The transformation of the property sector has always been SAIBPP’s mission since our inception 20 years ago. Over the years, we have called on banks to help fund projects of black property practitioners in order to achieve meaningful and sustainable transformation. Robin Lockhart-Ross, Managing Executive: Nedbank Commercial Property Finance, explains what needs to be done to overcome the funding challenge and what Nedbank is doing to change the face of the industry.

SAIBPP: There is a common perception that commercial banks are not funding black developers adequately. New players are compelled to go to other developoment finance institutions to get funding. How does Nedbank help emerging property developers?

Robin Lockhart-Ross (RLR): The blunt reality is that the barriers to entry for any first-time developer moving into the commercial property market are high. Being a source of relatively sustainable and predictable cashflows and a store of relatively secure and marketable value, commercial property is in principle a particularly appropriate asset class to raise gearing. But in practice capacity to raise conventional bank funding will usually be dependent on the prospective developer’s ability to contribute capital and to demonstrate expertise, neither of which attributes one accumulates overnight. New players in the commercial property sector do emerge, but nearly all new commercial property players need to start somewhere and that is usually with a small loan for a modest building acquisition or development.

The new entrant then generally grows his/her borrowings by pledging the equity built up in the first property for a further loan to acquire the second property. It takes some time for equity to build up in the first property before the borrower is in a position to raise a second loan, so young self-made commercial property developers and owners are rare.

Every financial institution has its own risk profile. Development finance institutions (DFIs), including microfinance institutions, community development financial institutions and revolving loan funds, play a crucial role in providing credit in the form of higher risk loans, equity positions and risk guarantee instruments to the private sector in most developing countries.

DFIs are typically backed by the government or states with developed economies. A commercial bank like Nedbank relies on its funding from client deposits and borrowings from the market. Because both these sources of funding must be safeguarded by not engaging in high-risk lending, Nedbank cannot adopt as high a risk profile as a DFI.

SAIBPP: Given the poor state of the South African economy, where, as Nedbank, do you see opportunities for small property developers for them to succeed?

RLR: There are always property development opportunities where there are concentrations of people and pockets of economic activity. When the economy is at a low point in the growth cycle, the larger opportunities are not apparent but the smaller, niche opportunities are always there, even though it may take more time and effort to identify these opportunities. We see opportunity for small property developers in the housing arena since the market demand for affordable housing is high. The small property developer may not be able to undertake a multi-unit housing development, but he/ she should be able to build or acquire a small dwelling of sorts to rent out and build equity for the next opportunity. There are also opportunities in small-scale student housing, preferably with a transport offering; in stand-alone retail properties with a food, clothing and service offerings in historically underserviced areas, and in consumer service-related properties situated close to economic hubs.

SAIBPP: What should they look out for to avoid failure?

RLR: In commercial property, the biggest threat is an economic downturn. When a downturn occurs, the risk escalates that some tenants in the property-owner’s building will vacate the building, either closing down their operations or opting to cut costs by trading from premises where the rental is lower. In a downturn scenario, where the economy is not expanding, new tenants are extremely difficult to secure and the owner is usually left with a reduced income from which to pay the financier. If the rental income from the buildings remains at a level whereby the property owner can continue to pay his or her mortgage bond and rates obligations, then all continues to be well. However, should the rental income level drop to below the mortgage finance instalment, and the owner then defaults after a period of reduced or non-payment, the building may have be auctioned off in order to settle the mortgage finance. Very few, if any small property owners, will have the financial capacity to carry a significant rental shortfall on a recently financed or highly geared commercial property. Smaller property owners should also look out for market changes. They need to be cognisant of the suitability of their buildings for the economic activity in the area.

SAIBPP: How can the property sector help towards stimulating economic growth and including as many people as possible into the mainstream economy?

