Property industry's reaction to Budget 2023

"Home owners and the property industry as a whole welcomes the announcements that tax brackets for transfer-free property transactions is increasing by 10% to R1.1 million. More good news is no rise in income tax or fuel levies.

"Possibly the best news for business and home owners, though, is the massive tax rebate scheme for investment in sustainable energy infrastructure.

"Commercial enterprises being offered a rebate of 125% of the cost of wind, solar, hydropower and biomass projects in the first year - with no limits on how much can be claimed, nor how big the project is - will be a huge incentive to get off the grid and make businesses themselves more sustainable in the long term.

"The 25% rebate being offered to homeowners for investment in solar energy is equally good news."

"With repo rate increases over the past year leaving South Africans bleeding, we needed some relief in the budget to prevent a catastrophe in the private sector.

"But that relief must be weighed against the biggest threat that still looms over the economy, which is a stable power supply."

Geffen says a government bailout of Eskom was inevitable in this year's budget, but given the SEO's entrenched culture of corruption and mismanagement the Treasury cannot be permitted to give R184 billion of taxpayer money directly to Eskom to service debt.

"That money belongs to the people of South Africa, and we have the right to demand that the government acts in a fiscally responsible manner.

"If the Finance Minister wants South Africans to assume R254 billion of Eskom's debt, then the government should be responsible for ensuring that the money is spent responsibly.

"Our economy cannot sustain another 207 days of loadshedding this year. It's make or break time for Eskom and the government needs to hold Eskom and itself accountable to the citizens of South Africa."

Berry Everitt, CEO of the Chas Everitt International property group says there were quite a number of "positives for property" in the Budget speech.

The increase in the transfer duty threshold which means that the first R1,1m of any property purchase price is tax free. This will especially benefit and encourage first-time buyers.

Tax incentives for households to install solar panels and businesses to invest in renewable power generation. Households will for the next year be able to claim a rebate of 25% of whatever they spend on panels, capped at R15 000. We hope a similar rebate will be introduced in future for storage batteries, which are generally the most expensive components of domestic solar power systems.

Businesses will be able to reduce their taxable income by 125% of whatever they invest in renewables, without limit, for two years. This will no doubt assist many businesses large and small to stay open in the face of increased loadshedding and the rising cost of diesel for generators, and therefore help to preserve the employment they provide.

R13bn worth of tax relief for individuals and businesses, including increased tax thresholds for personal income tax and no increases in the general fuel tax or road accident fund levy. The tax free lump sum that retirees can claim has also been increased, to R550 000. This will put more money in the pockets of consumers who are struggling with the increased cost of living and ease the financial pressure on many existing homeowners.

The extension of the diesel subsidy for generator operation to food manufacturers which will hopefully also help to keep food price increases down.

Increased spending on infrastructure and the implementation of many large projects that will not only provide many jobs but improve the living conditions in many towns and cities and make them more attractive to both residential and corporate property investors.

Increased spending on the police service and anti-corruption measures, which will help over time to reduce SAs very high crime rate and the effect that has on consumer confidence and willingness to invest in local property.

The plan to restructure and rationalise the public service, which Treasury estimates will save taxpayers some R27bn over the next three years.

However, he says, there were also some negative aspects of the Budget which will probably limit property demand and prices in the short to medium term.

These include:

Government's decision to take on more than half of Eskom's current debt, at a cost of some R254bn to the SA taxpayer. This is money that could otherwise have been spent on economic expansion and desperately needed job creation. As it is, GDP growth is only expected to reach 0.9% this year and average 1,4% over the next three years. 

The projected increase in government total debt from around R4,7trillion to around R5,8trillion over the next three years. This makes SA more vulnerable to external and internal economic shocks and thus less attractive to investors. 

Gerhard Kotzé, MD of the RealNet national estate agency group, says there are several aspects of the Budget that will be beneficial to homebuyers and homeowners in SA, and will help to increase property demand and values going forward. 

