The cost of developer finance

Commercial real estate investing in South Africa can be a lucrative opportunity for investors looking to diversify their portfolio and generate an income.

In turn, developers benefit from this investor interest as it can afford them the opportunities to build office buildings, retail spaces, residential estates, and industrial warehouses in areas where demand is increasing.  

But getting financing for commercial real estate has become more difficult, especially from commercial banks based abroad as these lenders look at reducing their risks and exposure as property prices fall.  

Banking failures contribute to lending hesitancy 

In a recent interview with the Financial Times, Berkshire Hathaway’s vice chair Charlie Munger has warned of a brewing storm with US banks that are exposed to “bad loans”. His comments come as a handful of banks such as Silicon Valley’s Signature Bank and First Republic failed and are snapped up by rivals.  

Munger highlighted in his interview that things are “not nearly as bad as it was in 2008”, but added “A lot of real estate isn’t so good anymore…We have a lot of troubled office buildings, a lot of troubled shopping centres, and a lot of troubled other properties. There is a lot of agony out there.” 

So what has the impact of this been? 

Lenders retreat 

The impact has been that some lenders have reduced their exposure to lending in the commercial property space. It has led to a rise in alternative funders trying to step in and fill this gap.  

For now, local developers have options. Commercial and alternative lenders in South Africa include Tuhf, Old Mutual, Prescient, and Spartan. Government support is also available and an option to consider as banks tighten their lending criteria. But it pays to conduct research into what government and other entities specialise in and what they will provide grants for. 

‘For example, the Gauteng Partnership Fund can assist with funding in affordable housing in the Gauteng region. The Industrial Development Corporation (IDC) and International Finance Corporation (IFC) also offer grants,’ points out Vijay Jainundh, head of Paragon Debt Advisory.  

It’s also important to note that this type of lending is not as competitive as the one in the retail space. Jainundh says: ‘While the mainstream banks are very competitive on certain standardised loan products such as a vehicle, home loan, and personal loans, they may not be as competitive or offer favourable terms when it comes to non-standardized or non-homogenous loans. Here, typically, non-bank funders have the edge over mainstream banks when it comes to structured loans bridging and working capital finance.’