY GUIDE, 2004. Accessed 08/07/2012.

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land tenure in developing countries. World Bank’s 2007 Urban Research Symposium, May 14-16, Washington DC.

7. Statistics South Africa’s several releases: Census 2011, (2012)Measuring poverty in South Africa: Poverty lines for statistical reporting. Technical Report. November, 2008.Income and Expenditure of Households 2010/2011. (6 November, 2012)

Living Conditions of Household in South Africa 2008/2009. (2011)