Time for “sleeping giant” PE to wake up to UDZ rebates

Time for “sleeping giant” PE to wake up to UDZ rebates

Ashwin Daya Chief Financial Officer and acting CEO of the Mandela Bay Development Agency.

Port Elizabeth’s Central area is ripe for the kind of inner city upgrading so visible in Cape Town and Durban.

But, despite the tax incentives available within South Africa’s official Urban Development Zones (UDZ), which include the Friendly City, it’s lagging behind its coastal counterparts when it comes to private sector take-up, says Cor Van Deventer, one of the directors of Greyvensteins Attorneys, a member of the national Phatshoane Henney Group of Associated Firms.

Referring to the government’s UDZ tax incentive scheme, which was introduced in 2003 to address urban decay in city centres throughout SA, van Deventer says the concept has worked well in other countries and is slowly but surely gaining momentum locally, too. However, he says, Port Elizabeth, despite its potential, seems to have lost the impetus evident during the refurbishment of places like Donkin Square a few years back.

“Port Elizabeth has a wealth of old, stagnant buildings that are ideally positioned close to the waterfront and which have remarkable sea views,” he says. “These have huge potential to be redeveloped into commercial entities, low cost housing units or rental accommodation in line with the UDZ tax incentive, which is applicable to new builds and renovations in the designated zones.

“Whether it’s because people don’t know about the UDZ tax rebates or they’re not claiming back possibly because of a fear of the perceived red tape involved, they’re missing out on a golden opportunity to save thousands, if not millions, of rands in tax deductions while being part of the regeneration and economic growth of the city. And if people are holding back because they’re concerned about height restrictions or flyovers negatively affecting the value of buildings, they only have to look at the many thriving buildings and hotels in Cape Town’s central city,” says van Deventer.

The South African Revenue Service (SARS), in its Guide to the Urban Development Zone Tax Incentive, describes the rebate as “essentially an accelerated depreciation allowance designed to reduce taxable incomes and create assessed losses.

“South Africa,” it continues, “has a number of urban areas that are impoverished and suffering from extensive urban decay. In order to address these concerns and maintain existing infrastructure, governments internationally have increasingly used tax measures to support efforts aimed at regenerating these urban areas. In 2003, the Minister of Finance announced a tax incentive (the UDZ incentive) in the form of an accelerated depreciation allowance … to promote investment in designated inner cities…. The allowance, when claimed, reduces the taxable income of a taxpayer. Further, it is not limited to the taxable income of a taxpayer and can create an assessed loss. This deduction was originally only available until 31 March 2014 but has been extended until 31 March 2020.”

In brief, the UDZ rebate allows for approved investors to claim back on building costs, architect fees, pavements and parking, drainage, security and landscaping, according to the SARS Guide. They will not, however, be able to claim back on the cost of buying the land or property, transfer duties and financing costs.

Further to this, new buildings or extensions qualify for a 20% rebate on building costs in the first year of trading, and then 8% of the cost for the next 10 years; improvements to existing buildings that preserve the exteriors and structural framework qualify for a rebate of 20% of the costs in the first year and then 20% of the cost in the four years following the assessment; new low cost housing units that don’t exceed R350 000 to build or where the rental charged does not exceed one percent of the cost, carry with them an incentive of 25% of the cost of building in the first year, 13% of that cost for the next five years and then 10% in year seven; and improvements to existing buildings in low-cost residential units qualify for 25% of the building costs in the first four years.

Van Deventer says the approximately 250ha of designated UDZ land, which extends from the Port Elizabeth Harbour and part of Humerail, through the CBD and Central, to parts of North End and Mount Croix, is already home to some signature residential and commercial developments. With additional upgrading and the planned 2020 relocation of the coal depot on the Humewood waterfront – long a controversial eyesore – he believes the area could become the country’s flagship urban development zone.

“The success of upgrades to date, along with the fact that Port Elizabeth is the only city in SA with two ports, underpins its enormous economic and development potential,” says van Deventer. “Coupled with the large tax incentives available to businesses and private investors who support the government’s housing and inner city regeneration policies, Port Elizabeth is in an enviable position with regard to its potential for inner city rejuvenation, which is vital for its economic growth and development. It’s therefore critical that we find out what the reason for the slow update of the incentive is and address the problem proactively.”

Andrew Whitfield, councillor on the Mayoral Committee for Economic Development and Tourism, agrees that the uptake of the UDZ rebate in Port Elizabeth has been poor, possibly because the incentive hasn’t been structured in a way beneficial to the private sector or because of inadequate marketing.

“We need to reassess just how attractive it is to the private sector and will accordingly be engaging actively with Treasury on this issue. We want to restore the economy of the city by fully capitalising on this opportunity, which we are going to be repackaging and promoting.”

