This is what could happen to your bond if your land is expropriated – according to South African banks

The Banking Association of South Africa (Basa) has warned that land expropriation without compensation could have a significant impact on property rights in South Africa.

Basa, which represents all registered banks in the country, said that the legislation could have a marked decrease in the value of property caused by either an amendment to the legislation and market uncertainty.

It warned that the resultant reduced appetite from property buyers could destabilise the banking sector and may have a negative impact on the credit rating of the sector and the country.

The current exposure banks have in relation to land-based property is approximately R1.613 trillion in the form of mortgages.

Despite these issues, Basa has indicated that it is not clear exactly what impact land expropriation will have on the property loans, with ‘initial legal opinions indicating that the borrower would still be fully liable for any debt incurred, irrespective of any expropriation of the underlying asset’.

What happens to your bond? 

In its official submission on the bill, Basa said that expropriation without compensation in its current form does not seem to take into consideration the security rights (real rights) mortgagees have over immovable property.

“At this stage, it is not understood if any of these rights will be affected and if property law legislation in South Africa would need to be amended to cater for the changes. This will need to be fully investigated,” it said.

“Security aside, we understand that in the event a property which that bank has taken security over is to be expropriated, such an event will be considered as default under the loan.”

Basa said that this will have the following  consequences:

  • The repayment of the loan at the election of the bank could be accelerated and this would place the borrower in a situation whereby he/she would need to repay the loan far quicker than what was anticipated;
  • The immovable property could, at the election of the bank be foreclosed upon as set out above; and/or
  • Cause default in other loans (not only residential or commercial property finance loans) which has the potential impact of financially crippling the borrower as those loans could be accelerated at the election of the bank and security executed against same.

Clarification needed

With the issues still up in the air, the Institute of Race Relations (IRR) has called on South Africa’s major finance firms to clarify their position on the planned land expropriation without compensation law.

The civil society group has asked South Africa’s major banks and investment companies how they are advising clients about the proposed law, and the steps they are taking to mitigate risk.

Expropriation without compensation will have enormous consequences for South Africa, economically and financially, with asset values being affected across the board, the IRR said.

It added that ordinary South Africans will be vulnerable to the most severe financial shocks and losses, and concern over the security of their investments is mounting.

“The destruction of property rights in South Africa through EWC will have severe consequences,” said Hermann Pretorius, IRR campaigns manager.

“Corporate South Africa cannot remain on the fence. Institutions that have built their reputation on being on the side of ordinary South Africans must now live up to that.

“Banks, insurers, and investments firms and similar institutions cannot sit on the side-lines while their clients are left to fend for themselves against a state bent on increasing its power at the expense of what people have earned through hard work.”

The Department of Agriculture, Land Reform and Rural Development recently confirmed that it has had no discussions with the country’s banks about being compensated for any loans against a property that is expropriated.

Speaking to BusinessTech in January, department spokesperson Reggie Ngcobo confirmed that this is because the minister is waiting for the bill to be finalised.

Parliament meanwhile, has extended the comment period for South Africa’s proposed land expropriation bill until 29 February 2020

Read: New land expropriation changes could lead to local or international investment boycott: business group

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This is what could happen to your bond if your land is expropriated – according to South African banks