The Institute of Race Relations (IRR) has raised significant concerns about the Expropriation Act, warning that it could severely disrupt the country’s banking and credit systems, with far-reaching consequences for the property industry.
Signed into law on January 23, the South African Expropriation Act has reignited criticism over its potential impact on state financial institutions and banks.
The legislation threatens to undermine a crucial benchmark that banks use to assess risk and extend credit, with IRR researcher Anlu Keeve stating that at some point, the risk of extending capital may no longer be worth taking.
The Expropriation Act casts doubt on the market value of property, including property being used as collateral.
This implies a higher credit risk, firstly because owners might lose their mortgaged properties and receive compensation below market value, making it impossible for them to settle their debt, and secondly, because the mere risk of expropriation anywhere in the country creates uncertainty about the value of property as collateral.
Higher credit risk means higher interest rates and tighter lending conditions. Without the confidence that property will retain its value or remain in the hands of the borrower, this is inevitable.
Under the Expropriation Act, property owners remain liable for loans even if their properties are expropriated. If the compensation for the expropriated property is insufficient to cover the outstanding debt, the owner will face severe financial strain, including additional costs for alternative housing and continued loan repayments on property they no longer own.
This burden is compounded if the expropriated property was a source of income.
The IRR stated that because of this elevated risk, the Expropriation Act could mean that banks will have to apply stricter loan approval criteria, higher interest rates, and reduced access to credit − particularly for first-time homebuyers, small businesses, and those with weaker financial profiles.
“If borrowing becomes more expensive, demand for property and business investment will decline.”
If fewer people can access financing, property prices will drop. This could result in a selloff of Real Estate Investment Trusts (REITs), mortgage-backed securities, and property-linked bonds, which would reduce their value. This would further erode the value of the collateral that banks rely on to secure loans.
“Banks will think twice before issuing new property loans in an environment where title deeds can be arbitrarily revoked,” Keeve said.
“Over time, the risk is that the Expropriation Act will slow activity in property markets, reducing homeownership rates, construction activity, and real estate investment.”
If credit risk escalates further, it could lead to a rise in non-performing loans, the IRR cautioned. A wave of defaults would weaken bank liquidity and force financial institutions to write off massive losses, it said.
Keeve stressed that even if a full-scale banking crisis is avoided, the uncertainty alone is damaging. Financial instability breeds investor nervousness.
If confidence in the system dwindles, foreign and domestic investors will withdraw capital. This means a weaker rand and the prospect of capital flight.
Failing banks would place direct pressure on National Treasury, increasing the risk of government bailouts.
“If banks start to collapse, the state will have no choice but to step in with public funds, placing an unplanned burden on an already overstretched national budget and potentially risking further credit-rating downgrades, which have their own set of very negative consequences,” Keeve said.
The IRR called on the Expropriation Act to be amended to ensure all expropriations are subjected to proper judicial supervision and linked to market-based compensation in each instance.
