the property finance business in south africa alan gary wight master of commerce business ...

303 Pages·2013·5.77 MB·English

THE PROPERTY FINANCE BUSINESS IN SOUTH AFRICA
BY
ALAN GARY WIGHT
submitted in fulfilment of the requirements for the degree of
MASTER OF COMMERCE
in the subject
BUSINESS MANAGEMENT
at the
UNIVERSITY OF SOUTH AFRICA
SUPERVISOR: PROF V G GHYOOT
NOVEMBER 2001
Student number: 551-414-2
I declare that THE PROPERTY FINANCE BUSINESS IN SOUTH AFRICA is my
own work and that all the sources that I have used or quoted have been indicated and
acknowledged by means of complete references.
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SIGNATURE DATE
(MR A G WIGHT)
SUMMARY OF DISSERTATION
Title THE PROPERTY FINANCE BUSINESS IN SOUTH AFRICA
By A.G. Wight
Degree Master of Commerce
Subject Business Management
Supervisor Prof. V. G. Ghyoot
Problem Statement
The business of property finance has not been properly documented in South Africa.
Available resource material focuses on the perspective of the property developer and
investor largely neglecting the business of property finance. Thus comprehensive
information on this business was not available to students and researchers
This study set out to correct this deficiency.
Research Procedure
Key property finance personnel in the major banks in the Republic of South Africa
were interviewed to establish how the business of property finance is conducted.
Jointly the interviewees represent 77% by volume of business over a period of two
years
A parallel process of literature research was undertaken to compliment the interview
research and provide technical depth to the findings.
Findings
The empirical and literature research results were combined to comprehensively
document the processes, structures, systems, products and risks associated with the
business of property finance in South Africa.
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Key Terms
Property Finance
Property Finance Products
Property Finance Risk
Structured Finance
Loan Application Process
Property Finance Systems
Property Finance Organisational Structures
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ACKNOWLEDGEMENTS AND THANKS
To
• Laura and Tamsyn for the time to do it
• Frank Berkeley for his indulgence
• Neville Kain for his insistence and perseverance
• Phillip Wilmot for cattle-prodding me into a university education
• Valmond Ghyoot for his wisdom, guidance, patience, contribution and motivation
• friends and colleagues from all the financial institutions who made the data
collection and research phase such an interesting and pleasurable task, and who
showed true interest in seeing the job done correctly
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TABLE OF CONTENTS
LIST OF EXHIBITS ........................................................................... 12
l PROPERTY FINANCE ........................................................................................ 14
Ll INTRODUCTION .......................................................................................... 14
1.1.1 The Subject of Property Finance ............................................................. 14
1.1.2 The importance of the property finance industry in South Africa ........... 15
Ll MOTIVATION AND OBJECTIVES ............................................................ 17
1.2.1 Motivation for the dissertation ................................................................. 17
1.2.2 Objectives of the dissertation ................................................................... 18
1.2.3 Method of presentation ............................................................................ 18
2 EMPIRICAL AND LITERATURE RESEARCH ................................................ 20
2.1 INTRODUCTION .......................................................................................... 20
2.2 INTERVIEW RESEARCH ............................................................................ 22
2.3 LITERATURE RESEARCH .......................................................................... 25
2.3.1 Introduction .............................................................................................. 25
2 .3 .2 Educational institutions ............................................................................ 25
2.3.3 Training institutions ................................................................................. 28
2.3.4 Publications .............................................................................................. 29
2.4 CONCLUSIONS ............................................................................................ 33
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3 THE LOAN APPLICATION PROCESS ............................................................ 34
3.1 INTRODUCTION ....................................................................................... 34
3.2 CLIENT CONTACT ................................................................................... 36
3 .2.1 Types of clients .................................................................................... 36
3 .2.2 Information requirements ..................................................................... 37
3 .2.3 Concurrent activities ............................................................................ 39
3.2.3.1 Creditchecks .................................................................................... 39
3.2.3.2 Deeds office search .......................................................................... 39
3.2.3.3 Desktop valuation ............................................................................ 39
3.2.3.4 Preliminary cash flow analysis ....................................................... .40
3. 2. 3. 5 System interaction ............................................................................ 40
3.2.4 Common errors and observations ....................................................... .41
3.3 THEPROPERTYVALUATION ............................................................... .47
3 .3 .1 The valuation process .......................................................................... 48
3.3.2 Definition of the problem ..................................................................... 49
3 .3 .3 Preliminary analysis and data collection .............................................. 50
3 .3 .4 Highest and best use analysis ............................................................... 52
