PROPERTY: Banks Erode Their Own Asset Base
Recent Western Cape Business News
With current bank lending extremely low, property investors are becoming increasingly concerned that the SA Banks are suffocating the commercial property market.
This is according to Tony Bales of Cape Town-based Bales Investprop, operators in the transactional side of the SA commercial property market.
“There are currently many buyers and sellers in the market, but for the first time ever, the old adage of value being the price a willing buyer is prepared to pay is being severely tested as many transactions are reliant on bank funding, which appears to have dried up significantly,” says Bales. “At the end of the day, value is the price at which a successful sale will be transferred and registered. Hence, true value in 2009 is the price property transactions achieve where there are willing buyers, willing sellers and willing and able financiers!”
Bales states that bank lending margins have increased, lending criteria have become extremely stringent and initiation fees have rocketed. “Certain banks have reduced their terms considerably. Yes, the global banking market is in trouble, and yes, SA banks did need to pull back from the excessive levels of a few years back, but have they not gone too far?”
In general, lending to the commercial property market in SA has been far more robust than internationally. The SA listed property sector has very low levels of debt compared to their international counterparts. Locally the majority of debt is well secured through mortgages as well as suretyships. Internationally most debt is non-recourse, which has been one of their downfalls as the moment property values drop significantly, borrowers simply “give back” the properties to the lenders. This is generally not possible in SA due to “tie-in” mechanisms such as suretyships.
“What is happening at the moment is that sellers are realizing that they can only sell to buyers who have large cash resources. Buyers also know this and push for and negotiate transactions at lower prices (higher capitalization rates). Property values are hence being put under pressure,” explains Bales. “This becomes a bit of a catch 22 situation as once property values are under pressure, the lenders get more conservative and impose even more stringent lending criteria, cash flush buyers realise that there are few other buyers and negotiate prices down even further. The result being that the value of the entire market gets eroded. This comes about, not because there are no purchasers, but because there is little (or no) bank funding.”
“While most construction companies are currently fairly busy – mainly with infrastructure projects, they have also voiced concern over their lack of projects in the pipeline. Many of these projects will be completed in 2010. Construction is a very labour intensive industry and with projects drying up, this will have a huge effect on increasing unemployment and all the related industries it supports. Much of the construction pipeline comes from property developers.”
According to Bales, property developers appear to be very badly affected. “Not only do developers need development finance, but they also generally rely on end-user finance. Both these forms of finance are the most difficult to secure at present. The result is that developers are shelving projects and in certain cases selling assets – into a market where banks are reluctant to finance!”
“This lack of bank funding in fact is broader than just lending on property sales. Banks are also limiting lending to businesses. This is having a huge effect on tenants and owner occupiers. Where previously companies were able to secure bank overdrafts, they are now also finding it very difficult to renew existing facilities or secure new facilities. The result is that companies are paying rentals later and later and in many cases, starting to fail. Recent statistics suggest the liquidations of companies (as opposed to CC’s) have started to rise significantly. This is not a good sign for the property market as these are generally the larger companies, and hence the larger tenants.”
“In a recent study conducted by Bales Investprop where the leading listed property company CEO’s were asked what their biggest challenges were during the next year, they were unanimous that lack of funding and liquidity was their biggest challenge,” says Bales. “It has also become known that the longest time spent at annual/ interim results presentations is explaining the planning and concern for the lack of bank funding. This challenge relates to rising tenant debt/ default and the holding back the growth of their existing portfolio’s.”
As can be seen, the current lack of bank funding into commercial property is having a large dampening effect on SA property. “Hopefully bankers understand the effect they have on the development, construction and investment sectors of the SA economy. As much of the SA commercial property market has bank loans, we only hope the banks themselves are not eroding their own (and everyone else’s) asset/ security base by their current lack of commercial property funding?” concludes Bales.
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