26 June 2009
Snow in Plett
The drought has finally been broken with some very strong winds and driving rain over the past week. A fair amount of damage was done with trees uprooted and signs destroyed, but fortunately nothing too serious. Big seas have been running and waves have again come over the Bird Island sand spit separating the Keurbooms Estuary from the Bay. But the best news of all is that the Tsitsikammas and Outeniquas are covered in snow! The falls have far exceeded that of the previous three years and we are all waiting for the clouds to lift so that some spectacular pictures can be taken. There is simply nothing more beautiful than our beautiful Bay being surrounded by a ring of snow!
17 June 2009
Banks Clip Mortgage Originators' Wings
Banks have recently renegotiated commissions payable to mortgage originators and this has resulted in a substantial deduction in the future income potential for originators and Estate Agents who are the prime source of mortgage referral business to originators. Banks claim that the commissions were too high and have reduced their returns and increased their bad debts, but is this really so?
The mortgage originator's cost is paid up front when a bond is registered. Previously an originator could have expected to receive R24 000 against a R1 million bond. This being based upon the assumption that the originator's commission rate was 2,4%. Recently renegotiated commissions appear to have been reduced to 1,5%. If a bank charges its client a nominal interest rate of Prime (i.e. 11%) then the nominal interest cost of the originator's commission to the bank over 20 years is 0,22% for a 1,5% commission and would have been 0,36% for a 2,4% commission rate. The bank would therefore earn 11% minus 0,22% = 10,78% net). This is surely a small cost for any bank to acquire business and is much much lower than it would cost to implement their own sales infrastructure?
So why have originators' commission rates been reduced? Perhaps it is a result of the high life that has been exhibited by some leaders in the origination field who have perhaps naively flouted their wealth and extravagant lifestyle in the print and electronic media that has resulted in bankers and non-executive directors expressing displeasure at Board level, or perhaps the banks have begun to feel uncomfortable with the originators taking control of their client relationships, and cross selling other products such as insurance to their client base that has raised alarm bells!
While banks claim that the cost of commission to originators, which is paid upfront, has had a considerable impact on their income, it seems a little far fetched to justify how a R7 500 commission against a loan of R500 000 could have much of an affect on their total write offs or interest income.
Of course, banks don't only pay out costs for registering new bonds, they also charge clients substantial new mortgage documentation fees of at least R4500 per bond and also debit the client's account with a monthly administration fee; and sell householders insurance at inflated premiums, charged annually in advance (not monthly), and also often debited to the client's account a few months before expiry of the current premium. All these amounts are capitalised (unless the client pays additional cash into the bond) and earn substantial interest for banks. And while banks are accounting for the additional interest income each month, the capital outstanding is increasing - not reducing, and this is a major contributory factor to bad debts when the client cannot service the bond repayments, particularly in the first ten years when most of the payments go towards servicing interest, with very little capital having being repaid. At a later stage, when the outstanding capital is still high, the losses are accordingly also high and the additional income that has been earned in prior years is conveniently forgotten.
Then there are early settlement penalty fees. Clients need to give their banks 3 months notice of intention to settle their bond. If one does not, the bank will in all likelihood charge an early settlement penalty. On a R1 million bond, this penalty would amount to R25 500! This is of course far more than what the mortgage originator originally received as a commission. Is it possible that banks may have shrewdly negotiated their early settlement penalties into the new National Credit Act legislation to cover the cost of recouping mortgage origination commissions?
If banks are concerned about the costs of their up-front payments to originators, then it could be argued that there is a case for documentation fees and early settlement penalties to be off-set against the commission paid to the originator.
At the moment banks are not able to service direct mortgage applications with speed and do not have the infrastructure to compete with the service of mortgage originators. It will be interesting to see what happens when the economy improves. Will banks want to acquire origination companies or will they attempt to further strangle them hoping that their staff will join the banks?
The banks have long since abandoned personal relationships with their clients (motor vehicle finance on dealer floors and call centres are prime examples) and the originators, who provide a personal touch with face to face client interaction, may already be too powerful for banks to ignore if they want to be amongst the future mortgage growth market leaders.
