Is risk management a determinant of financing sustainable empowerment deals of commercial and industrial properties?
Date
2013-07-15
Authors
Kubheka, Nomathemba
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Abstract
The introduction of Black Economic Empowerment (BEE) was one of imperative
economic tools that the South African government established to achieve its
transformational objectives of growing the economy, decreasing inequalities, and
creating more job and business opportunities for the majority of the population.
Although this legislation is not yet fully implemented, more and more companies and
individuals are buying into its concepts to address the past inequalities within the
economic market. Risk management is at the core of the BEE transactions; while this
is the case, the understanding of the profile of the ideal investor by the financiers would
enable them to ensure sustainability of the property transactions they finance. The
primary focus of all investments is rendering of a return in the future by forfeiting
scarce resources, normally capital. Industrial and commercial properties deals are
expected to generate rental income so as to realise a capital gain of profit in the long
term. Risk management entails the identification, measurement and evaluation of risk
associated with the process of decision making. The sustainability of the
abovementioned deals ensures that the alluring factor of risk management is
indispensable as most activities in the property investments contain risk.
The main purpose and objectives of this research were to investigate the general understanding of the BEE partnerships in the commercial and industrial property
sector, pre-cautionary measures (risk management) to take note of in such
partnerships (investigated as success and failures of the deals), and the financing and
the sustainability of such BEE deals. Given a certain risk profile, property investment
looks lucrative, but the risk of failure and factors that guarantee the expected positive
outcomes by the investors are of paramount importance.
The research methodology included a combination of secondary and primary data
collection and analysis. The latter included different rounds of questionnaires and
interviews and the analysis of data through the use of the Delphi method. A sample of
20 representatives from the insurance industries, banks, trading houses, property
valuation market as well as the property investment companies took part in this research study. The findings indicated that there is a general understanding of what BEE is and
companies are utilising the legislation. The main success factors raised was that
previously disadvantaged participants need not only be part of the deal or contribute
financially, but should be operationally involved in the daily running of the business.
This in a way minimises the risk of the failure of the deal. Some of the success factors
included knowledge, skills and experience of the project team, the application of the
codes of good practice, and delivering on the goals set. The most common cause of
failure is when deals are concluded for the wrong reasons; i.e. partnering for the
purpose of meeting the required BEE scorecard or fronting. Lack of planning and
implementation the risk management techniques is another cause of failure.
Therefore, risk management techniques are critical to the success of the
empowerment property deals and they should be encouraged as a persuasive tool that
will ensure that the BEE deals are sustainable.