South Africa’s hidden R25 billion a year rental property market

Foreign-owned spaza shops contribute R25 billion a year to the local economy through the rent they pay to South African landlords. 

However, there are significant problems with this practice, with many of the foreigners ‘fronting’ – an illegal practice where a South African registers a business on behalf of an undocumented foreigner. 

This is feedback from senior analyst at Trade Intelligence Tshego Modise, who, in collaboration with Yebo Fresh, conducted a study of the impact of increased regulatory scrutiny on the informal economy. 

The informal economy, particularly spaza shops and retail traders, is being increasingly regulated by the government following a series of high-profile food safety incidents across the country. 

Increased regulation of the overlooked sector aims to improve public health and safety while also formalising the informal economy. 

The informal economy is highly lucrative, with experts estimating its value at around R750 billion and the spaza shop sector alone worth R180 billion. 

It is also vital to absorb the millions of South Africans who are not formally employed while supplementing the income of low-wage workers. 

According to FinScope consumer data, the average personal monthly income in the informal sector was R4,199, higher than the national average (R3,864) and minimum wage (R3,710).

The sector has long been viewed as needing much more stringent regulation, not only for safety reasons but also to open it up to formal businesses and aid tax collection. 

This has become particularly pressing given its strong growth compared to the formal economy, which has averaged an annual growth rate of 1% for the past decade. 

The strong growth of the informal economy has also attracted the attention of JSE-listed companies, such as Shoprite and Tiger Brands. 

Shoprite has rapidly expanded its Usave offering in townships and around informal settlements, a key driver of its growth. 

Last year, South Africa’s largest food producer, Tiger Brands, announced plans to have its range of products available in around 150,000 stores within the next five years.

However, for other formal businesses to invest heavily in this growing market and expand in it, further regulation is needed to level the playing field and ensure the health and safety of consumers. 

The need to tackle illegal immigration is another driving force behind the push to regulate the informal economy in South Africa.  

Many of the small-scale retailers operating spaza shops in South Africa are immigrants from other parts of Africa, such as Somalia and Ethiopia, and from other parts of the world. 

Modise explained that regulating this would prove difficult as foreign spaza shop owners are deeply embedded in the sector and contribute meaningfully to local economies. 

There are also concerns that foreign shop owners are being particularly targeted, and the government’s stated plans to increase regulation is merely a guise for targeting immigrants. 

These traders have outcompeted local shop owners through lower prices, efficient supply chains, and extended hours. Removing them does not guarantee that South African entrepreneurs will fill the gap, Modise said. 

Structural challenges like limited access to bulk-buying discounts, financial support, and crime risks persist. 

Additionally, foreign-owned spaza shops contribute an estimated R25 billion annually in rent, benefiting South African landlords.

This does not mean that increased regulation of foreign-owned spaza shops is not needed, with some employing illegal tactics. 

In particular, the tactic of ‘fronting’ is used whereby a South African registers a business on behalf of an undocumented foreigner and undocumented immigrants.

Sometimes, this is a mutually beneficial transaction, but the South African is often a victim of extortion. 

By requiring spaza shop owners to comply with laws such as the Immigration Act of 2002, the government seeks to create a safer business environment that benefits local communities. 

Foreign nationals operating spaza shops must possess valid documentation, such as a business visa, asylum permit, or permanent residency, and fronting is criminalised.

Registration requirements include certified copies of the owner’s ID, proof of residence and a business name reservation certificate.

However, the demand for title deeds as proof of business location excludes many shop owners, particularly foreign nationals. 

This has led to local citizens registering businesses on behalf of foreigners, fostering corruption. 

Transferring or using a title deed improperly may create disputes over property ownership. In some cases, the foreign trader might falsely claim ownership, leading to lengthy legal battles.