The mortgage originator's cost is paid up front when a bond is registered. Previously an originator could have expected to receive R24 000 against a R1 million bond. This being based upon the assumption that the originator's commission rate was 2,4%. Recently renegotiated commissions appear to have been reduced to 1,5%. If a bank charges its client a nominal interest rate of Prime (i.e. 11%) then the nominal interest cost of the originator's commission to the bank over 20 years is 0,22% for a 1,5% commission and would have been 0,36% for a 2,4% commission rate. The bank would therefore earn 11% minus 0,22% = 10,78% net). This is surely a small cost for any bank to acquire business and is much much lower than it would cost to implement their own sales infrastructure?
So why have originators' commission rates been reduced? Perhaps it is a result of the high life that has been exhibited by some leaders in the origination field who have perhaps naively flouted their wealth and extravagant lifestyle in the print and electronic media that has resulted in bankers and non-executive directors expressing displeasure at Board level, or perhaps the banks have begun to feel uncomfortable with the originators taking control of their client relationships, and cross selling other products such as insurance to their client base that has raised alarm bells!
While banks claim that the cost of commission to originators, which is paid upfront, has had a considerable impact on their income, it seems a little far fetched to justify how a R7 500 commission against a loan of R500 000 could have much of an affect on their total write offs or interest income.
Of course, banks don't only pay out costs for registering new bonds, they also charge clients substantial new mortgage documentation fees of at least R4500 per bond and also debit the client's account with a monthly administration fee; and sell householders insurance at inflated premiums, charged annually in advance (not monthly), and also often debited to the client's account a few months before expiry of the current premium. All these amounts are capitalised (unless the client pays additional cash into the bond) and earn substantial interest for banks. And while banks are accounting for the additional interest income each month, the capital outstanding is increasing - not reducing, and this is a major contributory factor to bad debts when the client cannot service the bond repayments, particularly in the first ten years when most of the payments go towards servicing interest, with very little capital having being repaid. At a later stage, when the outstanding capital is still high, the losses are accordingly also high and the additional income that has been earned in prior years is conveniently forgotten.
Then there are early settlement penalty fees. Clients need to give their banks 3 months notice of intention to settle their bond. If one does not, the bank will in all likelihood charge an early settlement penalty. On a R1 million bond, this penalty would amount to R25 500! This is of course far more than what the mortgage originator originally received as a commission. Is it possible that banks may have shrewdly negotiated their early settlement penalties into the new National Credit Act legislation to cover the cost of recouping mortgage origination commissions?
If banks are concerned about the costs of their up-front payments to originators, then it could be argued that there is a case for documentation fees and early settlement penalties to be off-set against the commission paid to the originator.
At the moment banks are not able to service direct mortgage applications with speed and do not have the infrastructure to compete with the service of mortgage originators. It will be interesting to see what happens when the economy improves. Will banks want to acquire origination companies or will they attempt to further strangle them hoping that their staff will join the banks?
The banks have long since abandoned personal relationships with their clients (motor vehicle finance on dealer floors and call centres are prime examples) and the originators, who provide a personal touch with face to face client interaction, may already be too powerful for banks to ignore if they want to be amongst the future mortgage growth market leaders.
Nominal Interest Rates vs APR Rates
John Fuller, Principal of Chas Everitt International property, Plettenberg Bay, reports, "I read with interest the comments made by Mr CHUKA UROKO of Nigeria in the CyberProp Newsletter of 12th June regarding his comparison of interest rates in several countries, and especially his comparisons with Dubai, South Africa and the UK. It always brings a smile to my face when I hear comparisons being made about our finance rates and those of many other countries, and I have on several occasions had the pleasure of educating buyers from Europe when they have compared our mortgage rates to theirs. Most people are unaware that there is a vast difference between the calculation methods used to determine financing rates in most African and European countries compared to South Africa. As a Banker in my previous life before starting the Chas Everitt franchise in Plettenberg Bay I worked in all the English speaking African countries, plus Egypt, Mauritius, India, France, UK, and Dubai; and all these countries quoted their finance rates on a different basis to us.
