Discursivity and the urban geographies of real estate finance

This article aims to address the call on researchers to “open up the black boxes” of financial markets to understand how they are ‘kept opaque, how they structure their “contexts,” and how those contexts are inscribed within them’ (MacKenzie, Reference MacKenzie2005: 554). The underlying assumption here is that finance, markets, and the economy are not detached entities, but are interwoven within social, political, and cultural relations. Markets do not simply appear ‘out of thin air but are continually produced and constructed socially with the help of actors who are interlinked in dense and extensive webs of social relations’ (Berndt and Boeckler, Reference Berndt and Boeckler2009: 536). In this sense, financialisation can be considered a practical accomplishment, produced through a network of actors, technologies, processes, and knowledge.

Drawing on the concept of performativity from Callon (Reference Callon2007), this approach to financialisation contends that financial and economic discourses including theories, models, and measurements – do not describe reality, but constitute it. In other words, the financial modelling of markets, such as Johannesburg’s real estate market, is not merely a tool used to analyse and predict the performance of that market; it helps define the market itself. Central to the understanding that financial markets are performed into being is an investigation into the historically grounded and power-laden discourses that can shape financial knowledge and practices such as calculation, risk modelling, and price formation. Discourses are systems of meaning that constitute institutions, practices, and identities in contradictory and disjunctive ways (Fairclough, as cited in Larner, Reference Larner and de Goede2006: 205). By attaching meaning to social realities, discourses make intelligible ways of being in and acting towards the world. As they attach meaning to social realities, discourses govern modes of conduct that bring financial markets into existence. This means that risk and valuation metrics, expert advice and media commentaries on property markets do not exist in addition to ‘real’ material financial and economic structures. They are precisely how financial markets materialise (de Goede, Reference de Goede2005: 7). To illustrate, consider the expropriation without compensation (EWC) bill adopted by South Africa’s ruling party, African National Congress (ANC) in 2017, to accelerate land redistribution (Silungwe and Fourie, Reference Silungwe and Fourie2018). Shortly after the announcement of EWC, the rating agency Standard & Poor’s, alongside institutions like the International Monetary Fund (IMF) and International Finance Corporation (IFC) released a report highlighting that the adoption of EWC would create significant uncertainty around property rights and deter fixed investment, lower government revenue, and subdue Gross Domestic Product (GDP) growth (Silungwe and Fourie, Reference Silungwe and Fourie2018). Fearing that the returns on their investments might be compromised, investors have abstained substantially from investing in real estate over the past five years, despite government reassurances that foreign investors have ‘nothing to fear’ (News24, 2019). Although real estate growth has been subdued since 2014 and the global run on emerging markets, this decline accelerated after 2018, in both direct property investments and the listed sector (SimplyWallSt, 2022). Without suggesting that investor concerns are entirely unfounded, this example illustrates how market commentaries do not merely reflect on phenomena, but also materialise within a network of meanings, practices and institutions.

This example brings into focus two relevant points of discussion. First, it is not the case that any market commentary or expert forecast performs that depiction into being. The ability of S&P, the IMF, and the IFC to perform certain representations into being underscores the power relations within which discourses are formed. From a Foucauldian perspective, discourses refer to bodies of knowledge that not only define the subjects authorised to speak and to act but also the knowledgeable practices that these subjects undertake. The ability of S&P and the IMF to speak about the financial and economic realities of states, and for these discourses to be accepted as ‘true’ or ‘scientific’ claims, reveals the inextricable link between power and knowledge. Here, the question of power should not focus on why actors say certain things, but rather how discursive systems enable them to act in a particular way and influence the decision-making of others.

However, discourses and the meanings and the subject-positions they create are not neutral. They are tied to historical modalities of truth production that entail, at some point or another, the exclusion of ‘subjected knowledge’. Here ‘truth’ should not be seen as something to be revealed, but instead, the unconscious structures that determine what gets considered as ‘the truth’ (Foucault, Reference Foucault and Rabinow1978: 132). The ability of a subject’s discourse to be viewed as ‘true’, for instance, S&P’s rendering of South Africa’s land reform bill, reveals the functioning of discourse in relation to power. In financial markets, geography plays a formative role in linking regimes of truth to spaces of power. The discursive authority of financial centres like Wall Street and the City of London has been mediated by a long history of colonialism and imperialism (Schultz, Reference Schultz2021). This history refers not only to the practices of economic, social, and military domination and subjugation, but is intricately linked to how Western discourses of reason, progress, and ‘scientific rationality’ have been normalised as the only way to know, interpret, and be in the world. Today, this history has been projected into ‘spaces of hegemony’, whereby the financial centres of London, New York, and Frankfurt enjoy significant authority in not only determining what counts as ‘information’, but also what this information means and how it should be acted upon by market participants (de Goede, Reference de Goede2005: 7).

