Written by Gary Palmer. Published by Privateproperty.co.za with kind permission from BizCommunity.
South African property investors who require short-term liquidity for commercial purposes are increasingly being turned away by banks. This is due to banks tightening up even more as their margins are being squeezed and is subsequently preventing banks and bond brokers from providing property owners and investors with finance.
"Stricter control measures and tougher lending criteria has resulted in the major banks being unable to process and approve loans as quickly as they would like and we are currently in a situation where investors do not have access to immediate cash flow," says Gary Palmer, CEO of Paragon Lending Solutions.
South Africa's major banks are primarily focused on unsecured lending. But there are growing concerns at the rate of which unsecured lending has been managed to the extent that the National Credit Regulator is in discussion to amend loopholes in the National Credit Act to reduce the rate of unsecured lending.
Profit margins are tighter
Furthermore, stricter guidelines in terms of Basel regulations require banks to hold more capital and the increased costs of holding capital has resulted in banks' profit margins becoming tighter than they were before the recent interest rate cut.
"The rate cut is likely to further contribute to a decrease in banks' financial results and the outcome has caused a knock-on effect whereby bond brokers are now battling to secure finance for their clients who require lending to develop properties and invest in further developmental projects," Palmer says.
What this means for the property investor is that they are finding themselves between a rock and a hard place. "For example, an investor requires short-term immediate finance for working capital, the purchase of an investment property or funding a development. However, due to a bank's lengthy processing times, the investor can find himself out of pocket due to the delay in approving the loan, and can result in the investor losing out on the investment."
Second tier lenders
Palmer suggests that second tier lenders play a crucial role in short or medium term finance for the property investor. "Second tier lenders are not restricted by the major banks when it comes to finance as the investor, who has a valuable asset, can utilise these alternative sources to acquire short-term finance in order to be able to take advantage of investment opportunities. The investor puts their valuable asset up for security with the second tier lender while they are waiting for finance from the major banks."
He explains that reputable second tier lenders, who usually have good working relationships with the banks and brokers, are then able to structure a short-term loan with the investor, providing them with a bank guarantee in a short space of time. "An experienced lender in the property space will be able to advise on the actual cost of a development and can advise investors on how to arrange the finance that is necessary.
"By doing so, the investor can rest with the confidence that his or her needs are being met. Short-term liquidity allows him or her to continue to finance their investment, without the risk of losing their investment while waiting for finance by a first tier bank, or lose out if their application goes awry," Palmer concludes.