South African interest rates for the financing of fixed and movable assets are quoted as Nominal Annual Compounded Monthly (NACM) Rates. Nominal Rates can be calculated and quoted for monthly, quarterly, half-yearly and annually, etc., e.g. a rate where payments are made quarterly will be quoted as NACQ. With NACM interest is calculated on a reducing balance basis, based upon the capital outstanding each month. We often hear this being referred to as the "Mortgage Redemption Method". If the NACM interest rate is 11% then interest is calculated at one twelfth of 11% per month on the balance outstanding each month. What is nice about using NACM rates is that it is easy to calculate your true cost over different periods as your interest rate stays the same regardless of the financing period. This is a particularly useful method to use where rates vary during the term of finance, or if one intends settling the transaction early.
The other countries that I have referred to use a calculation which is referred to as the 'Annual Percentage Rate yield', which is commonly called the 'APR Rate'. This is commonly used in Europe and in other countries wherever there there has been a past colonial influence in their economy. APR is calculated on a simple interest basis on the Present Value (finance amount required), and the interest cost on the PV is then simply multiplied by the number of years finance required. APR rate quotes provide a lower and often misleading interest rate percentage compared to the equivalent NACM percentage rate of interest. South Africa used APR rates until 1980, when we converted to NACM and Asset Based financiers for the first time included variable interest rate clauses in their finance agreements to cater for changes in the Prime Overdraft Rate. In fact, in those days Prime was 9,5% and our Banks were financing cars at 11,6% APR over 36 months, which was actually 21% NACM. No wonder banks are squealing today! The introduction of NACM rates created transparency and consumers have been much better off since its implementation.
If the Real Estate fraternity is made aware of the differences between the two different rate methods it will help in advising clients that our mortgage finance rates are not as ridiculously inflated as is often assumed. For example, in the Nigerian article Mr Uroko refers to an interest rate of 4%. I happen to know this will be APR, and the equivalent interest rate on an NACM rate basis over 20 years is 6,58%. It is important to remember that the quoted NACM rate always stays the same, while the APR rate varies with the finance term. For example, 4% APR over 10 years is 7.11% NACM, and over 5 years the NACM equivalent is 7,42%. Where we are also very fortunate is that few countries offer home finance over 20 and 30 years. Many go no longer than 10 years. In fact, when I retired in 2005, I was trying to introduce mortgage finance to Dubai. At that stage a home could only be leased over 10 years, with a method of passing ownership being tied to the payment of 1 Dirham thereafter. Whilst our interest rates may seem high, South Africans are fortunate to have access to generous finance terms, and our monthly repayments (monthly cash flow) is still amongst the most affordable in the World.
Therefore, next time we are in London or Paris, walk past a car showroom, take a look at the sign on the roof or windscreen. It will in all likelihood say 'Interest Only 6% APR'. As South Africans we can walk on with a smile knowing that over 60 months this rate is equivalent to 10,85% NACM, just proving that we are not so badly done by after all! Quoting APR percentages can be extremely misleading and consumers can be easily hoodwinked by the true cost of interest, especially where finance periods are not the same. For example, if finance is quoted at the same APR rate but payments are payable monthly in advance, then the nominal yield to the financier will be higher than that for monthly in arrear payments.
I hope we will all bear in mind the difference in future when we hear or read about financing rates in other countries, and ask the question - 'Is it Nominal or is it APR?' "
South African interest rates for the financing of fixed and movable assets are quoted as Nominal Annual Compounded Monthly (NACM) Rates. Nominal Rates can be calculated and quoted for monthly, quarterly, half-yearly and annually, etc., e.g. a rate where payments are made quarterly will be quoted as NACQ. With NACM interest is calculated on a reducing balance basis, based upon the capital outstanding each month. We often hear this being referred to as the "Mortgage Redemption Method". If the NACM interest rate is 11% then interest is calculated at one twelfth of 11% per month on the balance outstanding each month. What is nice about using NACM rates is that it is easy to calculate your true cost over different periods as your interest rate stays the same regardless of the financing period. This is a particularly useful method to use where rates vary during the term of finance, or if one intends settling the transaction early.