3.3.5 Land value estimate ............................................................................. 52
3.3.6 Application of the three approaches .................................................... 53
3.3.7 Reconciliation of value indications and report .................................... 54
3.4 APPLICATION SCREENING .................................................................... 57
3.4.1 Credit assessment ................................................................................. 57
3.5 LOAN APPROVAL .................................................................................... 59
3.5.1 Purpose ................................................................................................. 59
3.5.2 Granting authorities ............................................................................. 59
3.5.3 The Loan approval document .............................................................. 60
3.6 ACCEPTANCE ........................................................................................... 64
3.6.1 Purpose ................................................................................................. 64
3.6.2 The loan offer ....................................................................................... 64
3.6.3 Acceptance of the offer ........................................................................ 71
3.7 REGISTRATION ........................................................................................ 73
3.7.1 Attomev instruction ............................................................................. 75
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3.7.3 Bond registration .................................................................................. 79
3.8 CHAPTER SUMMARY .............................................................................. 80
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4 PROPERTY FINANCE ORGANISATIONAL STRUCTURES ......................... 81
4.1 INTRODUCTION .......................................................................................... 81
4.2 FUNCTIONARIES ........................................................................................ 81
4.2.1 Relationship manager ............................................................................... 82
4.2.2 Valuer ....................................................................................................... 84
4.2.3 Credit analyst ........................................................................................... 86
4.2.4 Administrator ........................................................................................... 88
4.2.5 Regional manager .................................................................................... 90
4.3 ORGANISATIONAL STRUCTURES .......................................................... 92
4.3.1 Introduction .............................................................................................. 92
4.4 FUNCTIONAL STRUCTURE ...................................................................... 94
4.4.1 Purpose ..................................................................................................... 94
4.4.2 Advantages ............................................................................................... 94
4.4.3 Disadvantages .......................................................................................... 95
4.5 TEAM STRUCTURE ..................................................................................... 96
4.5.1 Purpose ..................................................................................................... 96
4.5.2 Advantages ............................................................................................... 96
4.5.3 Disadvantages .......................................................................................... 97
4.6 SPECIALIST STRUCTURE .......................................................................... 99
4.6.1 Purpose ..................................................................................................... 99
4.6.2 Advantages ............................................................................................... 99
4.6.3 Disadvantages ........................................................................................ 100
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5 PROPERTY FINANCE INFORMATION SYSTEMS ...................................... 101
5.1 INTRODUCTION ........................................................................................ 101
5.2 DESIGN FUNDAMENTALS ...................................................................... 102
5 .2 .1 Stability .................................................................................................. 102
5.2.2 Integration .............................................................................................. 104
5.2.3 Flexibility ............................................................................................... 106
5 .2.4 Accessibility ........................................................................................... 107
5.3 TRANSACTION PROCESSING SYSTEMS .............................................. 111
5.3. l Client ...................................................................................................... 111
5.3.1.1 Client search ....................................................................................... 111
5. 3.1. 2 Client details ....................................................................................... 111
5. 3.1. 3 Client relationship .............................................................................. 112
5.3.2 Account .................................................................................................. 114
5.3.2.1 Application details .............................................................................. 114
5. 3. 2. 2 General details ................................................................................... 115
5.3.2.3 Electronic funds transfer details ......................................................... 116
5. 3. 2.4 Repayment profile details ................................................................... 117
5.3.2.5 Projected disbursement details ........................................................... 117
5.3.2.6 Letters ofundertaking ......................................................................... 118
