Water and Real Estate – Making the Connection

Water and Real Estate – Making the Connection

For decades, residential real estate developers and managers have worked within a given set of relationships between themselves, the municipality as service provider, the state as regulator and the investors whose primary interests they serve. That set of relationships has been based on a robust set of assumptions, so the decision-making process has become routine and institutionalised. But what happens if the core assumptions change?

Let us examine some of those core assumptions to understand the implications of any change that might happen. Arguably the absolute foundation of any real estate development is the assumption that the municipality will provide five basic services – roads, electricity, water, sanitation and refuse removal. This means a routine decision-making process each time a new development is launched, much like a checklist.

This changed when Eskom crashed and suddenly the assumption of assurance of supply (AoS) – the guarantee of a given quantum of energy delivered to a given entity at a given time and at a given price – was found to be flawed. After initial anger, then turmoil, adaptive responses came in the form of standby generator sets. So it is the AoS assumption that is critical to the raft of municipally delivered services that enables development to occur in the first place.

Now let us apply the AoS assumption to water. Here there are two major elements to be disaggregated – potable water and waste water. AoS for potable water is the guarantee of a given volume at a given pressure and a given quality at a known price at a specific time and place. We know that certain elements of this are no longer happening.

For example, the homeowners’ association (HOA) of an estate located in Madibeng, a municipality known to be dysfunctional, pays the monthly water bill, but this does not get passed on to Rand Water, so the water pressure gets cut. Nothing the HOA can do will change this, because the bottleneck is the dysfunctional municipality.

 

Water and Real Estate – Making the Connection

 

Another example is the excessive chlorination levels in water from a municipality. The reason for this is the overloading of a bulk water plant that was never designed to convert sewage effluent into potable water. This bulk water plant cannot meet the legal specification for biological parameters, so those running the plant compensate by over-chlorinating. While this kills the bacteria, it also creates a new health risk in the form of elevated levels of trihalomethane, a carcinogenic by-product of the decay of chlorine. In short, the attempt to manage one risk creates a new set of risks in an increasingly complex domino effect.

Yet another example is the management of sewage. A residential golf estate processes its own sewage, but is also under pressure to source alternative water for irrigating its fairways and greens. Next-generation technology now enables a sophisticated plant to be installed that recovers all of the water from the sewage stream to be used safely as irrigation water. Advancements in disruptive technology include financing, so that this solution can be financed as operational expenditure rather than capital expenditure. This has major benefits for a residential estate, where the words ‘special levy’ typically trigger anger and consternation. In short, the AoS aspects that used to underpin the entire relationship between the developer, the municipality and the investor have changed.

This has left a vacuum in which HOAs are increasingly expected to replicate the core services traditionally supplied by municipalities, but are unable to do so because there are no new rules of the game. The predictability of the past, when decision-making processes were procedural and routine, has become unpredictability, in which uncertainty prevails and anger mounts.

Then, on top of it all comes a thing called the King IV Report on Corporate Governance, which raises the issue of the fiduciary responsibilities of directors, trustees and managing agents. Central to these are ethics, responsibility and risk. What this means is that anyone holding fiduciary responsibility, even as an unpaid trustee or director, has to make sense of this growing complexity under the persistent shadow of the threat of liability in terms of King IV for failing to act responsibly when acting on behalf of others.

Heavy stuff indeed! So where is the good news? This comes in the form of a structured intervention in which a team of professionals helps the HOA and board to change from an initial high-risk, low-information posture to a future lowrisk, high-information posture. This is done in a three-stage process designed to develop a 20-year plan, underpinned by a robust set of verifiable facts and driven by a coherent strategy that enables long-term budgeting and forecasting to be done.

This process is being rolled out in conjunction with the Association of Residential Communities to all chapters across the country. It is also being made available to other specialised interest groups that have to manage real estate in one form or another, increasingly embedded in a new regulatory and institutional landscape that is changing so fast that it has not yet been formalised in policy and law.

The good news about this process is that while it de-risks the HOA and those holding fiduciary responsibilities defined by King IV, it also protects the investment value of the real estate. Conducted systematically, it also claws back control over water quality, which is increasingly at risk from dysfunctional municipalities.


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