The other countries that I have referred to use a calculation which is referred to as the 'Annual Percentage Rate yield', which is commonly called the 'APR Rate'. This is commonly used in Europe and in other countries wherever there there has been a past colonial influence in their economy. APR is calculated on a simple interest basis on the Present Value (finance amount required), and the interest cost on the PV is then simply multiplied by the number of years finance required. APR rate quotes provide a lower and often misleading interest rate percentage compared to the equivalent NACM percentage rate of interest. South Africa used APR rates until 1980, when we converted to NACM and Asset Based financiers for the first time included variable interest rate clauses in their finance agreements to cater for changes in the Prime Overdraft Rate. In fact, in those days Prime was 9,5% and our Banks were financing cars at 11,6% APR over 36 months, which was actually 21% NACM. No wonder banks are squealing today! The introduction of NACM rates created transparency and consumers have been much better off since its implementation.
If the Real Estate fraternity is made aware of the differences between the two different rate methods it will help in advising clients that our mortgage finance rates are not as ridiculously inflated as is often assumed. For example, in the Nigerian article Mr Uroko refers to an interest rate of 4%. I happen to know this will be APR, and the equivalent interest rate on an NACM rate basis over 20 years is 6,58%. It is important to remember that the quoted NACM rate always stays the same, while the APR rate varies with the finance term. For example, 4% APR over 10 years is 7.11% NACM, and over 5 years the NACM equivalent is 7,42%. Where we are also very fortunate is that few countries offer home finance over 20 and 30 years. Many go no longer than 10 years. In fact, when I retired in 2005, I was trying to introduce mortgage finance to Dubai. At that stage a home could only be leased over 10 years, with a method of passing ownership being tied to the payment of 1 Dirham thereafter. Whilst our interest rates may seem high, South Africans are fortunate to have access to generous finance terms, and our monthly repayments (monthly cash flow) is still amongst the most affordable in the World.
Therefore, next time we are in London or Paris, walk past a car showroom, take a look at the sign on the roof or windscreen. It will in all likelihood say 'Interest Only 6% APR'. As South Africans we can walk on with a smile knowing that over 60 months this rate is equivalent to 10,85% NACM, just proving that we are not so badly done by after all! Quoting APR percentages can be extremely misleading and consumers can be easily hoodwinked by the true cost of interest, especially where finance periods are not the same. For example, if finance is quoted at the same APR rate but payments are payable monthly in advance, then the nominal yield to the financier will be higher than that for monthly in arrear payments.
I hope we will all bear in mind the difference in future when we hear or read about financing rates in other countries, and ask the question - 'Is it Nominal or is it APR?' "
09 June 2009
FNB Quick Sell Plan
First National Bank and Chas Everitt International Property have teamed up to assist FNB clients who are experiencing distress in meeting their mortgage payments in the current market.
This service is to assist FNB clients to dispose of their homes at the best possible market price, rather than face inevitable foreclosure, which could lead to a much lower selling price on a forced sale basis.
FNB clients requiring assistance should discuss their needs with their bank. The bank then values the property, agrees a reserve price with the client, signs a mandate with the client and then forwards the transaction to Chas Everitt or two other national agencies that are also participating in the programme.
Chas Everitt has contracted to perform extensive marketing of the property under the "FNB Quick Sell Plan" banner, for a reduced rate of commission.
View Chas Everitt's FNB Quick Sell Properties
100% Mortgage bonds are available from FNB to approved buyers, plus a 50% reduction in conveyancing fees during the transfer process. This system has already proved a great success for many clients. We commend FNB for their proactive approach in supporting their clients!
This service is to assist FNB clients to dispose of their homes at the best possible market price, rather than face inevitable foreclosure, which could lead to a much lower selling price on a forced sale basis.
FNB clients requiring assistance should discuss their needs with their bank. The bank then values the property, agrees a reserve price with the client, signs a mandate with the client and then forwards the transaction to Chas Everitt or two other national agencies that are also participating in the programme.
Chas Everitt has contracted to perform extensive marketing of the property under the "FNB Quick Sell Plan" banner, for a reduced rate of commission.
View Chas Everitt's FNB Quick Sell Properties
100% Mortgage bonds are available from FNB to approved buyers, plus a 50% reduction in conveyancing fees during the transfer process. This system has already proved a great success for many clients. We commend FNB for their proactive approach in supporting their clients!
