Could banks be the biggest losers in expropriation without compensation?

Johannesburg - Banks could be some of the biggest losers if expropriation of farms without compensation takes place, with clients potentially defaulting on property loans they can no longer afford to service because they no longer have land.

On Tuesday the National Assembly adopted a motion, proposed by the Economic Freedom Fighters, for a committee to review Section 25 of the Constitution which concerns the right of property ownership. The motion was adopted with a vote of 241 in support, and 83 against.

But what exactly will happen to banks' debt if a decision is taken to amend the land policy, is not clear at this early stage, experts have told Fin24. Banks are also taking a wait-and-see approach.

If the government decides not to compensate the banks when taking land, R160bn could be wiped off their books.

Default risks

Anthea Jeffery, head of policy research at the Institute of Race Relations, told Fin24 that if banks know there is a risk in title to land, it would have to be factored into the price of the loan facility.

“They will have to take a robust approach,” she said.

She said the Expropriation Bill of 2015, which has not been approved by Parliament yet, stipulates that on expropriation the bond on the property ends. In the current Expropriation Act of 1975, the compensation has to be used to first service the loan.

“But with the new motion undoubtedly there will not be any money,” she said. “How will the bank get the money it is still owed? It can’t foreclose on the property, because the state now owns the property."

Jeffery said the farmer won’t be able to service the loan any more because there is no land to derive an income from, and will default. The bank has no relationship with the government, so it can’t recover the money from there. 

“If this default happened on a massive scale, it could be disastrous for banks,” she said.

If expropriation without compensation is passed into law, it would give rise to serious difficulties both for property owners and banks which lent money against security over properties, said Pieter Niehaus, director and head of real estate, Norton Rose Fulbright SA.

“The owner of expropriated land would lose the rights of ownership and occupation of the land and the bank would lose its security for the repayment of the loan,” he said.

Banks heavily invested in sector

Theo Boshoff, legal intelligence manager at Agbiz, said commercial banks as well as the Land Bank are heavily invested in the agricultural sector, of which roughly a third is collateralised through land.

The debt-to-asset ratio in the agricultural sector is extremely high and many loans are secured by registering mortgage bonds over the property, Boshoff said.

“If property is expropriated, the owner as well as the bank’s real rights on the property will be extinguished,” said Boshoff. “This means that the former owner will lose his or her ownership rights and the bank will lose its collateral.”

Research shows that the sector has become highly reliant on credit, which usually takes the form of bond financing. Economists from the major banks estimate that South African farmers are indebted to the tune of about R160bn.

The majority of this debt (70%) is held by commercial banks, with the rest shared between the Land Bank (25%) and development finance institutions and agribusinesses.

Banks circumspect 

The banks, when asked about the risks they faced if the new bill was passed, were circumspect, emphasising that they would continue to engage government constructively on land reform.

ABSA said at this stage the nature of the envisaged amendments to the property clause as well as other clauses are not clear, but added it would participate in public consultation to discuss the impact.  Standard Bank merely said it would work with government to drive transformation in the agricultural sector while promoting food security and social prosperity.

The Land Bank said it believes that it is premature to hold firm views on matters regarding expropriation that is still subject to consultation.

To reduce the risk in the event that a farmer cannot repay his loan, banks often couple a loan to the value of the land by registering a bond that allows them to sell the land as a last resort.

"If one were to amend the Constitution to allow expropriation without compensation, it could endanger the faith banks place in the land as security and set into motion a chain reaction that eventually leads to the ordinary consumer losing out," said Boshoff.

Policy certainty

Jeffery also believes that with the sword hanging over banks’ heads, they would be more circumspect in granting loans, until there is more policy certainty.

Niehaus said that neither the property owner nor the bank will be able to blame each other for the loss of the asset or the loss of the object of its security.  

“The loan by the bank is a separate obligation from the mortgage obligation,” he said. “The expropriation would result in in a commercially untenable situation in that the property owner would still be contractually bound to the bank to repay the loan, while having been deprived of the property used for residential, farming or business activities which would in many instances generate income to repay the loan.”

Niehaus said in theory, if the state decides to expropriate without compensation, a bank could lose its security.

“But the question that needs to be answered by the parliamentary committee investigating the issue is whether the bank loses its rights to claim repayment of the loan by the property owner as well and how it fits in with the rule of law,” he said.

Long process

Bulelwa Mabasa, director and land claims specialist at Werksmans Attorneys, said it is important to note this is a long process and it could be some years before the way forward is agreed upon, and the land for redistribution and land reform is identified.

She admitted there is a risk for the banks that they would be left with the debt on the land that is currently mortgaged in favour of bond holders.

“It will be interesting to see whether or not bonded property will be carved out as an exception and not be expropriated without compensation,” she said.

“There is a question whether the state will have the money to make good on the debt sitting on the banks' books. “

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