Pay your bond but lose your property – South Africa’s big land expropriation problem

Parliament has extended the comment period for South Africa’s proposed land expropriation bill, but major questions remain around the legislation – especially how the law will impact banks and home loans.

In its submission on the bill, the Banking Association of South Africa (BASA) said it fully supports government plans to rectify past racial injustices, to correct current land ownership patterns, to reduce inequality and alleviate poverty.

However, the association said that this process should be undertaken in an orderly manner that does not dilute property rights in the country.

“A marked decrease in the value of land-based property, caused by either an amendment to legislation and/or market uncertainty, and the resultant reduced appetite from property buyers could destabilise the banking sector, and have a negative impact on the credit rating of the sector and the country,” it said.

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

It added that this amount excludes other types of non-mortgage loans afforded to borrowers premised on their net worth, where their land-based property constitutes much of their net equity base and provides support to lenders for such loans in the event of default (the market value of land-based property is estimated to be in excess of R7 trillion).

“Many banking crises around the world have as their starting point the decline in land-based property and the impact that this has on market confidence. An example of this is the 2007-2008 global financial crisis which started from the downturn of land-based properties in the United States of America,” it said.

Loans

Basa said that a critical consequence of the bill would be the negative impact on the capital adequacy and the stability of commercial banks. It added that private-sector lenders could:

  • Withdraw from providing loans where land-based property is being offered as security for the loan; and/or
  • Adopt a more conservative approach to the extent of the loans they would be prepared to provide as compared to land-based property values (so-called maximum loan to property value); and/or
  • Increase borrowing interest rates to compensate for the additional risk in the event of expropriation.

“Widespread expropriation at nil compensation/expropriation at below market value has the potential to create systemic risk for the banking sector, as loan agreements concluded with a bank do not typically consider a scenario in which land-based property seizure results in the forcible change of ownership at below market value,” Basa said.

“If a loan is defaulted upon due to expropriation at nil compensation or expropriation occurs at below market value, it is unclear how the lender will be able to recover the losses incurred on the loans granted.

“Initial legal opinions indicate that the borrower would still be fully liable for any debt incurred, irrespective of any expropriation of the underlying asset.”

Unknowns

Basa said that government and the land expropriation bill is vague/silent in a number of areas, including:

  • Definitions around  ‘the arbitrary deprivation of property’, ‘public interest’ and ‘public purpose’;
  • Limited recognition of the real rights that registered property owners enjoy, including the need to expropriate such registered rights (includes among others, a mortgage, long leases and a special notarial bond);
  • Where there is a disagreement between parties in respect of compensation payable for the state to be able to expropriate the property prior to a court ruling on the dispute is problematic;
  • Alignment to international expropriation best practice.

“We suggest that, unless either the proposed amendments to Section 25 or preferably the expropriation bill clarifies these areas in particular, the resultant court cases which will seek to obtain clarity on these aspects will simply exacerbate public uncertainty, which in turn will impact negatively on land-based property values,” Basa said.

No discussions

The Department of Agriculture, Land Reform and Rural Development says 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 Didiza has not met with the country’s banks as she is waiting for the bill to be finalised.

“The issue of home loans has not been discussed with the banks as the land expropriation bill is still an ongoing parliamentary process,” said Ngcobo.

“Currently the issue is out of her control and we will assess the situation once the bill has been finalised.”

President Cyril Ramaphosa has said that South Africa must finalise its land expropriation policy in 2020.

Speaking at a conference on Tuesday (14 January), Ramaphosa asked business leaders to present solutions to redistribute land to majority blacks as the government works to finalise changes to legislation and the constitution to allow for the expropriation of land without compensation.


Read: This is how much the average house costs in South Africa – and why banks will offer favourable home loans in 2020

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Pay your bond but lose your property – South Africa’s big land expropriation problem