Chas Everitt - Wetherlys Discount
Chas Everitt International Property Plettenberg Bay has arranged a special 5% discount for any homeowner wishing to purchase goods from Wetherlys furniture stores. This discount is obtainable nationally from any Wetherlys store.
All you need to do to obtain your discount is quote our Account Number to your local Wetherlys store when purchasing. Its as simple as that!
E-mail our Office Coordinator Tracey Clague at plett@everitt.co.za or call her on +27 (0)44 533 5250 for the Account Number. This service is absolutely free to you from Chas Everitt.
Please also remember that Wetherlys not only provides the widest range of furniture in South Africa, but that they will also quote you on furnishing your entire home, including all furniture, linen, curtains and accessories, all at most competitive prices. Please ask your local store to visit your home should you require their decorating service.
All you need to do to obtain your discount is quote our Account Number to your local Wetherlys store when purchasing. Its as simple as that!
E-mail our Office Coordinator Tracey Clague at plett@everitt.co.za or call her on +27 (0)44 533 5250 for the Account Number. This service is absolutely free to you from Chas Everitt.
Please also remember that Wetherlys not only provides the widest range of furniture in South Africa, but that they will also quote you on furnishing your entire home, including all furniture, linen, curtains and accessories, all at most competitive prices. Please ask your local store to visit your home should you require their decorating service.
07 June 2009
Plett Estate Agents police their own conduct
Plettenberg Bay Estate Agents have joined forces to set their own standards of conduct to ensure a high standard of compliance. Most Agencies support the concept, with only a few not wishing to participate. Remax Principal Graham Anley chairs the meetings and initial discussions have mainly centered around estate agent For Sale and Show House boards.
The Municipality used to monitor Estate Agent Boards, but some six months ago their employee resigned and a subsequent new appointment only lasted a month. This is when Brokers, led by Graham decided to take charge of their own conduct. Meetings are held every second month and the cooperation amongst Agencies has improved markedly. Open communication now exists amongst Brokers and there has been a marked improvement in levels of conduct regarding the use and placement of boards.
The forum is an excellent one which will result in further cooperation in future and a number of additional issues will be tackled in due course. Everything possible will be done to welcome the Agencies who have thus far chosen to ignore invitations to attend the meetings.
The Municipality used to monitor Estate Agent Boards, but some six months ago their employee resigned and a subsequent new appointment only lasted a month. This is when Brokers, led by Graham decided to take charge of their own conduct. Meetings are held every second month and the cooperation amongst Agencies has improved markedly. Open communication now exists amongst Brokers and there has been a marked improvement in levels of conduct regarding the use and placement of boards.
The forum is an excellent one which will result in further cooperation in future and a number of additional issues will be tackled in due course. Everything possible will be done to welcome the Agencies who have thus far chosen to ignore invitations to attend the meetings.
Plettenberg Bay Estate Agents face challenging times
As the economic noose tightens, the number of Estate Agents in South Africa has declined quite dramatically. A recent report from the Institute of Estate Agents reveals that the number of registered Estate Agents has declined from 80 000 to 38 000 in the past year.
While times may be tough at present, those Agents who can survive will no doubt benefit in future. It is highly unlikely that the number of Agents will dramatically increase when the market improves. The new Agent qualification criteria, the costs of training, as well as expected increased EAAB registration fees, will ensure that only the serious and professional agents will remain in the industry.
The Pettenberg Bay property market has not been immune to the effects of the current recession, and a number of agencies have already closed and left town, while one has indicated that they will operate from an Agent's home until the market improves. Amongst those who have closed their branded offices are Durr, Aida, Rawsons, Bitou Properties, ERA, and Jawitz.
Using 2007 sales as a benchmark, the local property market shrunk by two thirds in 2008, and 2009 is only looking slightly better with sales expected to be no more that 50% of the 2007 levels. For many Agents and Agencies its now a matter of getting through 2009 and hoping that 2010 will show a marked improvement. One thing is certain - the shakeout will continue, with some more casualties expected, before better times return.
While times may be tough at present, those Agents who can survive will no doubt benefit in future. It is highly unlikely that the number of Agents will dramatically increase when the market improves. The new Agent qualification criteria, the costs of training, as well as expected increased EAAB registration fees, will ensure that only the serious and professional agents will remain in the industry.
