CAS COOVADIA: Here’s what’s at stake if land grabs are sanctioned
Borrowers would still be liable for the full debt on an expropriated property, according to initial legal opinion
The property market and economic growth generally will be severely affected by the expropriation of land, whether without compensation, below market value, or outside the law, the constitution and the courts.
Property owners with mortgages and other bonds on property that may be expropriated without compensation face especially severe liabilities. Initial legal opinion indicates that borrowers would still be liable for the full debt on a property, even if the underlying asset has been expropriated without compensation. This is because clients enter into loan agreements with banks that are secured by mortgages over the property. These loan agreements remain valid and binding, irrespective of the value realised for the property used as security.
Banks have extended R1.6-trillion in residential, commercial and agricultural mortgages to borrowers. The market value of land-based property in SA is estimated at R7-trillion, representing the homes and savings of ordinary people. Banks are very mindful of the need to protect the interests of their customers, both depositors and borrowers, some of whom could be potential beneficiaries of the land reform process.
The Banking Association SA (Basa) has made a detailed submission to parliament on the constitutional amendment bill, which aims “to provide that where land and any improvements thereon are expropriated for the purposes of land reform, the amount of compensation payable may be nil”. In its submission, Basa highlights:
- A sound banking and financial system is essential for inclusive economic growth. Banks rely on the market value of property as security for loans, to protect investors and to ensure consumer deposits can be repaid on demand. Banking crises often start with a decline in the value of land-based property and the impact this has on market confidence, as was evident in the global financial crisis of 2008.
- The decision to expropriate land without compensation should not be left to the executive without oversight and decision-making by the judiciary. Any attempt to remove judicial oversight must be resisted. Judicial decisions on what is “just and equitable” balances the government’s imperative to accelerate land reform and the rights of stakeholders to have an independent determination of remedies where land is earmarked for expropriation without compensation or at below market value. Though it is tempting to argue that parties always have recourse to the courts, the costs and burdens of challenging executive decisions will be prohibitive for citizens.
- “Just and equitable” compensation for expropriated land may be below market value. This will inhibit a bank’s ability to provide credit where property serves as security for a loan. To mitigate this, the government should automatically guarantee the difference between just and equitable compensation and market value. The difference should be paid to affected financial institutions. This approach was approved by cabinet in October 2012, when it adopted the department of rural development & land reform policy: “A framework for land acquisition and land valuation in a land reform context and for the establishment of the office of the valuer-general.” However, this has since been ignored in versions of the Expropriation Bill.
- A lack of clear and decisive political leadership is undermining assurances by President Cyril Ramaphosa that expropriation without compensation will be done in such a way as not to harm economic growth and food security. We recommend that an independent impact assessment be done to ensure this is in fact the case.
- The possibility of expropriation without compensation has already started discouraging essential investment by farmers and others into their properties. The likely outcomes of expropriating agricultural land for less than market value are severe, including increased food insecurity due to reduced investment in local agriculture.
- Expropriation without compensation, especially if done without judicial oversight, will also reduce the capacity of banks to extend credit, which is often used by entrepreneurs for personal development and to improve living standards. The SA Banks Act and the global Basel regulatory framework for the financial sector require that banks have sufficient capital and liquidity to return depositors’ and investors’ funds — with interest — on demand. If the value of land is reduced by expropriation without compensation or at below market value, banks will have fewer assets on their balance sheet with which to extend credit, and they will have to adopt more conservative loan policies.
Basa recognises that the present patterns of land ownership in SA have their origins in apartheid and colonialism. We fully support initiatives to redress the injustices of the past, create jobs, reduce inequality and alleviate poverty. We remain committed to working with key stakeholders to create a better life for all South Africans.
However, we are serious about Ramaphosa’s undertaking that this will be achieved without damaging our prospects for economic growth, our food security, and within the confines of the law. The aim of the proposed amendment to the constitution has been expressed as “making explicit that which is already implicit”. It should not extend beyond this.
We are convinced land reform, which is critical for SA to succeed, can be undertaken in a legal, constitutional, inclusive and sustainable manner that does not dilute property rights. It is essential that land reform is implemented faster and more effectively, especially in urban areas where about 1.2-million families live in informal settlements. They need access to title deeds that can serve as security to help them build wealth.
Expropriation of land at below market value will have dire consequences for all South Africans if not managed in an orderly manner. The land reform legislative process is ongoing, with the Expropriation Bill and the proposal to amend section 25 of the constitution being far from complete. We hope due consideration is given to our submission to parliament to avoid systemic risk to the financial sector, the economy, food security and the future of the country.
• Coovadia is MD of the Banking Association SA. The full Basa submission can be found at banking.org.za