Post-riot township economy is uncertain, but established investors won’t leave easily

Read More

The government has long been trying to push the transformation of South Africa’s townships from dormitories of cheap labour during apartheid to sites of economic activity and job creation in their own right.

July’s unrest, which swept through the country’s two economic hubs of Johannesburg and Durban, threatened to undo whatever progress had been made since 1994. The looting and vandalism, which cost businesses billions of rands, dealt a blow to investor confidence, already impaired by Covid-19’s economic onslaught.

There have been some concerns that private investors would flee the townships in the aftermath of the unrest. 

Others, however, say there are still reasons to invest in South Africa’s townships — and that those who have found a foothold in these potentially lucrative markets have what it takes to stay.

Professor Ivan Turok, holder of the South Africa research chair in city-region economies at the University of the Free State, said the unrest has triggered a mixed response from businesses.

“On the one hand, you have companies who say: ‘We have to rebuild. We have to get back to where we were. These remain important markets’.”

That has been the response of established retailers such as Shoprite, Turok noted. After the riots, Shoprite soothed shareholders’ concerns, despite 1 189 of its outlets having been severely affected. 

South Africa’s biggest retailer by market capitalisation noted that it was adequately insured and that any irrecoverable one-off costs were not expected to be material at a group level. 

Shoprite chief executive Pieter Engelbrecht thanked patrons for helping the retailer to “rebuild our business and serve our communities in KwaZulu-Natal and Gauteng”.

Turok explained: “They [Shoprite] have a business model that works well in the townships, they are fully insured against risks and they haven’t questioned their existence in the townships.

“Some other less significant investors have, I think, become more concerned about instability and mistrust. Where the case for investment was perhaps less compelling, they are raising questions about the state of governance and the heightened risks to private business operations.”

Powder keg

Last month, state-owned insurer the South African Special Risk Insurance Association — which was set up in 1979 in the wake of the growing number of politically-charged riots — reported to parliament that claims relating to July’s devastation would amount to between R20-billion and R25-billion. A survey by the department of trade and industry found that almost a thousand businesses were affected by the riots, threatening up to 10 373 jobs.

Business confidence, according to an index by Rand Merchant Bank and the Bureau for Economic Research, slid back into into negative territory in the third quarter as a result of the unrest. This was after confidence rose to neutral terrain in the previous three months.

The riots came when investment was already constrained as a result of the pandemic-related uncertainty. Though the investment outlook is looking less negative than it did last year, according to the South African Reserve Bank’s monetary policy review, growth in capital expenditure is still projected at -0.3% in 2021 and at 0% in 2022.

Alan Mukoki, the chief executive of the South African Chamber of Commerce and Industry, said: “The one obvious damage is one of confidence. Some investors would not want to go back. Or those who do go back, might want to scale down … If something like that were to happen again, you might lose a lot of money.”

Any investor will try to avoid risk, Mukoki added. 

“They are not turning their backs. They are scared to go back and reinvest and grow because of the lack of stability. We always talk about the four horsemen of VUCA, [which]stands for volatility, uncertainty, complexity and ambiguity.

“No one will invest in an environment that has those four horsemen. Because they are wild. They are untamed. It’s a powder keg … And those things that cause those riots have not been removed.”

Turok agreed that the perception of risk among investors is higher than it was before the riots. Prior to the unrest, he said, there was a strong investment case for South Africa’s townships. 

“It is a large consumer market and a sizable labour force. There are many people living in townships and, although their average incomes are relatively low, it adds up to sizable spending power. There is also considerable potential for various productive activities.”

Investment case

A 2014 World Bank study found that at the time 38% of South Africa’s working age population lived in townships and informal settlements, which were also home to 60% of the country’s unemployed. Between 2000 and 2011, township populations grew by 3.5% a year on average, the study noted.

The dominant form of organised private investment in townships has been retail, Turok explained. “Shopping malls have taken off in a way that has surprised some observers over the last 20 years … Retailers have discovered over that period that townships are an important consumer market. But diversifying the township economy, so that it attracts activity that adds more value locally will be important in the period ahead.”

Jason McCormick’s family were among the first to invest in the rural and former homelands in the 1980s. McCormick is the chief executive of JSE-listed Exemplar REITail, a property company with a portfolio of 23 rural and township retail assets across five provinces in South Africa.

“In the late 1990s, after the new dispensation came in, the townships effectively became investable. Because previously there was too much unrest in the townships,” McCormick said.

Townships were an untapped market, he said. “You had these huge populations with needs and wants, but with no way to satisfy them. They were still having to go from Mamelodi to Pretoria, from Soshanguve to Pretoria, from Atteridgeville to Pretoria and they were spending money outside the townships.”

The riots have changed Exemplar’s investment plans, McCormick said. “It would be crazy for anyone not to take cognisance of what has happened … We’re just looking differently at where we are going to be deploying our capital.”

The group will be looking at other, less volatile, townships as sites for future investment. “But,” he added, “We are certainly not going to be rushing to develop high-rise offices in Sandton, or residential properties in Sandton, or even retail, anywhere other than in the townships. Because that is what we understand.”

McCormick Property Development is forging ahead with its investment in Mamelodi Square, which will count Capitec and Shoprite among its tenants.

There is no doubt July’s unrest will affect the township investment case, McCormick said. “Anyone wanting to deploy between R100-million and R500-million worth of capital needs to be careful about where they deploy that capital. And, in certain areas, interest in investing may wane … I think everyone needs to assume that it [the riots] may happen again.”

But, he said, newer investors will probably be more put off than old hands. “For people like ourselves, who have been at it for a long time and who know the ropes very well, it is not chasing us away.”