The Pettenberg Bay property market has not been immune to the effects of the current recession, and a number of agencies have already closed and left town, while one has indicated that they will operate from an Agent's home until the market improves. Amongst those who have closed their branded offices are Durr, Aida, Rawsons, Bitou Properties, ERA, and Jawitz.
Using 2007 sales as a benchmark, the local property market shrunk by two thirds in 2008, and 2009 is only looking slightly better with sales expected to be no more that 50% of the 2007 levels. For many Agents and Agencies its now a matter of getting through 2009 and hoping that 2010 will show a marked improvement. One thing is certain - the shakeout will continue, with some more casualties expected, before better times return.
Harcourts Opens In Plettenberg Bay
The Australian Property Group, Harcourts, have signed up a franchisee for Plettenberg Bay. The new office will be operated by Debbie Cairns, for a number of years the top Agent at the local Remax office. Debbie will be joined by Lisa Ritchie, another top Remax Agent. Debbie will focus on sales with Lisa running the office. Stephen Ritchie is also leaving Remax to join the new franchise. Chas Everitt International Property wishes Debbie, Lisa, and their new team all the best of luck in their new venture, especially during these challenging times. The new Harcourts office will open in the Main Street premises recently vacated by Jawitz Properties
06 June 2009
New Plettenberg Bay Developments At Risk
Plettenberg Bay property, especially vacant land, will go through a period of consolidation and low capital growth over the next five years. John Fuller of Chas Everitt International Property, Plettenberg Bay, says there is an enormous surplus of vacant stands on the market following large scale real estate developments in the town over the last ten years. These new developments include areas such as Brackenridge, Whale Rock, Schoongezicht, The Hill and Baron's View. Baron's View is being marketed for the third time by new developers, following two previous failed attempts by previous developers to sell the stands. The other developments have many stands which have either not sold or have been sold to investors who are now unable to resell their stands at a profit. John says that Plettenberg Bay remains the most beautiful resort town in South Africa, and an exceptionally desirable place to live, but being mostly a secondary home environment it has been hit hard by the current world and local economic crisis, and property sales have dropped dramatically because of consumer debt and the introduction of the National Credit Act and Banks' reluctance to finance vacant land without substantial deposits.
Many investors snapped up stands at launch or on resale thereafter thinking that the high annual price inflation being experienced then would continue, but have since unfortunately discovered that the market has fallen back to 2005 price levels. Those who do not reduce their inflated asking prices and ignore that the market has changed forever will find that their holding costs will be considerable. Their high price expectations will only assist the better priced properties to sell first.
Two new golf estate developments have been in the pipeline in Plettenberg Bay for some time and the developers will need to introduce some exceptionally creative marketing strategies if these are to be successfully launched during the next three years. Garden Route golf courses like most courses elsewhere are struggling to generate positive cash flows and simply cannot survive without strong demand from international investors and increased international tourism into South Africa. Developers normally attempt to cover the basic annual running costs for the golf course from owner membereship subscriptions, but if the properties are not sold the course can collapse. There are simply too many new residential golf estates on the Garden Route competing for a diminishing buyers' pool. Supply far exceeds demand at this time.
Many investors snapped up stands at launch or on resale thereafter thinking that the high annual price inflation being experienced then would continue, but have since unfortunately discovered that the market has fallen back to 2005 price levels. Those who do not reduce their inflated asking prices and ignore that the market has changed forever will find that their holding costs will be considerable. Their high price expectations will only assist the better priced properties to sell first.
Two new golf estate developments have been in the pipeline in Plettenberg Bay for some time and the developers will need to introduce some exceptionally creative marketing strategies if these are to be successfully launched during the next three years. Garden Route golf courses like most courses elsewhere are struggling to generate positive cash flows and simply cannot survive without strong demand from international investors and increased international tourism into South Africa. Developers normally attempt to cover the basic annual running costs for the golf course from owner membereship subscriptions, but if the properties are not sold the course can collapse. There are simply too many new residential golf estates on the Garden Route competing for a diminishing buyers' pool. Supply far exceeds demand at this time.
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