Second, based on the discursivity of financial practices, poststructuralism problematises the ideal/material dichotomy and enables us to consider how representations of risk and reward in property markets engage the production of space. Markets are produced in, and productive of, space and place and, importantly, imaginaries of those places (Butcher, Reference Butcher2020: 175). These imaginaries are circulated in media reports, political discourse, and everyday conversations that forge representations about what certain places are like in relation to others. Financial markets act upon these spatial representations through sophisticated modelling technologies that calculate the risks and rewards associated with investments in a certain place. This may lead to a withdrawal or influx of capital into an urban area that significantly influences the property values and the wealth of residents and tenants in a particular neighbourhood. As such, it is not only that private investment shapes cities, but social ideas and geographical imaginations shape private investment (Jacobs, Reference Jacobs1961: 313). It is at this point where poststructuralism and critical political economy approaches especially complement each other. On the one hand, poststructuralism allows us to explore the power relations inscribed in the financial discourses that perform real estate markets into being, such as creditworthiness, risk and reward. On the other hand, critical political economy perspectives consider how these discourses, which are inherently political and historically contingent, interact with processes of spatial production in post-apartheid Johannesburg. The following sections consider how discourses of risk and creditworthiness have shaped FoRE in South Africa, followed by an investigation into how FoRE has shaped and transformed the urban landscape of Johannesburg.

The selective character of real estate financialisation in South Africa

In the period leading up to the 2008 GFC South Africa, like many nations, experienced a ‘property boom’. This period saw escalating house prices, a surge in mortgage lending, a flourishing construction industry and significant innovations in mortgage finance (O’Neill, Reference O’Neill2012: paragraph 33). In 2001, the first residential mortgage-backed security (RMBS) was established by SA Home Loans (SAHL) with JP Morgan equity, following an amendment in securities legislation by the South African Reserve Bank (SARB) that allowed non-banks to perform banking functions and play multiple roles in a security transaction (van Vuuren, Reference Van Vuuren2004). In 2004, several property loan stock (PLS) companies set up single-borrower commercial mortgage-backed securitisation (CMBS) programmes (Freybote and Karoly, Reference Freybote, Karoly, Ben-Shahar, Leung and Ong2008: 197). Although mortgage-backed securitisation remains a small, yet expanding industry, it reached levels of innovation and sophistication in a few years ‘that took the US and European markets nearly two decades to achieve’ (Freybote and Karoly, Reference Freybote, Karoly, Ben-Shahar, Leung and Ong2008: 188). The booming property market coincided with pressures from the post-apartheid government to deracialise and democratise finance, particularly the property market, which resulted in the Financial Sector Charter (FSC) of 2004. Although housing finance was only a small part of the FSC’s terrain of ‘transformation targets’, signs of a US-style subprime story were starting to show, with higher interest rates and mortgages bundled into securities (Butcher, Reference Butcher2016: 85).

Yet, contrary to expectations, the South African real estate boom did not result in a subprime mortgage crisis. Instead, the prime mortgage market – higher value properties in higher-income areas – saw the most substantial decrease in value (Butcher, Reference Butcher2016: 103). Contrary to the overinclusion of mortgage loans to low-income households and neighbourhoods in the global North through predatory loans, analysts noted a decreasing share of mortgage finance to low-income households and neighbourhoods (Melzer, Reference Melzer2010: 6).

Mortgage lending and real estate investment in South Africa follow a risk-averse approach, characterised by an extreme selectivity in terms of location, sector developments, and borrower/tenant profiles (Butcher, Reference Butcher2016; Migozzi, Reference Migozzi2020). Post-crisis analyses revealed a distinct preference particularly in mortgage lending, for high-income borrowers with permanent employment in higher value properties and more expensive, historically white, neighbourhoods (Butcher, Reference Butcher2020; Haferburg and Huchzermeyer, Reference Haferburg, Huchzermeyer, Kirkness and Tijé-Dra2017; Migozzi, Reference Migozzi2020). Nationwide, only around 36% of mortgage applications are approved, with a large majority (87.87%) valued over R700 000 (NCR, 2022: 7), i.e., properties located in the ‘conventional’ rather than the ‘affordable’ and/or ‘government’ market. The mortgages underpinning RMBSs are similarly conservatively selected, characterised by low loan-to-value (LTV) and low payment-to-income (PTI) ratios (Freybote and Karoly, Reference Freybote, Karoly, Ben-Shahar, Leung and Ong2008; Migozzi, Reference Migozzi2020). Although the lack of georeferenced, disaggregated and accessible data on the mortgages underpinning RMBSs make it difficult to trace how they translate into urban space, available evidence reveals that they have a clear metropolitan focus (Migozzi, Reference Migozzi2020: 647). For the various RMBSs grouped under the Amber House Fund, backed by SAHL, Gauteng (Johannesburg) represents 46.56% of the value of distributed mortgages, followed by Western Cape (Cape Town) at 16.2% and Kwa-Zulu Natal (Durban) at 12.92% (SASF, Amber House Fund, 2022a). These RMBS deals do not include subprime mortgages but are instead composed of issuances that have an average LTV ratio of around 70% and a PTI ratio of 20% or less (see SASF 2022b: 2020). Securitisation, therefore, operates by selecting the most privileged sections of society who are able to put up a large down payment for a home loan, with larger salaries that allow for low PTI ratios (Migozzi, Reference Migozzi2020: 647).

