More than 90% of the loans in the South African residential mortgage market are provided by the banking sector. The rest are provided by credit provider companies (e.g. SA Home Loans) or by large employer organizations (Transnet, Eskom, etc). The growing need for housing, mainly as a result of the positive shift in the South African demographics, has lead to a significant growth in the demand for residential properties during the last 5-10 years.
The mainstream mortgage credit lenders have all structured their businesses to only attract and accept the ‘better quality’ applicants. Credit policies have been drafted to exclude applicants who need funds and who are not in ‘full’ compliance with the stringent credit criteria of these institutions. There is therefore a significant market of very good lending opportunities not being fulfilled.
A market gap and business opportunity exists to penetrate the home loans market in a sector where current home owners are being deprived of successfully applying for a home loan or an extension on their current mortgage.
Bondpro Finance (Pty) Ltd has developed, tested and currently offers a suitable product and service to address the needs in this identified market gap.
1. Market Analysis
Market Overview
The size of the market can be estimated by analysing the value of new home loan applications at South Africa’s top 4 banks both during good and bad economic environments.
During 2006, which is generally regarded as the peak of the recent housing boom, the total value of all new home loan applications at South Africa’s top 4 banks was measured to be between R18-20bn per month. At this time the total value of these home loan applications that were denied was estimated between R6-8bn per month.
During 2009, the total value of all new home loan applications decreased to between R8-10bn per month and the value of applications denied was estimated between R4-6bn per month.
These figures do not include current holders of mortgages who may have wanted to take a larger mortgage or switch to a different provider.
Target Market and Client Profile
Given the above market, Bondpro has identified a section of the market that it is willing to lend money to, in spite of being turned away from the other credit providers. The identified target market contains the following elements:
Residential property owners with asset/finance/debt restructuring needs,
Residential area’s A, B and selected C and D (these are categorised by the 2 large property valuation companies in South Africa – see point 6.0 ‘Credit process and criteria’ below),
Property values of at least R350 000,
Gross monthly income to exceed R10 000,
Within the age groups of 25 to 57,
Largely salaried applicants (80% of applications).
Trends
There is always a demand for credit both in good and bad economic climates. Bondpro’s opportunities for loans grows in bad times and contracts in good times, and is therefore considered to be counter cyclical. However there have been a few recent trends which have made a significant impact on the home loans industry (“the industry”).
Following the implementation of the new National Credit Act (“the Act”) passed in June 2006, the industry has become better organised and regulated. As a result of the Act, all credit providers now have to be registered and have to report quarterly to the National Credit Regulator. This has created a greater degree of caution towards lending money as many do not want to contravene the clauses in the Act which refer to reckless lending.
Due to the recent collapse of the financial system globally, both banks and funders are practising a greater degree of caution when providing funding for home loans. Banks are also having their fee structures scrutinised. Banks therefore, are spending a great deal of effort to protect their balance sheets and their lending margins.
Finally, residential property values in the mid market (between R300 000 to R2 million) usually increases at a faster rate than inflation. After the lack of increases over the past two years, it is expected that residential property values will escalate steeply in this market in the future.
2. Industry Analysis
Industry Structure
Banks as credit providers, but do not provide debt consolidation to the same market segment targeted by Bondpro.
Apart from the banks, there are other players in this industry, however these credit providers do not take on clients with judgements or defaults to their name. They also only deal with 2nd mortgages and do not consolidate the client’s debt into a single first mortgage. In addition they do not have the administrative know-how or the technological systems that Bondpro has. Due to their different approach, they are not direct competitors of Bondpro.