To change patterns of property ownership, urgent reforms are required in the financial services sector, particularly in the form of lending policy reforms.
Black people, black developers, and black-owned property businesses continue to be discriminated against and systematically undermined by disproportionate application of lending rules that seek to marginalize, instead of deliberately promoting and enabling participation in the property sector.
One of the results of these skewed lending practices is higher interest rates applied to black people many of whom are first-time homeowners or purchasers of “low-cost housing” and stricter pricing methods for black-owned property developers, and black-owned enterprises or commercial owners.
In addition, townships, historically “black” areas, and traditional Central Business Districts are receiving limited investments or developments/redevelopment due to the perceived “risk profile” of those locations. The credit assessment systems used by banks and lenders, to this day, perceive townships as hollow-wastelands devoid of economic potential and are therefore reluctant to fund large commercial developments in these areas. There has been increased interest by the Gauteng Partnership Fund and Trust for Urban Housing Finance (which currently has a funding product earmarked for the Township backroom rental market).
The low and declining number of black commercial property owners and developers is also a testament to the unsuitable lending policies. Members of SAIBPP have on many occasions raised the issues of requirements for higher capital, equity, and experience requirements, above those required of similar but more established white counterparts despite their historical advantage of multi-generational capital accumulation.
Property as a direct property investment sector is also not completely understood amongst the wider Financial Services sector, which includes e.g Development Finance Institutions (DFIs), Pension funds via Asset Managers and general Private Equity. Black developers also face the challenge fo accessing funding for the pre-feasibility funding stages.
INHIBITORS TO FINANCIAL ACCESS
- Access to Credit: Traditional lending practices result in the marginalisation of black people and do not promote black participation. Lending institutions impose higher interest rates on black people.
- Asset-based secured lending is unsuitable for the majority of black South Africans and particularly black property investors and developers due to the prohibitively high-security requirements.
- Access to development finance: Development finance institutions in South Africa do not focus on property investment and in most cases do not fund property development.
- Township property development is generally perceived as higher risk thereby developments in these areas attract requirements for higher capital requirements, equity, experience.
- Oligopolistic nature of the financial services sector resulting in a lack of real competition in the financial services sector.
WHAT MUST BE DONE
- Urgent reform is required in the commercial banking sector with regard to lending practices and credit risk assessment methodologies
- Lending rates (credit pricing) for first-time buyers /new entrants into the property market must be capped. Administrative costs must also be scrapped and legal costs to be waived partially or in full to enable access.
- The mandate of existing DFIs (e.g. IDC, Land Bank, BIP etc.) to be broadened to include and also prioritise commercial property developments and acquisition of land for commercial developments, including seed funding for other pre-feasibility costs where applicable.
- Set requirements must exist for commercial banks to undertake community reinvestment and/or lending activities in previously “black” areas. Such community reinvestment must be mandatory and monitored by an independent body.
- An independent measurement authority must be established to regularly evaluate and monitor the implementation of the above and issue penalties against non-compliance. The Prudential Authority – South African Reserve Bank can play this role as well.
- A tailored broadened mandate for instruments for the equity requirements in property investments.
- There must be transparency in credit granting and legislative interventions that compel credit grantors to publicly report on lending practices by demographics.