Likewise, commercial property developments, particularly in the office, retail and entertainment sectors typically prioritise wealthy urban nodes (Murray, Reference Murray2011: 187). The geographical composition of Real Estate Investment Trusts’ (REITs) investment portfolios reveals not only an overwhelming preference toward commercial properties (Nurick, Boyle, Allen, Morris, and Potgieter, Reference Nurick, Boyle, Allen, Morris and Potgieter2018) but also established wealthy nodes in urban areas, a ‘risk-averse strategy that favours caution over experimentation’ (Murray, Reference Murray2011: 187). Additionally, private real estate developers often partner with public authorities on megaprojects aimed at elevating a city’s ‘world-class’ status. These projects include signature buildings, prestigious headquarters, mixed-use developments, and cutting-edge infrastructural services like telecommunication technologies and transport networks. Although some of these megaprojects include mixed-use developments in low-income areas, such as the N2 Gateway Project in Cape Town, the substantial involvement required by the private sector means that private developers are often able to dictate their target market. To mitigate the potential risks associated with undertaking megaproject developments, private real estate actors are typically very strategic and meticulous in choosing where developments should be located and how to yield the best possible returns. As such, their targeted location and population market often involves growing middle- and upper-income groups and areas.

Social and urban structures of housing financialisation in Johannesburg

Founded just over one hundred years ago with the discovery of gold along the Witwatersrand, Johannesburg has grown to be South Africa’s most populated city and home to the ‘richest square mile in Africa’, called Sandton. It is also a city of extreme contrasts, ‘a telling touchstone for South Africa’s extremes and excesses, the mise-en-scene for displays of ostentatious wealth in the midst of deplorable impoverishment and deprivation’ (Murray, Reference Murray2011: 1). These contradictory experiences largely take place around a geographic divide that separates the leafy northern suburbs from the industrious mining areas in the south. The northern suburbs exhibit claims of Johannesburg being the world’s largest ‘man-made urban forest’, with literally millions of trees, lakes, and parks (Mabin, Reference Mabin, Harrison, Gotz, Todes and Wray2014). Separated by a mining belt, the southern suburbs historically constituted the residential core of white working-class families (Harrison and Zack, Reference Harrison and Zack2014). Here, residents face a much harsher micro-climate and landscape, which has undermined investment in the area for decades. The east-west axis runs immediately to the north of the historic Main Reef Road, which traverses the city along the northern side of the gold reef and mining belt. This separates Soweto (South Western Townships) from Johannesburg’s southern suburbs and the almost exclusively formerly ‘whites only’ suburbs to the north (Haferburg and Huchzermeyer, Reference Haferburg, Huchzermeyer, Kirkness and Tijé-Dra2017: 67).

The unpleasant climate and landscape south of the mining belt pushed the city’s upper classes and social elite to the northern suburbs, where large tracts of land were demarcated for residential purposes (Larsen, Reference Larsen2005: 31). Properties tend to be markedly higher than those in the southern suburbs, and they constitute the main focus of mortgage market activity in the city (Butcher, Reference Butcher2016). For instance, in 2021, the number of bonded resales and new transactions in Johannesburg was 23,013. Of these, nearly half (47%) took place in the luxury market, where properties are priced above R1.2 million (8558 bonded transactions) (CAHF, 2022b: 8). These market segments are almost exclusively located in the northern suburbs, as Figure 1 illustrates.

Figure 1. Distribution of residential properties by market segment, City of Johannesburg 2021.

Source: CAHF (2022b).