Whitfield says further that the municipality will likely take a ‘carrot and stick’ approach.

“On the ‘carrot’ side, we will promote the benefits and successes to date. There are some catalytic projects that have stimulated interest from the private sector and encouraged businesses to move into the central business district (CBD). We also think it’s important to capitalise on the heritage buildings in the city, which are a huge drawcard for tourists. These include the multi-million rand refurbishment of the iconic King Edward Hotel by the Lion Roars Hotels and Lodges Group.

On the ‘stick’ side, he says, the municipality is in the process of promulgating the Problem Buildings Bylaw, which will allow for punitive measures to be implemented to correct problem buildings in the city.

Ashwin Daya, Chief Financial Officer and acting CEO of the Mandela Bay Development Agency (MBDA), also agrees that the UDZ tax incentives have not drawn private sector investment to the Port Elizabeth CBD as originally envisaged, perhaps because of a lack of greenfield sites available for development within the zone, which lies predominantly in the heart of city and its immediate surrounds.

“Added to this is that existing property owners have not taken advantage of the benefit and refurbished their properties to the extent required. We have also found many people misinterpreting the incentives as relating to renovations made by residents of homes and flats that they occupy as a primary residence. It needs to be pointed out that these tax incentives will only apply where any erection, extension or improvement of buildings have taken place and which are used for the purposes of trade, for example a building being let for commercial or business purposes,” says Daya.

He says the planned Problem Building Bylaw presently being drafted by the NMBM will go a long way towards these UDZ incentives being reviewed once more as a viable tax benefit for property owners to upgrade their buildings given that many buildings in the CBD are dilapidated and lying idle. And, once the Problem Building Bylaw has been implemented, he says the MBDA will implement a new marketing campaign to promote and publicise the UDZ benefits to the investment community.

He says: “The NMBM currently promotes the UDZ incentives through its development entity, the MBDA, and it must be noted that the existing zone, as determined by National Treasury, includes certain areas in the harbour which have not been able to be leveraged due to the manganese ore dumps and oil tank farm not yet being relocated to the Ngqura Port. According to Transnet this is planned to happen by 2020.”

Positive developments under way in the PE UDZ include the redevelopment of the Old Post Office in the CBD by Irish investor Ken Denton, along with a few smaller refurbishments within the zone. Denton has also recently purchased a few buildings from the Times Media Group, and Daya says time will tell whether he redevelops these properties in line with the tremendous potential that they have to transform the CBD into a vibrant hub.

Daya says the MBDA will shortly be awarding a tender for the upgrade of the Vuyisile Mini node, a public infrastructure project intended to catalyse further private sector investment.

“This node falls within the Baakens River Valley precinct which is the next major node and catalytic programme of the MBDA, with many potential projects and developments being envisaged to be taken up by the private sector over the next few years.”

According to Daya, Transnet has approved the development of a waterfront marina in the PE Harbour, which is presently undergoing feasibility studies and conceptual plans. Once implemented, he says this will be the next mega project for Nelson Mandela Bay and the region, one which will enhance and stimulate economic development and GDP growth, as well as promote job creation. It’s a project that he believes will offer opportunities that will involve tourism, leisure and entertainment activities and elements.

While National Treasury has only extended the UDZ benefits to March 2020, with no indication at this stage that any more extensions will be forthcoming, Daya says the MBDA and NMBM, along with Transnet, will lobby together for further extensions, given that the new waterfront marina development has the potential to become a major catalyst for future private sector investment, with the continuation of the UDZ benefits playing a big role in providing tax incentives to investors.

Daya says National Treasury will also be lobbied for a revision of the existing zone boundaries as gazetted to ensure that key future development nodes such as the Baakens River Valley and the Happy Valley (Telkom Park Stadium) precincts are included.

Ian Olivier, area principal of Pam Golding Properties Port Elizabeth, believes the remarketing of the UDZ rebate will refocus attention on the city’s potential – renewing its status as the water sports capital of South Africa and capitalising on its coastal location as a prime tourist and investor destination.

“There are few places anywhere in the world where you can get properties with sea views within walking distance of the sea at the low prices available in Port Elizabeth,” says Olivier, who puts the starting price of a property with all of these attributes at around R400 000.

He believes there are huge opportunities for investors to form syndications to buy units in individual blocks that, properly managed, would be assured of full tenant take-up.

“Well tenanted, well managed blocks offer good returns on investment, which makes them attractive to shareholders and future buyers,” he says, adding that there is also huge scope for well-run backpackers’ establishments.

Critical to the success of any urban upgrade, however, he says, is the eradication of crime, which he feels needs to be community-driven, at least in part.

“Along with metro policing, the community plays an important role in driving criminals out. The risk aspect for investors has to be fair.”