A disaster is unfolding for small scale South African property investors as the country’s banks are increasingly shunning rented out residential property as security in loan funding.
Gary Palmer, CEO of Paragon Lending Solutions, notes that “Banks are responding to discernable changes in South Africa’s economic landscape over the past 24 months by placing much more focus on non-interest income, and moving away from interest income (lending)”.
Adds Paragon this is not a short-term dip in loan servicing, but a fundamental shift in business strategy. “Therefore, we are already seeing an increase in business from property investors who are looking at other options to secure finance against their assets and continue growing their businesses”.
He said although banks will no longer rely on serviceability from rented out residential property such as a block of flats, owners of rented residential property, South Africans should not ignore the potential security their property represents.
Paragon explains that banks are relying less on rental income from residential investment property as a means of serviceability. This is as a result of the leases being of a short term nature. The result of this is that owners of residential property, in spite of holding significant property assets and receiving monthly rental income, will not easily be able to secure finance from the banks. He says this could potentially be very damaging to the property development industry.
“The property development and property investment industry is particularly dependant on loan finance as very often cash reserves are tied up in a project. For example, many investors and building owners are looking at short-term financing as they plan to sectionalise a block of flats with the intention of selling the units. Therefore they tend to seek 12 month funding – which is not attractive for the banks in this market.”
According to Palmer, unlike the commercial banks, some second tier lenders such as Paragon Lending Solutions view rental residential property as a growing and profitable area of the property market. “People are struggling to secure bonds and therefore the demand in the rental market is very high – particularly in the rental bracket of between R 3 000 p/m and R 5 000 p/m. This also affords landlords preferential selection from a growing pool of tenants.”
He says the security of the rental income of a building can be assessed by profiling the existing and potential tenants. “If a building owner can pick good tenants with good credit history and an encouraging employment history, it’s a reasonable assumption that the rental income will be stable and reliable in terms of servicing a loan.”
Palmer explains that banks are currently looking at financing residential properties for primary use, however they will not looking at financing residential investment properties or blocks of flats where the income will be used to service the loan. “Banks are relying on sustainable income to service their loans so as a result they are looking for blue chip tenants with long leases.”
Far-reaching changes to Lease Agreements, as a result of the Consumer Protection Act and the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act (‘PIE’), which regulates the conditions and circumstances under which occupiers of property may be evicted, makes it difficult for landlords to evict non-paying tenants have further dissuaded banks from this market.