From the 1970s, the residential character of Rosebank, Randburg, Sandton, and Parktown gradually changed, as retail and office decentralisation from Johannesburg’s CBD was starting to gain momentum (Beavon and Larsen, Reference Beavon, Larsen, Harrison, Gotz, Todes and Wray2014). Reasons for this include ‘white capital flight’, cheaper land, and better working conditions, as well as the financial deregulation and increasing commodification of real estate (see Goga, Reference Goga, Tomlinson, Beauregard, Bremner and Mangcu2003; Larsen, Reference Larsen2005; Murray, Reference Murray2011). Indeed, during the 1980s, real estate globally became increasingly valued for its financial performance Locally, commodification occurred alongside an overaccumulation crisis, with excess capital from financial institutions prompting investment in decentralised nodes (Goga, Reference Goga, Tomlinson, Beauregard, Bremner and Mangcu2003). Backed by an oligopolistic investment structure, this situation spurred a herd mentality in real estate markets that depreciated CBD properties and drove ‘capital flight’ into suburban nodes. ‘Decentralised office investment … became the “flavour of the month”’ (Da Silva, cited in Goga, Reference Goga, Tomlinson, Beauregard, Bremner and Mangcu2003: 75).

Governing financialisation in emerging markets

This concluding section briefly explores the interaction between real estate financialisation in South Africa and global power dynamics. While real estate financialisation stands as a variegated and fragmented process, research shows that its manifestation in the global South is distinct from what has been witnessed in countries like Spain, Ireland, the UK, and the US (Fernandez and Aalbers, Reference Fernandez and Aalbers2020). In their recent article, Fernandez and Aalbers (Reference Fernandez and Aalbers2020: 681) urged researchers to example the relationship between housing and finance developments in the global South and how they relate to those in the global North. Commonly, responses to this question reference structural disparities between the global North and South, including challenges in securing foreign loans in domestic currencies and exchange rate volatility due to foreign liquidity dependency (Kvangraven, Koddenbrock and Sylla, Reference Kvangraven, Koddenbrock and Sylla2021). While these are important insights, it is also necessary to consider the shared political perceptions of nations in the global South, particularly the idea of ‘emerging markets’ that influence the global political economy and potentially reinforce the power and knowledge dynamics within which they are framed.

The idea of ‘emerging markets’ has been framed within a geopolitical imagination rooted in colonial history (Agnew, Reference Agnew2003: 2). Originating from European and later American encounters with the world, this imagination often views the places and peoples beyond the horizon of the West as sources of chaos and danger (Agnew, Reference Agnew2003: 2). Contrary to the civilised, rational, and enlightened colonial gentleman, non-European people and territories are associated with darkness, savagery, and backwardness (Agnew, Reference Agnew2003). This binary representation of societies and spaces has been projected onto the rest of the world, shaping the geographical representations, assumptions, and understandings that guide the interactions among states, governments, markets, and societies (Agnew, Reference Agnew2003: 5).

Consider, for instance, the complex intersection of power, knowledge, and geography in forming the International Financial Architecture (IFA). The IFA defined as ‘collective governance arrangements for promoting the stability of the international financial system’ (Elson, Reference Elson2010), mainly focuses on preventing financial crises. A key concern with the IFA has been navigating the inclusion of ‘less developed’ countries from the global South into the international financial system. The IFA, in its various revisions and adaptations often brought on by global financial crises, has consistently highlighted the lack of transparency as the most significant threat to global financial system stability (Langley, Reference Langley2004). While financial crises often originate from Wall Street activities, ‘lack of transparency’ is typically characterised as an ‘emerging market’ problem. Compared to developed markets such as the US, UK, and Europe, emerging markets are considered ‘unknown territories’: their markets are deemed less efficient and novice, their regulatory bodies lack substance, and they grapple with issues like political corruption, societal unrest, and market volatility. Yet, akin to the allure that captivated the imaginations of colonial explorers, these areas are potentially lucrative: emerging markets are geographies to be conquered and resisted.

