Despite rising operating costs and low business confidence in the first half of 2015, the local commercial property finance market remains buoyant and continues the strong trend witnessed over the last few years, states Nedbank Corporate & Investment Banking (NCIB).

“Four or five years ago, 3.5% of our total commercial property finance book was problematic – that number is now less than 1.25%. This is a low ratio by bank standards, where anything below 2% is acceptable. Our credit loss ratio (bad debt as a function of the total book), which is usually between 0.2% and 0.4%, is currently less than 0.2%,” notes NCIB managing executive Robin Lockhart-Ross.

He adds that, in the middle of 2014, NCIB’s finance book reached R100-billion and then R110-billion by the end of 2014, which, by August, was estimated to be R119-billion. This was a significant achievement owing to the current economic environment.

However, Lockhart-Ross indicates that the upcoming implementation of Basel III capital and liquidity requirements is set to present some challenges that will make it increasingly difficult and costly for banks to lend on a longer-term basis.

“These requirements mean that the amount of capital banks need to hold against a loan increases as the term of the loan itself increases. In addition, new liquidity ratios are going to be applied in 2018 that will require banks to source funding for its loan book of a duration that matches the period of the loans, which will be difficult to achieve in the South African market,” he says.

Moreover, this is likely to see banks having to shorten the period of their loans to property investors, which, in turn, may also result in nonbank lenders increasing their presence in the property finance market as they will not be subject to the same strict requirements under Basel III regulations.

Basel III is a global voluntary regulatory framework for bank capital adequacy, stress testing and market liquidity risk.