How do you get developers to invest in property not just for profit, but for the greater regeneration of the city? The controversial Urban Development Zones is one incentive to encourage investment in underperforming areas of the city. Is it a success story for the CBD, or is it unnecessary? Worse yet, does it displace the marginalised groups who operate in these areas?
At the Cape Town Partnership we are working collaboratively to create a city where residents, visitors, innovators and investors feel welcome and have a sense of belonging. The nature of this work means that we often encounter highly polarised debates.
These debates seldom come in the form of fully-formed arguments, but rather “in little moments of outrage, emotion or other messy responses”, as Partnership board member, Ralph Haman, noted in his recent inaugural lecture as Professor at the University of Cape Town’s Graduate School of Business. It takes leadership that is able to bring people around to address these responses, integrate ideas, reframe challenges and collaboratively determine innovative solutions.
The need for dialogue on existing and potential future packages of solutions became apparent once again when the Cape Town Partnership joined representatives of the City of Cape Town (CoCT) and other municipalities for a workshop with National Treasury on how to advance the benefits of the Urban Development Zone.
The Urban Development Zone is an income tax rebate used to incentivise property development in areas where the market is underperforming relative to the potential (a function of a number of factors, including existing infrastructure). In other words, it is to provide an additional incentive for property owners to invest in their properties in areas where there is existing infrastructure, accessibility and services.
Although regulated at a national level, this incentive has the fiscal sustainability of local governments (the municipality’s ability to generate revenue needed to fulfil its developmental mandate), and local economic development is at its core. The premise is that a tax incentive to encourage investment in urban properties will:
a) increase the values of those properties and thereby increase the rates base of the local authority and
b) stimulate local economic activity both through construction work, and through urban regeneration and the resultant attraction of more people and more economic activity.
USZ criteria, supplied by South African National Treasury
A study conducted by the CoCT showed that less than 7% of development applications between 2004 and 2009 took advantage of the UDZ incentive – regarded as a low take-up. Another study conducted at national level showed that 80% of developers who applied for the UDZ would have developed anyway, but may have invested more in their property as a result of the incentive. This has been used to argue that the UDZ has not created a spatial displacement of investment, but rather that the UDZ compliments sound location and economic principles. This is a positive finding as spatial displacement of investment could result in “white elephants” down the line, as occurs in incentive zones where investment and economic activity are not sustainable after an incentives sunset period. Atlantis is a commonly cited example of this, where once investment incentives were ended, there was capital flight – industry relocated to areas deemed more desirable in terms of proximity to skilled labour and proximity to other economic nodes for value-chain agglomeration.
There is, however, some evidence to suggest that the UDZ distorted the office market in Cape Town CBD, as developers thought the incentive would come to an end by 2013. Some rushed to complete projects even though the market wasn’t ready to absorb the new supply, resulting in above average vacancy rates.
The market will need time to absorb this new stock and regain equilibrium. The State of Cape Town Central City Report shows positive movement in this regard, as well as increasing investment in the development of residential stock: an important move in the market to help create a multi-use central city and reposition the CBD not just as a commercial node, but as a liveable, vibrant, 24-hour historic downtown. In this context, and, given the particular economic criteria set out in legislation to determine the boundaries of UDZs, there was some debate at the workshop about whether or not the incentive is needed in areas where investment and development has gathered momentum since 2004 (when the original demarcations were determined), based on an improved demand to live and work in a well-managed, vibrant urban environment. We are not alone in this, cities like Philadelphia have experienced a similar phenomenon.
The UDZ has now been extended to 31 March 2020. In the extended UDZ, however, there are some changes. Firstly, the geographic area to which this incentive applies has been extended.
The current geographic area to which the UDZ tax incentive applies.
Secondly, additional incentives have been built in to encourage residential development, and in particular, so-called “gap market housing”, defined in this case as a R350 000 apartment, or R300 000 single residential unit.
This is, in part, a response to a comparative lack of take-up of the incentive for affordable housing and relates to another issue that came up at this workshop: that of displacement, or exclusionary gentrification. The question was asked: “Is protecting the rates base of local authorities through this incentive justifiable if the implementation of programmes to attract investment directly or indirectly displace marginalised urban groups, such as informal traders or other forms of emergent, vibrant African residential or economic activity?”
The question speaks to the social value of land, and the social and economic value of forms of emergent activity in African cities, such as the potential for high-density, hyper-localised forms of retail to encourage integration across cultures or nationality. (Have you ever considered the social and economic value of trade across Africa facilitated through informal trade markets? Or the value of a street like Longmarket Street, where a Spitz shoe store can be found directly across from a multi-use hairdresser, photocopy and internet café?)
