Hendrik F. Prinsloo 

Department of Construction EconomicsUniversity of Pretoria

South Africa 

Email: hendrik.prinsloo@up.ac.za

Background:• Securitisation has long been an important factor in international

finance markets. • This finance method became popular in the United States of

America during the early 1980’s but is still in its infant stages of development in South Africa.

Purpose:• The purpose of the study was to determine if securitisation can

act as a viable alternative to traditional methods of funding property in South Africa.

To obtain an answer to this question: (Methodology)• Does the current South African legislative environment support

securitisation? • To what extent is Real Estate Securitisation possible within the

current South African Securitisation Framework • The development of securitisation in South Africa has been

evaluated to determine the level of progress.

Securitization is one of the most significant developments to have emerged in international finance since 1970 and one that can assume even greater importance in the future. (Thompson: 1995)

The foundation of any project lies in the funding of the project. The purpose of securitisation is the provision of funds to the company that embarks on securitisation.

The decline in real estate lending operations in the 90’s have led to a void in the market for alternative methods of financing real estate.

Securitisation had the potential to unleash new sources of financing for companies, municipalities, banks or any other entity with a predictable cash flow seeking innovative methods of financing.

 

The development of securitisation in South Africa took off relatively slowly partly due to stifling restrictions imposed by regulatory bodies before 2001.

The first securitisation issue in South Africa did take place during the last quarter of 1989.

The interest in securitisation only really started to pick up pace towards the end of the 1990’s.

The main reason for this sudden interest in securitisation was the introduction of the Amended Securitisation Regulations and the removal of Regulatory Constraints by the South African Reserve Bank in 2001.

The securitisation market in South Africa has been growing rapidly ever since.

This growth and development has been driven by a number of factors such as

the existence of securitisation specific legislation and security structures,

a stable economic environment, developed legal and banking systems and a strong investor demand for rand-denominated debt

securities.

1 euro = R 11

Securitisation is the packaging of normally untradeable assets with predictable cash flows (such as home loan books or credit card debt) into a tradable form.

The securitisation process was first applied in the US, when real estate assets were securitised with the express sponsorship of the US government.

The international development of securitisation is an ongoing process as securitisation is introduced to an increasing number of national markets.

Securitisation provides various benefits, some of the benefits include:

reduced funding cost improved returns reduced capital requirements improved liquidity reduced credit risk.

STEP 1:The process commences by identifying the assets to be securitised. Properties will be analysed to ensure that only ones with a low default rate are chosen. The assets will be packaged and transferred to the special purpose vehicle through securitisation. The services of a third party can be utilised to enhance the credit quality of the assets. At this stage an independent rating agency will evaluate all aspects of the securitisation issue and a risk grading will be assigned. The property company can ensure a satisfactory rating by choosing quality properties with an exceptional payment history. The trading price of the asset-backed securitisation is dependent on the rating of the securitisation issue.

STEP 2:The Special Purpose Vehicle will raise the required funds by means of issuing debentures.This allows the special purpose vehicle to take transfer of the pooled assets from the originating property company.

STEP 3:The proceeds that result from the debentures will be paid over to the property company. The property company has now created new funds that can be utilised to finance a new property development.

STEP 4:The Property Company will continue to collect rental from the tenants of the securitised properties. This fund will be paid directly to the Special Purpose Vehicle. The Property Company acts as the administrator of the properties.A service fee that is calculated based on the value of the payments that are administrated, will be paid by the SPV to the Property Company. The SPV may reinvest the cash flows that are collected by the originator in the interest bearing investments.

STEP 5:Normal coupon payments may also be paid to investors for reinvestment activity. This coupon consists of the nominal interest that the asset-backed security attracts throughout its life until maturity.

Thus far the securitisation of property has been evaluated through the existing framework of securitisation in South Africa.

It was established that a property company can act as an originator of securitisation.

It was determined that the property company acting as the originator of securitisation is in the same position as any other originator of securitisation.

Credit enhancement is imperative to the success of a securitisation scheme.

The first South African securitisation issue was undertaken during 1989 by the former United Building Society.

The real explosion in the South African Securitisation market only took place after the removal of regulatory constraints and the introduction of the amended securitisation regulation in 2001.

The first Residential Mortgage Backed Securities (RMBS) programme was initiated in 2001 followed shortly after by the first Asset Backed Securities (ABS) programme.

The first CMBS programmes was launched by iFour Properties in November 2004 followed by Vukile Property Fund’s and Growthpoint Properties’ CMBS programmes in November 2005 and Freestone Properties’ programme in June 2006.

1990 -20001990 The first official

policy expressed in the Banks Act 94 of 1990 (“the Banks Act”) in the form of a special securitisation schedule.

After the first securitisation issue already had taken place in 1989.

These guidelines were subjected to discussion with market participants before a final policy document was drawn up

The securitisation schedule regulated the manner in which securitised assets and income are transferred from originator to the SPV and operational aspects of the SPV

1992 Commercial and Debenture Schedule (Notice 152 )

The Commercial and Debenture Schedule provides regulations regarding the general utilisation of commercial paper and debentures.

RESTRICTIVE• These schedules stipulated that a company could only issue commercial paper

if it held net assets to a total value exceeding R 100 million (9 million Euro). (12 months prior to the issues)

• Securitisation is regulated by the Banks Act and fell within the meaning of “the business of a bank” which meant that only registered banks could securitise.

• Debenture can only be issued in denominations of R 1 million

2001 -2001 Government Notice

No. 1375 of 13 December 2001.

In terms of the 2001 Regulations the operation of a securitisation scheme was no longer regarded as “the business of a bank”.

Corporations as well as banks could make use of securitisation.

The 2001 Regulations also made provisions for a bank to fulfil multiple roles in securitisation transactions.

2004 Government Notice 681 of 4 June 2004

Broadened the types of assets that may be securitised.

Provided more detailed conditions for securitisation.

Allowed for the creation of synthetic securitisations.

SPV’s were exempt from having to register as a bank.

RESTRICTIVE CONDITIONS REMOVED

Fitch Ratings believes that mortgage based securitisations (MBS) are potentially the next big asset class to take off in South Africa.

For listed property companies, MBS programmes is an alternative and potentially cheaper source of funding than conventional bank loans.

More property companies may decide to take advantage of these and other benefits securitisation have to offer.

According to Fitch Ratings, the current legal and regulatory environment in South Africa is “sufficiently stable and robust to sustain a viable securitisation industry”

Recent announcements by Moody’s however indicates that although South Africa was relatively unscathed by the global credit crisis that was triggered by the sub-prime market meltdown, the credit crisis is most certainly causing a few rumblings in the South African securitisation market.

This will surely catch the eye of investors, both locally and internationally, who have been assured they have been sheltered from problems in the global credit market.

There has been signs of a return to normality in the markets but it is evident that the sub-prime meltdown has not yet run its full course.

 

a. The end result is that real estate securitisation is definitely feasible within the current South African securitisation framework. The number of RMBS and CMBS programmes issued since 2004 bears witness to this fact.

b. It was found that prior to 2001 there were quite a few limiting conditions in the South African regulatory environment but real estate securitisation was still supported to a certain degree. The implementation of new regulation in 2001 and 2004 paved the way for these limiting conditions to be eliminated.

c. It was established that real estate securitisation is quite practical within the standard securitisation process and doesn’t have to deviate from the accepted norms.