More black property developers are moving away from the traditional government tenanted sector and venturing into private sector opportunities

In the words of former US president Theodore Roosevelt, “Every person who invests in well-selected real-estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real-estate is the basis of wealth.”

Globally, real-estate is indeed by far the most significant store of wealth, representing more than 3.5 times the total global GDP, according to research by property group Savills. In line with global trends, the value of SA’s property sector is substantial, but remains skewed along racial lines, due to our past legacy.

Property remains one of the least transformed industries in SA and black property developers have had a minimal effect on the sector, as indicated in the Property Sector Charter Council’s 2019 state of transformation report. The report found that the weak economy placed new real-estate businesses under pressure and no new black-owned funds listed on the JSE in the recent past years.

In fact, the report found that the sector’s overall broad-based black economic empowerment (B-BBEE) recognition level slipped from level four at the beginning of 2018 to level five at the beginning of 2019.

The SA Institute for Black Property Practitioners (SAIBPP) has, in the past, said that fewer than 10% of real-estate investment trusts (Reits) have been initiated by black players in the industry. They also found that the sector has struggled to attract young black talent to pursue careers in commercial real-estate, most black executives within the listed property sector have come from the financial services sector.

Despite the grim assessment there has been some successes, albeit at a slow pace. Research by Nedbank shows that more black property developers are moving away from the traditional government tenanted sector and venturing into private sector opportunities, which bodes well for the acceleration of transformation.

The recent growth in the mezzanine financing space (from banks, private equity funders and public sector financing agencies) has given some black developers a leg up in their quest to bridge the equity funding gap. The various funding instruments have provided access to capital and favourable cost of funding, which was a major barrier before. There has also been increasing pressure from tenants, who are actively requesting more BEE representation from their landlords which is gradually opening doors for black property professionals and landlords.

Real-estate development is a long-term investment, it requires substantial capital and involve myriad risks to be managed or mitigated. These factors all contribute to the slow pace of transformation in the industry. Essentially, developers are rewarded for the risks they take; however, finance institutions seek to avoid risk and the list of finance application criteria to fulfil is prohibitively exhaustive.

Financiers require very detailed information on the development planning, risks anticipated and expected returns. The process necessitates upfront capital expenditure on the part of the developers just to get to “application-ready” stage. Add to that complexity the expectation of a sizeable equity contribution and offtake agreements, entry into the property development sector for black players soon become virtually untenable

The continued macroeconomic pressures have affect the commercial property market negatively, resulting in high vacancies and pressure on rentals. Diminished consumer purchasing power and excess supply has put pressure on the housing market prices. Financiers take these factors into consideration when assessing potential deals which in turn dictates the appetite levels for new developments.

The weak macroeconomic environment has therefore necessitated greater risk mitigation from a property financing perspective. This puts serviceability under the microscope and reduces funding appetite, requiring a greater equity contribution. The knock-on effect has had a profound effect on new entrant, such as black investor who have limited access to equity.

There needs to be a concerted effort by financiers, established property players and the public sector financing agencies to address the equity needs and expertise gap of black developers. The recent uptick in vendor financed property deals by established funds, who sell part of their portfolios to black investors has gone a long way in assisting black entrants into the property market. The growth of mezzanine financing has also assisted; however, there is generally some equity required to be injected by the developer.

An application for property development finance is expected to be supported with a viable development proposal, which should include the concept design, feasibility studies, cashflow projections, detail on the potential risks, proposed methods of mitigating said risks, market demand and the expected return on investment. Funding fundamentals are based on the cashflow or profits of the development and after completion being able to comfortably service the funding obligation.

These criteria are, however, not conducive to facilitating transformation in the sector. Instead formal assistance programmes should be developed to assist aspirant and existing black developers become funding ready, help them fully understand the content and context of the documentation and research required for a property finance application.

Banks assess all property development projects based on the soundness of the commercial property fundamentals. These fundamentals determine the appetite levels which, in turn, drive the equity requirement. The need to assist black developers have motivated banks to think broader about how to fund them without negatively prejudicing existing clients.

To this end, banks have sought to facilitate introductions between black developers and existing established clients with the necessary track record, experience and creditworthiness. This facilitation has translated into the creation of joint ventures and or partnerships, which enable the transfer of skills, knowledge and access to capital.

Financiers must, however, strive to continually provide guidance to new market entrants on the pitfalls of the market and provide guidance of how they can become funding ready. Existing real-estate entities must also continue allowing new entrants the benefits of market facilitation, which can include options such as vendor financing, guarantees, asset sale discounts, or retaining some shareholding in assets they’ve earmarked for disposal.

Government initiatives, such as public works’s policy on long-term rentals for 51% black owned entities, have also contributed to the transformation of the sector by creating opportunities for black landlords to enter the sector. This has been well-received by tenants, whose largest spend is rental which they can now expense as a BEE spend and in turn improve their procurement spend on their BEE scorecard.

The focus on transforming the sector must continue to take precedence and both public and private sector must continue providing guidance to prospective black entrants with limited property exposure.

While we acknowledge the successes of several black property fund entrants in recent years, these should not be an anomaly. Large sections of the population continue to find the formal economy inaccessible, making the rapid transformation of the sector a socioeconomic imperative. These lingering vestiges of apartheid's social and economic engineering need to be corrected as the consequences of not doing so are too dire to consider.

• Theunissen is founder and manager of Property Point, Growthpoint’s enterprise and supplier development programme.