The debate extends far beyond just the UDZ and speaks to the question of whether gentrification advances or slows down our socio-economic imperatives in South Africa.
The main benefit of gentrification (in its purest form defined as increasing property values) is developmental: rising property values enhancing the rates base of the local government, which can then use this income to deliver on its developmental mandate. Some will argue that it is valid to sweat inner-city land to ensure funds for development of infrastructure and services elsewhere. Others will argue that this will necessarily entrench apartheid spatial design. The debate is ongoing in the context of Cape Town and can be analogous to the recent opinion expressed by TO Molofe. He argues from a moral perspective that we cannot use profits gained in a harmful way to help those harmed, asking : “can we still claim to be moral, or to be acting in the best interests of our shared society, if we help save a child that we pushed into the water in the first place?” (Paraphrased). That is to say, is it morally acceptable to argue that the rates base generated from property value increases can be used to provide for the poor, when the poor were evicted or economically displaced in order to generate that income?
Cities in South Africa are striving to balance the fiscal imperative with imperatives derived from the National Development Plan to ensure inclusivity and broad-based economic opportunity.
In this context, it is important to see the UDZ as but one tool in our collective toolkit that also includes:
Social housing subsidies
Parking, heritage and development guidelines
A range of other tools to attract and support non-traditional, smaller, female or BEE developers
In addition, is the importance of work to stabilize existing tenants. This requires collaboration across private, public and civic sectors as international examples have shown.
Some cities are even doing the reverse of a UDZ – stabilising rates or even reducing them. This move, however, needs to be balanced with fiscal requirements of local government to ensure income to provide infrastructure and services, especially in the context of a developing city like Cape Town.
In order to really understand these trade-offs, or the opportunity for an innovative win-win, “rising tides raise all ships” solution, decision-makers need a cost-benefit assessment of the various forms of revenue generation: understanding the value of income and VAT of various forms of economic activity and how can this be channelled to address local development needs – as well as indirect benefits of reduced dependency on the state when people are enabled to be economically resilient through their own livelihoods, wherever that might lie on the spectrum of informal to formal. The economic argument cannot be answered without vastly improved research on the economic value of the forms of economic activity being displaced by gentrification across cities globally.
Informal and high density retail are the most visible forms of informal emergent economic activity and are often spoken of as separate to formal exchanges, aesthetically undesirable, seen only as competition (versus a potential distribution arm or a part of multiplier effects within the national economy, and its tax base). In order to understand the opportunity costs of displacing these forms, comparative indicators are needed, such as:
the ratio of jobs created per Rand invested[ii]
the ratio of jobs created per square meter of retail/commercial space
the ratio of Rand invested to trading density (turnover/m2) achieved, and resultant indirect and induced trade and tax impacts
These are not simple metrics to evaluate and compare and there is a lack of comprehensive research to draw from. Globally, however, Suzanne Hall at the London School of Economics has conducted a series of studies on some of these, and other impacts on street-level economies.
While gentrification that pushes people away from existing livelihoods is undesirable, so too are pockets of concentrated urban poverty, underutilised infrastructure and declining property assets. The trick is in finding ways to attract investment, without displacing the urban poor. This is the crux of global debates on gentrification surfacing in cities around the world the trend of inner city living returns.
The UDZ is an important incentive from a planning, fiscal and operational point of view, targeting areas that are underperforming (market) relative to their latent development potential (infrastructure). What is clear, however, is that it needs to be combined with other tools to ensure that, come 2020, this is a success story for all of post-apartheid South Africa, not just a success story for the “haves.
[i] If you are a developer interested in using this incentive, you can read more about it.
[ii] Remembering that permanent job creation is a function of exchange in the economy, not a function of supply of space – that is to say, simply building more office or retail space does not create jobs, but rather is a response to growth in those sectors, driven by broader economic factors.
Read these UDZ FAQs, which are very helpful
As the Cape Town Partnership’s Programme Manager, Jodi Allemeier has been working towards delivering on the Partnership’s ambitious mandate through a coherent, collaborative research and project facilitation team. She is also a recovering economist, former social worker and active citizen: participating in the likes of Food Not Bombs Cape Town, Open Streets Cape Town and Re-Imagine Cape Town. Her work has been spotlighted on Future Cape Town’s Assembly Radio Show, Design-Can-Do Cape Town short documentary and in the publications of the Cape Town Partnership.
Find out more about embedding resilience in Cape Town communities through collaboration at @urbanjodi