Wescape: privatising the profits and socialising the risks?

The City of Cape Town recently approved an application to move the approved urban edge to accommodate a 200,000-home residential and commercial development called “Wescape”.  The application, and the City’s approval, has generated enormous debate and numerous parties have opposed the proposal on various planning and economic-related grounds.

Notwithstanding these objections, the question that needs to be asked is who bears the risk if the project is a failure? Research by the International Property Databank shows that very few developments achieve the required rates of return that are predicted in feasibility studies. This is usually due to the difficulty of predicting future conditions and market take-up rates. Developments are therefore by definition risky and a level of risk-taking is required to get anything off the ground. However, what level of risk is acceptable and who carries the downside risk are critical questions that need to be answered.

Large developments like Wescape are highly prone to failure because firstly, they require large upfront costs [especially infrastructure] and secondly, there are long lead times involved that result in a high degree of uncertainty relating to key variables (costs, prices, state of the market etc.). Therefore, even experienced developers can easily fail. Examples of such failures include Canal Walk, Melrose Arch and the London Docklands where the first developer failed before the second developer/investor was successful. The second developer/investor in a scheme is usually successful because a lot of the delivery risk has been taken out of the equation and market conditions are better known at the time of the second purchase. This allows the second developer/investor to more accurately price the risk of the project and to pay a commensurate amount for the property.

If Wescape type projects have a high propensity to fail, who is left carrying the cost if Wescape fails? What happens if the proposed outcomes of the Wescape development do not materialise?  What happens if the market does not respond to the development after the City has committed significant upfront capital costs to infrastructure provision that it can’t recoup through development charges?  Who carries these holding costs?  What other city expenditure is compromised as a result? What happens if the development fails when it is partially built and the proposed jobs and services don’t materialise?

An initial reading of the landscape suggests that the costs of failure will be borne by the City [and its ratepayers] and people on the housing backlog forced to accept a subsidised house in a remotely situated, dormitory town.  Considering the state of the market and the remote location of the development, the chances of a “second” developer/investor stepping in to take over the failed development appear slim. To borrow from David Harvey’s Enigma of Capital, is this not a case of privatising the profits and socialising the risks?

 

Rob McGaffin is a town planner and land economist. He has worked as a town planner with the City of Cape Town and the Gauteng Department of Economic Development and has worked in property finance at several financial institutions. He currently lectures in the Department of Construction Economics and Mangement at the University of Cape Town [UCT] and is a Mistra Urban Futures Researcher with the African Centre for Cities.  Mistra Urban Futures is a global research and knowledge center in sustainable urban development, funded by the Swedish International Development Agency (SIDA) and the Mistra Foundation for Strategic Development.

 

Read older posts from this section

Leave a Reply