Could sectionalisation solve the housing market's growing stock shortage?

Despite the country's economic woes and the somewhat lacklustre performance of the housing market, stock shortages are looming in many areas - and not only in those where ongoing semigration has led to a spike in demand.

This is according to Arnold Maritz, Co-Principal of Lew Geffen Sotheby's International realty in Cape Town's Southern Suburbs, who says: "Nationwide, we're seeing growing stock shortages with very few approved new developments to alleviate the problem, and this can largely be attributed to bulk service issues such as sewerage and water infrastructure."

He adds that in Cape Town the situation is exacerbated by the city's geographical positioning between mountain and sea with very little available space left for further development.

"It's for the latter reason that the sectionalisation has become an increasingly common tool employed by developers in the Cape Town in recent years and is now a very viable solution in many parts of the country where new development is curtailed for whatever reason.

"However, what many people don't know is that the option to split their properties into double or even triple dwellings is actually available to most homeowners and not only to developers."

Maritz says that in the past, property owners had to rezone their properties to open a sectional title register or wade through reams of red tape to subdivide the erf. 

These days however you can develop a maximum of three sectional title units without having to rezone the property.  All you need is to obtain building plan approval for which neighbour's consent will only be required if your plans require departures.

"This is because South Africa's approach to densification has changed significantly with the focus no longer being on low density development that ensures lots of space; it's shifted to higher densification to address the growing lack of adequate accommodation in and around metros.

"You can also sectionalise properties in developments if the constitution of the homeowner's association allows for it - or doesn't specifically prevent it."

Specialist Conveyancing Attorney Elana Hopkins of Dykes Van Heerden Incorporated explains further: "It's now possible to construct two to three dwellings on your erf and sell the units off without having to apply for either a subdivision or the rezoning of your property.

She says that the first step is to peruse the title deed of the property and, if necessary, to uplift any conditions relating to the prohibition of more than one dwelling unit.

And, if the property forms part of a Home Owner's Association, to peruse its Constitution and other regulations to confirm that there are no conditions that prohibit either the opening of a Sectional Title Register or that prohibit the construction of more than one dwelling unit on a property that forms part thereof.

"However, although the process is much simpler than it was in the past, it is a little more complex than merely completing a standard Offer to Purchase and then selling off and transferring the units, especially if construction is involved.

"There are certain statutory requirements as well as financing implications that need to be considered and dealt with in these agreements, and for this reason it's always best to appoint a qualified conveyancer assist with the contract and the process.

"Seeing as the Property will be governed by the Sectional Title Schemes Management Act, Conduct and Management Rules will have to be filed with the Community Schemes Ombud Services.

"And, as the Scheme must be administered pending the first Annual General Meeting (AGM) of the Body Corporate taking place, interim measures and Rules will have to be agreed upon in the sales agreement of the first Units to enable the developer to manage the scheme until such time as an AGM has taken place. 

"Furthermore, the agreement that will most probably fall under the Consumer Protection Act and / or the Housing Consumer Protection Measures Act, will have to contain certain obligations and clauses required to comply with such legislation." 

There is, however, a catch for owner developers: "Sectional Plans cannot be drawn before a building is roof height - and these plans are required to open a Sectional Title Register which is required to transfer these units to third party end users. 

"As such, financing is required to enable the Developer to complete the Scheme before transfer can take place.  A normal building bond registered in the name of the third-party end user with progress draws taken against the Units as construction progresses cannot be utilised in this instance.  

"Unfortunately, a real right of extension against which progress payments can be made if developed, cannot be registered as the number of Units is not sufficient. The building bond will therefore have to be over the entire Property and in the name of the owner of the Property as a result. 

Hopkins says that with more and more owners now considering this option, the banks will no doubt soon develop financing products to satisfy this need.

Maritz says that although it may seem like quite a process, a growing number of property owners are considering this option as there are significant financial advantages to be gained.

These include: a considerable cash injection to ease financial burden, creating an additional source of income, considerably reduced maintenance costs and rates and taxes as well as the potential to achieve a higher return on investment when selling.

"On a macro scale, it's also an expedient way to create new housing stock, but as it can't be done on a plot and plan basis, the owner does need a building bond over the whole property, get the plans approved and complete the development to at least roof height before applying for the sectional title scheme and transferring the property to the new owner.

"At the end of the day, sectionalisation offers numerous benefits and can yield excellent returns however, it's not without potentially costly pitfalls, and should never be undertaken without thorough research in consultation with the town planner and relevant property professionals."

Melissa Webb, a partner and conveyancer at Guthrie Colananni Attorneys, had previously explained the difference in ownership and says - "when someone buys a portion of a subdivided property, it's exactly the same as buying any other erf - you acquire the full rights and title of an owner over the subdivided portion which you have bought".

READ: Subdivide vs sectrionalise your big property? The pros and cons

However, when land is sectionalised, the new portion/s remain part of the original erf, with the new section being identified by a number on a sectional title plan. Usually it is the unit numbers in an apartment block or, if one large erf is sectionalised, it could be (a) or (b) of the existing address and erf number, says Webb.

"And although it's possible to also own an exclusive use area, which would be a portion of the common property designated for your sole use, one is generally buying an undivided share in the communal property which is determined by what is known as the 'participation quota'," she says.

Web adds that each form of ownership has its own set of pros and cons, which she lists below:

1. Subdivided property

Pros:

- Normal Common Law Neighbour Laws would be applicable to manage the relationships between neighbours.

- You would be entitled to manage your property as you see fit without being subject to the decisions of an entity like a body corporate or a set of conduct and management rules.

Cons:

- There is no collective responsibility for maintenance of the property, the full cost of which would be for your account.

- To subdivide your property is an expensive and lengthy procedure which requires jumping through many hoops with your local authority.

- You have no say or control over what your neighbour does with the subdivided portion you sold to them.

- You have to obtain all your surrounding neighbours' approval and signature before proceeding with a subdivision.

2. Sectional title ownership

Pros:

- The relationship between each owner of a unit is strictly governed by the Sectional Titles Act 95 of 1986, Sectional Titles Scheme Management Act 8 of 2011, as well as the conduct and management rules enforced by the body corporate.

- The scheme is subject to the oversight of the Community Schemes Ombud Service (CSOS).

- It is relatively inexpensive to establish a sectional title scheme in comparison to formally subdividing your property.

- There is a collective responsibility for the maintenance of the common property of the scheme.

- You do not need to obtain your neighbours' permission in order to sectionalise your property.

Cons:

- Each owner would be required to pay a monthly levy to the body corporate which would go into an administrative fund to be used for things like repairing and maintaining the common property.

- In smaller schemes (say two or three units) the costs involved in some of the more complex procedures (such the accounting records of the body corporate) will be more of a financial burden than it would be if it were spread out across the owners of units in a larger scheme.

- You would need to adhere to the uniform image of the scheme, for example all buildings must be painted blue.

- You need to have an existing building with a roof on each proposed section in order to formally sectionalise and transfer the property into the name of the new owner.https://www.property24.com/articles/could-sectionalisation-solve-the-housing-markets-growing-stock-shortage/31421