To manage this risk-reward dichotomy, emerging markets are urged to implement reforms representing ‘standards of civilisation’. These are the benchmarks against which states, banks and companies should align to be considered legitimate international financial system members. These standards are advocated by a network of regulatory bodies such as the Bank of International Settlements (BIS), IMF, World Bank, and private sector actors like credit rating agencies (CRAs). Together, these institutions not only set the standards and codes of conduct governing market actors’ (countries, banks, listed companies, etc.) engagement in global capital markets but also monitor their adherence to these regulations (Langley, Reference Langley2004). Here, the geopolitical imagination of emerging markets as sources of uncertainty and risk engenders stricter compliance monitoring against global norms for ‘good’ corporate governance and ‘free markets’. For instance, in the sovereign credit rating space, the portrayal of corrupt politicians, inexperienced traders, and opaque market information impacts the evaluation of emerging market sovereign creditworthiness (Schultz, Reference Schultz2021). This calculation assesses a government’s capacity and willingness to repay its financial debt obligations in full and on time. While ability is assessed using quantitative economic growth, debt burdens, and GDP data, willingness involves assessing a government’s trustworthiness. Assumptions of emerging markets as ideological ‘hotbeds’ (Paudyn, Reference Paudyn2014: 18) and therefore potentially uncertain increase their ‘political risk’ score, which significantly lowers the overall credit rating. Indeed, this geopolitical perception of emerging markets biases the rating process. As Canbaloğlu, Alp, and Küçükkocaoğlu (Reference Canbaloğlu, Alp and Küçükkocaoğlu2019) demonstrate, CRAs do not apply the same variables when rating emerging market governments and advanced countries, with ‘home countries’ often receiving better scores than their economic and political fundamentals warrant (Fuchs and Gehring, Reference Fuchs and Gehring2017).

However, in a context where governments, banks, and corporations rely on capital markets for funding, emerging market actors typically adopt necessary standards to enhance their creditworthiness. For South Africa, this meant implementing macroeconomic reforms that facilitated economic financialisation and made national banks, listed companies, and the government subject to the surveillance of rating agencies and supranational regulatory bodies. These reforms include fiscal and monetary policies such as central bank independence and an inflation-targeting regime (Padayachee, Reference Padayachee2019). These changes, aimed at demonstrating the government’s commitment to prudent economic management, significantly influenced the selective character of housing and real estate financialisation.

First, the rationality of creditworthiness has subjugated commercial banks to the scrutiny of rating agencies and the prudent lending regulations stipulated in the Basel Accords. Established by the Switzerland-based Basel Committee on Bank Supervision (BCBS), the Basel Accords aim to regulate the capital levels of international banks about the risk profiles of their assets (Bruneau, Reference Bruneau2023). The BCBS determines the risk levels for different assets, including sovereign debt. Based on the calculation of risk-weighted assets (RWA), banks must maintain minimum capital reserves as a safety measure against credit default (Kruck, Reference Kruck2011: 53). RWA refers to the estimated value of a bank’s assets, adjusted for credit risk. Higher credit risk assets require higher capital reserves. Here, the question of how to evaluate the risk of sovereign exposures is contested Evaluating sovereign exposure risk remains contentious. The first Basel Accord determined that not all sovereigns were equal: debt of a select group of OECD countries was considered risk-free, whereas non-OECD members were seen as fully risky. In other words, lending to the latter group of sovereigns, their banks, and public sector entities would receive a 100% risk weight (Bruneau, Reference Bruneau2023: 158). Although subsequent Basel Accords removed this advantage for OECD countries, sovereign credit risk remains influential in calculating RWA and capital reserve requirements. Thus, in emerging markets like South Africa with ‘below investment grade’ credit ratings, banks must set aside additional capital reserves. For example, under the Basel III Accord, real estate exposures with higher LTV ratios contribute to a higher risk weight, which means higher capital reserve requirements (BCBS, 2017: 21). South African banks have been lauded for their overcompliance with these international best practices and the implementation of Basel reforms, which have secured favourable credit ratings on the one hand, and strengthened their conservative lending criteria in a context where the government’s creditworthiness remains volatile on the other (Butcher, Reference Butcher2016: 102).

Second, cautious real estate investment decisions are underpinned by the discourse valuing risk and influencing capital flows in emerging markets. Because they are perceived as ‘higher credit risk’ investments, emerging market assets and stocks are often undervalued or require a considerable risk premium for potentially high rewards (Lee, Reference Lee, Pech and Wai-Chung2003: 65). The hypermobility of capital leads to short-term procyclical investment into emerging markets. Risk-loving investors tend to ‘play emerging markets, favouring assets when risk aversion is low and swiftly withdrawing investments when risk aversion escalates (Schultz, Reference Schultz2021). This tends to exacerbate a slowdown in growth in emerging markets, subsequently increasing credit risk and borrowing costs (Lee, Reference Lee, Pech and Wai-Chung2003). These volatile capital movements fortify the conservative, risk-averse investment strategies of real estate actors like REITs, commercial banks, and institutional investors, as short-term investment horizons deter ventures into presumably higher-risk markets, potentially devaluing their assets and necessitating increased capital reserves. Indeed, overexposure to the South African property market is perceived as a risk by credit rating agencies (Moody’s, 2022), prompting many REITs to divest from South African assets and invest in European assets.