The first of these is the news that tax revenue collected in the past year was R93bn higher than expected.

"This enabled government to budget for R13bn worth of tax relief for individuals and businesses, including:

1. an increase in the transfer duty threshold to R1,1m, which will especially benefit first-time buyers;

2. an increase in the personal income tax threshold to R95 750, which will save consumers some money; and

3. a hold on any increase in the general fuel levy or the road accident fund levy, which will help keep transport costs down, and help more existing homeowners to make ends meet."

A second positive element of the Budget for homeowners is the offer of a one-year tax rebate of 25% of any expenditure on solar panels, even though this is capped at R15 000. 

"Even more exciting, though, is the two-year incentive on the table for small businesses to invest in renewable/ alternative energy generation. They can reduce their taxable income by 125% of whatever they spend to generate their own power in this way, and there is no limit at this stage What is more, government is providing guarantees on Bounce Back loans that will make it easier to obtain bank finance for their installations. 

"We this will lead to the creation of significant extra capacity by businesses, which could then all be fed back into the national grid to help relieve the current shortfall of 4000 to 6000MW and end loadshedding."

Thirdly, says Kotzé, the massive allocations for expenditure on other infrastructure such as roads, harbours, dams, bridges and water supply systems will not only be a huge driver of job creation and home buying capacity, but will also help to improve the quality of life in many areas, promote the development of new housing stock and make them attractive to homebuyers. 

"In tandem with this, we welcome the increased allocations to the entities fighting crime and corruption in SA. There is a direct correlation between a positive perception of the country and a positive property market. And that perception depends on consumer and business confidence in personal safety and good governance as well as the prospects for economic growth."

High Street Auctions Director Greg Dart says history is likely to remember the Budget Speech as the South African economy's biggest "good news, terrible news" event of the year.

"Starting with the good, Finance Minister Enoch Godongwana's announcement of radical tax incentives for businesses investing in sustainable energy infrastructure is very likely going to be the lifeline needed by numerous sectors that are at the brink of collapse.

"Businesses being able to deduct 125% of the cost of wind, solar, hydropower and biomass projects in the first year - with no limits on how much can be claimed, nor how big the project is - will incentivise the private sector to reprioritise its short-term capital expenditure.

"The positives for the private sector are two-pronged; easing trade and industry's risk exposure from the crippling effects of loadshedding, and being able to claim back in tax 25% more than the infrastructure spend itself, which will provide much needed relief to business budgets.

"And although the household tax rebate for investment in solar panels over the next year is smaller at 25%, every bit helps."

Dart says other very welcome positives for consumers include no personal income tax hike, the annual tax-free threshold for workers increasing to R95 750 and the tax brackets for transfer-free property transactions increasing by 10% to R1.1 million.

"That said, we can't ignore the 'terrible news' part of the budget, which could set our economy as a whole on a devastating path.

"As distasteful as an Eskom bailout might be to South Africans given the history of blatant maladministration and corruption that got us to the point of 207 days of loadshedding last year, it is a necessary evil.

"Godongwana's R254 billion government bailout for the failing SOE would be acceptable - if it wasn't planning to hand Eskom R184 billion over the next three years to 'settle loans'.

"To call this 'alarming' would be the understatement of the decade. That R254 billion belongs to the people of South Africa, and the responsibility for ensuring that the funds go where they're intended should remain with the Treasury.

"Handing R184 billion directly to Eskom is tantamount to paying the fox to keep the henhouse safe."

Dart has urged the Finance Minister to rethink the bailout.

"The government's total debt has now reached almost R5 trillion - while it earns less than R1.7 trillion in tax a year. The cost of paying off its debt is now the budget's fastest-growing line item, with a debt service spend of more than R360 billion a year.

"The Treasury needs to make every cent count. Giving R184 billion directly to Eskom is throwing good money after bad."

Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers, says the markets received Budget 2023 positively, evident in a near-20 basis point (bp) rally in the benchmark 10-year yield and the 20c rally in the rand versus the dollar. 

While these are not exceptionally large moves, they do signal a positive stance or at least relief that the government has not changed tack on its fiscal strategy.

Finance Minister Godongwana tabled the FY23/24 Budget in parliament amid heightened uncertainty about the fiscal trajectory, Eskom's sustainability, and the pending Financial Action Task Force (FATF) Grey-listing.

Importantly, the direction laid out in the 2022 Medium Term Budget Policy Statement (MTBPS) in October last year was one of ongoing consolidation with a return to a primary budget surplus (i.e. revenue less non-interest expenditure). This budget follows through, with the consolidated budget deficit narrowing from an estimated 4.2% of GDP in FY23 to 3.2% in FY26. Encouragingly, the government is set to deliver a primary surplus (of 0.1%/GDP) a year earlier (in FY23). A return to primary surpluses will contribute towards stabilising the debt ratio the medium term.

The Eskom enigma

The big unknown was how government would credibly deal with Eskom's debt. Market participants were disappointed in October when the Treasury gave a vague range for the quantum that it was willing to take on. This time around there was more detail in terms of the quantum and timeline.

From FY24 to FY26 government will support Eskom to the total of R254bn. This entails an interest-free subordinated loan of R78bn in FY24, R66bn on FY25 and R40bn in FY26, as well as a debt swap of R70bn. This will be funded by borrowing, with R66bn already incorporated in the Medium Term Expenditure Framework in the MTBPS. The fact that the debt swap only occurs in FY26 suggests that the process has been intricate and complicated and that the technicalities of explicitly replacing Eskom debt with government debt are yet to be finalised. As such, the option of continuing with effective cash injections is a sound decision, as it is relatively simple and transparent.

While much of the detail will be made available by the end of March 2023, the government has effectively taken the Eskom cash injections out of the income and expenditure statement and moved it to the balance sheet. Government has an asset - the loan to Eskom - that will be replaced over time by a different asset - equity stake in Eskom. While Eskom has a liability to government, it will be repaid in shares rather than cash.

Lower deficits but higher debt

This flatters with deficit metrics, which are marginally better than what was projected in October, but it lifts the debt profiled by 3.6 percentage points (ppt) by FY26. Hence, the Eskom support will require that government borrows more than what was estimated before. The fact that the bond market has not weakened due to a higher debt trajectory is a function of the funding strategy that seems to rely more heavily on cash, Treasury bills, and floating rate notes. Based on our estimates there is no need to increase issuance in fixed-rate or inflation-linked bonds in 2023.

This does not mean there are no risks. The Special Relief of Distress grant is set to end in March 2024, with no indication of what will replace it. However, the budget includes an unallocated reserve that could cover a narrow income support grant, such as a job-seekers grant. The wage bill has again made media headlines. While there is notable upside risk to this expenditure line item, this will only come to the fore when wage negotiations are concluded later this year. 

Credit rating likely to remain steady

We think this budget will hold the line on stabilising the sovereign credit rating outlook, and is a net positive against a global backdrop where fiscal strain is in focus in other emerging markets. As long as SA policy remains relatively conservative and transparent, we should be able to attract our fair share of portfolio inflows.

From a monetary policy perspective, we think the budget is broadly neutral. Fiscal risks have been less of a constraint on the South African Reserve Bank (SARB) over the past three years in light of the positive terms of trade benefit and improvement in revenue collection by the South African Revenue Service. Rather than local factors, the SARB remains a price taker on the policy stance given the Federal Reserve's signal that further rate hikes may be required. To be sure, the markets have vacillated between calling the end of the hikes in January to now expecting ongoing policy tightening.

Notwithstanding positive aspects in this budget and seemingly a more sustainable fiscal path, we should be cognisant when looking at the aggregate picture that the Treasury team delivered a positive budget with some creative accounting.