Mailbox: Land ownership not a prerequisite to build a good business

Professional property valuer Peter Meakin argues lessees of land don’t need to own land to build a successful business. In fact, he argues, the defining advantage to tenants is that long leases grant the same opportunities as ownership but with nil capital costs or mortgage obligations. Lessees can then deploy more capital in their businesses.

By Peter Meakin

Mr Terence Corrigan, the IRR’s project manager, is a disappointing land economist. In “A glimmer of good news on land?” he tells how Mr David Rakgase leased Nooitgedacht farm in Limpopo in 1991, and offered to buy it after 11 years in building up a “successful farming operation”.

Mr Corrigan erred in claiming that “ownership would have given him greater opportunity to use the farm as he saw fit, and leverage it to raise capital”. He is wrong because Mr Rakgase says he built up a good business without owning the land!  Many firms in the Victoria and Alfred Waterfront, everyone in Hong Kong and most Singaporeans are in the same position. The latter two pay more land rents than taxes. The defining advantage to tenants is that long leases grant the same opportunities as ownership but with nil capital costs or mortgage obligations. Lessees can then deploy more capital in their businesses.

One of the most successful leasehold projects was Queen Victoria’s 1820 perpetual quitrent tenures (PQT) in the Cape Colony.  The “free land” attracted settlers from across the oceans and from South Africans. Ex-President Mbeki’s Xhosa clan was a PQT beneficiary.

These rents gave secure tenures and were the mainstay of the colony’s finances until the 1914 Income Tax Acts. That is when Jan Smuts, Minister of Finance, started expropriating without compensation, the “hard-earned” fruits of citizens wages, salaries, interest, profits, dividends, capital gains and consumption. And from then on South Africa’s “unearned” PQT land rents were gifted to the owners.

Surely Mr Corrigan recognises this duplicity?  For land rents arise not from any investment or work by the owner but from nature’s endowments as well as state spending on infrastructure and services. Land had no market value when [Jan] van Riebeeck landed but unimproved land now sells for ±16 years of rent paid in advance.

A handful of Nobel laureates ridiculed this land-price subsidy in an open letter to President [Mikhail] Gorbachev in the same year that Mr Rakgase took occupation of Nooitgedacht:

“A balance should be kept between allowing the occupiers of property to retain value derived from their own efforts to maintain and improve property, and securing for public use the naturally inherent and socially created value of land, the rent. Users of land should not be allowed to acquire rights of indefinite duration, in perpetuity, for single payments.  For efficiency, for adequate revenue and for justice, every user of land should be required to make an annual payment to the state, equal to the current rental value of the land that he or she prevents others from using.” – Now the Synthesis: Capitalism, Socialism and the New Social Contract. Richard Noyes, Editor Centre for Incentive Taxation, London

The obvious reason why Mr Rakgase wanted to buy the farm had little to do with realising more opportunities or to raise capital but to take advantage of the unearned profits with which the state inequitably endows freeholders. That is not to raise capital but to be given some. For the price paid for land is redeemed in the first sixteen years of ownership. Thereafter, apart from rates and taxes, land is held without payment for any of nature’s benefits or paying for state governance.

This subsidy can only be enjoyed by landowners in spite of the fact that sec 25 of the Constitution insists that “the state must take reasonable legislative and other measures, within its available resources, to foster conditions which enable (all) citizens to gain access to land on an equitable basis.” The most reasonable and equitable measure which will make land affordable, and so accessible, is to reverse the 1914 expropriations of work, investments and shopping by income taxes and vat and rescue the PQT statutes from Parliament’s library.

Further in Sec 228 (2) of the Constitution the power of a provincial (and ipso facto national) legislature to impose “taxes, levies, duties and surcharges (a) may not be exercised in a way that materially and unreasonably prejudices national economic policies.”

Mr Corrigan appears ignorant of this because with income taxes and VAT at 28% of GDP (and a GDP : Tax ratio of 1:1) things which could be bought for R100 before tax cost R128 after tax. With 2019 taxes at R1.1trn and 18 million households this increases the average cost of living by R60k pa. When the R1.1trn in personal taxes is replaced by land rents the average cost of living will fall as will the price of the 27m hectares of unused arable land which Frost and Sullivan counted in 2017.

So roll on the expropriation of unearned land rents where compensation is in ending the punishment which the state now inflicts for working, investing and shopping.

This will let Mr Rakgase enjoy his family’s perpetual tenure of Nooitgedacht in a South African tax haven. And allow Mr Corrigan to farm without having to read much about it.