The national economy was on a bull-run of sorts until 2008 when the country started feeling the impact of the global economic recession. Real GDP contracted significantly while unemployment rates skyrocketed as businesses closed shop. The mining sector was especially hard hit as Botswana’s diamond exports slowed to a trickle, impacting negatively on government revenue, the balance of payments and foreign exchange reserves.
Employment figures in the mining industry plummeted as copper and nickel mines either shut down or retrenched thousands of employees.
To ensure long-term fiscal sustainability, government invested heavily in infrastructure development projects, notably expansion of Morupule ‘B’ Power Station, Sir Seretse Khama, Maun and Francistown airports as well as major dam projects. The Monetary Policy was also favourable as it stimulated economic activity. Banks also relaxed their loan requirements and consumer spending shot up. The property market was not left out as clients sought equity release, portfolio rebalancing and debt consolidation products.
At the time, there was very limited development especially in residential property. Enter Botswana Housing Corporation (BHC) with massive housing developments that were immediately swallowed up by the cash endowed middle class. BHC’s Block 7 flats, for example, debuted at close to P600, 000 in 2009.
“The rapid growth of the property market was inevitable. There was limited housing stock in the market, in the face of skyrocketing affordability and a savvier customer base. The thriving market automatically resulted in price escalation,” said Sethebe Manake, Founder, Chief Executive Officer (CEO) of Vantage Properties.
The property market bull-run continued unabated until a few years ago when Linah Mohohlo, Governor of the Bank of Botswana (BoB), spear headed a string of debilitating regulatory changes that heralded an era of doom for local banks, characterised by shortage of deposits, declining liquidity and reduced profit margins. Mohohlo’s sweeping changes conspired to restore the balance of power to depositors and bring to an end an era of boon and abundance for local banks. Tough times had befallen the banking industry and they were no longer languishing in excess liquidity, super normal profits and low deposits rates. That era had come to a sad and resounding end.
Banks cringed as the Governor went on a rampage, decreasing the amount of Bank of Botswana Certificates (BoBCs) while government streamlined disbursements to parastatals and local authorities. Funds disbursed by government could no longer lie idle in bank vaults, earning limited interests and eventually financing BoBCs, though with limited benefits for government.
At the BOCCIM National Business Conference last year, Mohohlo sounded the death knell for the banking industry, warning of an end to their days of plenty, when they operated for over two decades with substantial liquidity surpluses. She warned banks that they were now in a transitional phase towards a more normal banking environment in which they could no longer afford to turn away deposits, as was the case before introduction of BoBCs in 1991.??“Going forward, banks will need to be more innovative in attracting and appropriately remunerating deposits. Banks are transiting from a high interest rate environment, rapid balance sheet growth and relatively high profits on the back of high interest rate spreads, to a period of low interest rate environment and a more competitive market. The resultant reduction in interest rate margins is indeed a welcome development for customers,” she said.
By December 2013 the dearth of deposits started to bite as banks subtly tightened their equity releases. By December 2014, Statistics Botswana revealed that there was a four percent decline in total deposits held by local banks from P53, 635m to P51, 492m. Deposits of resident private businesses fell by P961m while those of parastatals fell by P460m.
Due to lack of corresponding growth in deposits, the industry’s loan to deposit ratio rose from 47 percent in 2007 to 88 percent in 2014, leaving some banks fully lent. According to the 2015 Monetary Policy Statement, household dept decreased significantly despite lower interest rates, reflecting tightening liquidity and weaker growth in incomes. Annual household debt shot down from 24.2 percent in 2013 to 9.4 percent in 2014.┬áMortgage lending also decreased from 40.1 percent to 18.4 percent while unsecured lending fell from 19.6 percent to 5.3 percent between 2013 and 2014.┬á
Pundits have opined that the slowdown in personal and mortgage lending is testimony to the long held view that banks have tightened their loan application and review procedures. Also, they said, the mortgage market, especially for high value residential property, was weakening. It was only a matter of time before state financial institutions like BBS and NDB followed suit, especially because they have been borrowing money from local banks. Last week, reports emerged that NDB had frozen loan disbursements, citing crippling liquidity problems that rendered it unable to disburse funds for even loans that have already been approved. The local banks’ declining fortunes came at a time when, because of escalating property values, many Batswana have been gradually eating away at the value of their properties through equity releases and loan consolidations.
“The trend continued unabated to a point where almost everyone who has property somewhere has eaten off its value. Now there is nothing left and people are unable to squeeze out any value from their property to cater for their increasingly expensive lifestyles. They end up defaulting on their mortgage payments,” said Manake.
As a result, banks have been forced to foreclose many of their property mortgages. However, the same banks find themselves in a dilemma because they are unable to sell their repossessed properties as liquidity has been compressed. There are too many foreclosures in Botswana’s residential property market. Too many people are desperate to shed off their properties in the face of limited demand. Therefore properties prices are expected to go down. While industry players have sounded warning bells and cautioned about a looming property market crash, Manake believes there is nothing to worry about as the property market is simply aligning itself with the economic cycle.
“The current state of the market was long coming. But it’s not the end of the world. Of course there will be price reductions, but it won’t be so drastic as to result in a crash,” she said.
However, said Manake, there is a lesson to be learnt from the current tremors in the property market.
“As Batswana we must wake up. No one is going to do anything for us. We must create our own tailor made products to finance our property markets. We must seek our own sustainable solutions”
For individual property investors, Manake believes the greatest lesson is for them to engage registered professionals who will give them proper advice on their investments.