RLR: Property development only comes into play toward the end of the economic chain, once there is proven economic activity in an area. The current situation in South Africa where there is an increasing rate of urbanisation and a rising middle class has definitely created more economic opportunities that bode well for property developers. With urbanisation has come high demand for affordable housing together with the need for more formalised and convenient retail offerings. Any formalised retail offering will naturally result in more formal employment, whether this is as a sales person within the retail store or via the delivery of goods to the retailer, which, in turn, spawns further opportunity. Social grants have increased the disposable income of people living in historically disadvantaged areas. With more disposable income, these residents have attracted the attention of the national retailers. And the demand by the national retailers for formal retail space has resulted in the provision of many shopping centres in rural and peri-urban areas.

Nedbank Property Finance has embarked on two formal initiatives to stimulate economic growth in the property arena and to assist in including as many people as possible into the mainstream economy, namely the provision of student housing and the provision of affordable housing. These initiatives form an integral part of Nedbank’s Fair Share 2030 strategy which is informed by a set of long-term societal goals, encompassing affordable and sustainable energy services; sustainable clean water and sanitation; employment rates comparable to other prosperous nations; savings and investments that support national development objectives; good, cost-effective health and educational outcomes, and which is directed at making a meaningful contribution to meeting these challenges.

SAIBPP: What role do you see other funding institutions playing in using property as a catalyst for economic development and, in the process, help transform the property sector?

RLR: The challenge of accelerating transformation in the property sector is a multi-dimensional one, ranging from the promotion of more black ownership of property, the creation of more black property professionals and practitioners, and the facilitation of more access to opportunities and finance for black players. So, there are limits to the contribution and impact that a financial institution can make on its own in its primary role as provider of finance in support of property transactions. Meaningful and sustainable transformation in the property industry will require a concerted and combined effort by all major role players in both the private and public sectors.

Within the public sector there is massive scope for government to leverage its substantial investment in property, both in the form of its owned portfolio and its leasing activities, to promote transformation in various forms, and there is an obvious opportunity and need for the banking sector to play a role in providing finance for such initiatives.

Lessons have been learned from mistakes made in the past on all sides in the framing, granting and funding of government leases as a means to increase the level of black ownership of commercial property, and there has been a significant overhaul in the Department of Public Work’s processes and in the banks’ lending practices. So the time is ripe for government departments, black landlords and funding institutions to engage again to formulate co-ordinated plans and standardised processes that will provide certainty but opportunity to all affected parties in respect of government- owned or leased properties.

Within the private sector there are numerous ownership-based initiatives and programmes that have been promoted by major industry players and supported by banks. For example, several of the listed property funds have implemented schemes to introduce BEE shareholders, which schemes the banks have assisted in structuring and financing, often on a limited recourse basis to the incoming BEE participants. Similarly, several of the listed funds and construction companies have formed and funded incubator or nursery schemes that are intended to mentor and develop small and emerging BEE developers, contractors and practitioners, and/or they have established and sponsored networks and programmes that aim to twin or match such emerging players with established industry players on particular projects or ventures that can be funded by the banks.

Within the banking community itself, there are several contributions to transformation that banks can make in addition to their principal role as providers of finance. For example, we can in our choice and utilisation of service providers, like conveyancers, lawyers and consultants, give preference to black professionals and practitioners; or we can match black developers requiring capital or expertise to other clients of ours who can provide the necessary support to make a transaction bankable but require empowerment credentials to land the transaction; or we can ourselves provide equity or mezzanine funding to black developers who have access to opportunities but lack the necessary capital and resources; or we can sponsor bursary programmes and stage training courses designed to develop black property graduates, practitioners and professionals.

Beyond the narrower context of transformation within the property sector, financial institutions can play a role in transformation of the broader economy and society through what type of property developments they choose to fund in what sectors and geographies.

Probably the biggest property-based lever to economic development would be for all South African to have direct ownership of their residential properties, and there is much being done by all financial institutions to provide end-user finance for residential dwellings. Conversely, a potential inhibitor to economic development is a lack of private property ownership across all areas of South Africa.

In most economies, the ownership of private property is considered to be essential for the creation and maintenance of a prosperous society, since private property ownership increases a person’s chances of attaining financial security. Private property ownership attaches a monetary value to land, which can then be used as collateral to raise funding for business ventures. Thus private property is a key part of capital formation within an economy.