29 Sep Misalignment
Financial lag in lockdown lending casts a long shadow on gloomy economy
Returning from a nationwide catchup with their network of brokers and lending partners, Paragon Lending Solution CEO, Gary Palmer, says despite banks’ and landlords’ considerable help during lockdown, South Africa should prepare for a very bumpy few months as lenders and landlords run out of runway and eviction notices begin to pile up.
“Nobody has seen this movie before. According to the SA Reserve Bank, banks offered payment holidays worth R32 billion and helped out more than 80 percent of individuals and 95 percent of businesses who applied for help. However, we are understandably now seeing banks focused on returning to business as usual. Combined with a lack of dealflow, the tough business landscape will take its toll,” explains Palmer. “The immediate worry is that we are seeing more and more people unable to keep up with payments and this is going to get a lot worse.”
Palmer says many lenders in the SME space have taken a beating and warns that their ability to hold out, in order to help borrowers, is almost at an end. What’s more, it’s not just the smaller players who are less inclined to support South Africa’s struggling property owners and renters.
“It’s good to see that many banks and financiers have come to the party. We have seen a bank contact a client and give them six months with no installments and six months at half installments. Some have converted interest on capital to interest only. We’ve also seen great sympathy from many landlords. However, we are getting to the point where landlords are just not able to carry tenants anymore and lenders can no longer afford to wait on their repayments.”
Palmer says we can expect to start seeing the effects of a lag between the lockdown levels and people’s financial reality.
“At level 2, and even more so at level 1, many landlords and financiers will say that since everyone is back at work, they should start paying as normal and even catching up on the payments they missed. The reality, however, is that even though many may be working as normal, most have taken financial hits and are still far behind in terms of what they are able to pay towards servicing rent, mortgages and loans,” Palmer explains.
Palmer says the lack of disposable income is hitting people hard. And, while some are lucky enough to have permanent employment at a stable company, the majority of South Africans either run their own businesses or have been forced to take a pay cut or have even been retrenched. For them, he says, the hard times are just beginning.
“We can expect to reach an impasse between lenders and borrowers, and we will see the tensions escalate as patience wears thin. And what will happen – and indeed has already started to happen – is that banks and other lenders will pull the plug and call in their security. We can expect to see a real spike in legal action in the coming months.”
Palmer also warns that for many who didn’t take advantage of the payment holidays offered in the beginning of lockdown, applying for them now is not likely to be met with positive news.
Avoid nasty surprises
Palmer says there is no silver bullet to fix the current situation and that the best thing for tenants and property owners alike is to maintain a high level of transparency and good communication.
“Don’t wait until you are in deep trouble. Communicate often and openly with your lenders and landlords. Have a set of updated management accounts to show lenders so they have some comfort that you are on top of your financial situation.
“The banks are going to be more circumspect. Chances are they may send out valuers to adjust their asset valuations accordingly and this may not work in your favour. Some banks are stress testing their books by deducting 20 percent off future rentals and adding 1.5 percent to their cap rates. This has resulted in the reduction of between 35 to 45 percent on property values. If it’s possible, offer more security. If lenders see you are willing to back yourself and your future, they will have a higher level of comfort. The key here is to avoid liquidations and sequestrations.
“The harsh reality is that as we entered into level 2 the evictions notices began getting typed up. Clients are speaking to us and telling us that they have never experienced anything like this before. Banks are not likely to make their lending easier in the current environment and so SMEs will have to look at the non-bank environment and work the alternative lending networks. There is still some money out there, but it’s becoming harder to find. It’s important to see the cliff coming and to start the hard discussions sooner rather than later” Palmer concludes.