5.3.2. 7 Documents in transit ........................................................................... 119
5.3.2.8 Ledger transactions ............................................................................ 120
5.3.2.9 Arrears details .................................................................................... 121
5.3.3 Property .................................................................................................. 123
5. 3. 3.1 Property search .................................................................................. 124
5.3.3.2 Property and title deed details ............................................................ 125
5.3.4 Security .................................................................................................. 126
5.3.5 Workflow ............................................................................................... 127
5.3.6 Automated document processing ........................................................... 129
5.4 MANAGEMENT INFORMATION SYSTEMS ......................................... 131
5.4.l Management information systems in context ........................................ 131
5.4.2 Operational management information ................................................... 132
5.4.3 Tactical management information ......................................................... 135
5.4.4 Strategic management information ........................................................ 137
5.5 DECISION SUPPORT SYSTEMS .............................................................. 139
5.5.1 Geographical information systems (GIS) .............................................. 139
5.5.2 Risk categorisation ................................................................................. 142
5.5.3 Decision support models ........................................................................ 143
5.6 OBSERVATIONS AND CONCLUSION ................................................... 146
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6 PROPERTY FINANCE PRODUCTS ................................................................ 147
6.1 INTRODUCTION ........................................................................................ 147
6.1. l The time value of money ....................................................................... 149
6.1.2 Gearing ................................................................................................... 153
6.2 STANDARD PRODUCTS ........................................................................... 155
6.2.1 Amortised loans ..................................................................................... 155
6.2.2 Development loans ................................................................................. 158
6.2.3 Bullet payments - interest only .............................................................. 158
6.2.4 Stepped interest rate loan ....................................................................... 159
6.3 STRUCTURED DEBT ................................................................................. 161
6.3.1 Introduction ............................................................................................ 161
6.3.2 Interest rate instruments ......................................................................... 162
6.3.2.1 The repo rate ....................................................................................... 162
6.3.2.2 Banker's acceptances (BAs) ............................................................... 163
6.3.2.3 Negotiable certificates of deposit (NCDs) .......................................... 166
6.3.2.4 Interest rate swaps .............................................................................. 168
6.3.2.5 Interest rate options ............................................................................ 171
6.4 STRUCTURED FINANCE .......................................................................... 173
6.4.1 Introduction ............................................................................................ 173
6.4.2 Property trader vs property investor and income tax ............................. 174
6.4.3 Lease discounting ................................................................................... 176
6.4.4 Compulsory convertible loan (CCL) ..................................................... 180
6.4.5 Utilising the Bank's tax base ................................................................. 183
6.4.6 Income tax risk ....................................................................................... 184
6.5 STRUCTURED FUNDING ......................................................................... 185
6.5.1 INTRODUCTION ................................................................................. 185
6.5.2 SECURITISATION ............................................................................... 186
6.5.2.1 Introduction ........................................................................................ 186
6.5.2.2 The entities involved in securitisation ................................................ 187
6.5.2.3 The process of securitisation .............................................................. 188
6.5.2.4 Benefits ............................................................................................... 189
6.5.2.5 Attributes of the securitised portfolio ................................................. 190
6.5.2.6 Securitisation and South African legislation ...................................... 191
6.5.2.7 Observation ......................................................................................... 193
6.5.3 PARTICIPATION MORTGAGE BOND SCHEMES .......................... 195
6.5.3.1 Introduction ........................................................................................ 195
6.5.3.2 The entities involved in a participation bond ..................................... 196
6.5.3.3 Interest rate and fee dynamics ............................................................ 197
6.5.3.4 Participation bond process .................................................................. 198
6.5.3.5 Observations ....................................................................................... 199
6.6 CHAPTER SUMMARY .............................................................................. 201
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