An appetite for investing in real estate
According to Knight Frank’s 2018 Wealth Report: “Appetite for real estate continues to increase globally, as investors grapple with the global low-yield, low-return environment and show signs of shifting allocations away from some fund types such as hedge funds. In addition, there are worries around perceptions of stretched valuations across many publicly traded bonds, while record-breaking equity markets are making some nervous. As a result, money is moving towards alternative investments, with real estate a prime target for a large proportion of this capital because of its relatively high yield.”
The property investment habits of South Africa’s High Net-Worth Individuals
In April, AfrAsia Bank and New World Wealth published the South African Wealth Report for 2018, showing how wealth trends have shifted among the country’s richest people. The report covers wealth, luxury, prime property, collectable and wealth management trends in South Africa from 2007 to 2017, with projections through to 2027.
The Wealth Report revealed that at the close of 2017, total private wealth held in South Africa amounted to approximately US$722 billion, with an estimated US$306 billion of this being held by High Net-Worth Individuals (HNWIs). South African US$ wealth was negatively influenced by a significant depreciation of the Rand against the US dollar during the ten-year period, and GDP per capita was also down in US$ terms.
When assessing property and movement of funds offshore, it stated that South Africa’s HNWIs had decreased their real estate allocation (including all local and foreign property, and their primary residence) during the review period from 33% in 2007, down to 30% in 2017. It noted that there had been an increase in the movement of funds offshore during the same review period, with HNWIs holding 17% of their wealth offshore in 2017 compared to 13% being held offshore in 2007. The authors expect this percentage to rise to 22% by 2027, fuelled by increased allocations to foreign property, foreign cash and foreign equities. Despite the decrease in real estate allocation, at the end of 2017, real estate was the largest asset class for HNWIs in South Africa (30% of total HNWI assets), followed by equities (28%), business interests (21%), cash & bonds (15%), and alternatives (6%). The real estate allocation refers to both local (28,6%) and offshore (1,3%) allocations.
A trend for increased globalisation
Looking internationally, Knight Frank’s Wealth Report Attitudes Survey 2018 reveals that 62 percent of global Ultra High Net-Worth Individuals’ (UHNWIs) existing property investments are in their own country. This means that 38 % of their property investments are made outside their own borders. The report highlighted a clear trend of increased globalisation of many real estate investment portfolios as investors look to other core geographies for asset diversification.
The survey highlighted the average number of first and second homes owned by UHNWIs across the globe placing UHNWIs in the Middle East at the top of the list with an average of 4.0 homes, followed by Russia & Cis with 3.5, Asia with 2.9, Latin America with 2.9, Europe with 2.7, North America with 2.7, Australasia with 2.3, and African UHNWIs with an average of 2.1 homes.
Should you keep it local?
We love our country, and therefore remain inherently optimistic about its future. The South African Wealth Report 2018 highlights exclusive suburbs across the country that where approximately 2,400 homes valued at R20 million or more are located. Nine-hundred and fifty of them are in Cape Town, in areas like Camps Bay & Bakoven, Clifton, Constantia and Tokai. In Johannesburg, 580 of them are located in the likes of Sandhurst, Hyde Park, Houghton and Bryanston. Umhlanga in Kwa-Zulu Natal is host to numerous second-homes for HNWIs from Johannesburg, and the apartments on Lagoon Drive are some of the most expensive in the country. The report lists towns and suburbs like Keurbooms, Natures Valley, Zinkwazi, St Francis Bay, and Noordhoek as the potential next hotspots for R20 million homes in South Africa.
That being said, investments should be fact-based decisions, rather than emotional ones.
It’s no secret that the JSE’s real-estate sector has had a dismal year with losses of more than R120bn of its value so far in 2018, and there are real concerns that it will remain under pressure in 2019. FNB’s house price index reveals that we have had a negative real growth over the past three years as a result of the poor economic climate which was largely driven by the unstable political situation in the country during this time.
The 2018 South African Wealth Report’s assessment of prime property indices noted that South Africa’s residential property market performed poorly over the review period (2007 to 2017), with average prices declining by 11% in US$ terms. It gave possible reasons for the drop including the significant depreciation of the Rand against the US dollar; high agent commissions of up to 7.5% and high property transfer duties of up to 13%; increased utility bills (electricity & water) and levies, which have increased by more than three times over the 10 year period; and increased difficulty in getting mortgages following the global financial crisis.
There are naturally concerns over the economy, the volatility of the Rand, and fiscal policy uncertainties, however South Africa’s reputation for robust governance, strong auditing and a developed legal system are seen as positives when deciding whether to invest locally or to go offshore. There is growing concern over land appropriate without compensation, and it has become a highly emotive topic. A recent article indicated that the heads of numerous real estate firms believe the expropriation of land won’t extend to residential property. Another has experts being cautious saying it may be too early to say which way the process will go, and pointing to the importance of acting on sound advice rather than sentiment.
In an article first published in the Financial Times, and republished in Business Day on 26 August, President Cyril Ramaphosa wrote: “While a parliamentary committee is at present wrapping up public hearings on this issue and still needs to give consideration to any possible constitutional amendment, there have been several suggestions on when expropriation without compensation may be justified. These include, for instance, unused land, derelict buildings, purely speculative land holdings, or circumstances where occupiers have strong historical rights and title holders do not occupy or use their land, such as labour tenancy, informal settlements and abandoned inner-city buildings.”
What about investing offshore?
Regardless of where you live, it’s usually a good idea to have at least 20% exposure outside your country of residence, and investing in offshore property offers investors many advantages. When it comes to assessing whether or not any form of offshore property investment is suitable for diversification of your portfolio, you need to ask a number of questions, such as: Will it reduce the risk for a portfolio with single market exposure? Will it expose you to global growth due to appreciation in another currency, and will it result in passive income via rental yields? Will you invest directly by purchasing a physical offshore property, or will you invest via Real estate investment trusts (Reits)?
If you’re planning on investing directly in property, some of the questions you should be asking include: What does the property market look like in that area? What is the business climate in that area? What is the quality of life like for residents in that area? Is property investment in the area affordable for South Africans?
One of the benefits of offshore investing is that International markets can offer stable returns from well-established properties. It can also offer growth opportunities from new properties and sectors. If you’re considering investing indirectly, then perhaps investigate some of the available Reits. While South Africa has roughly 25 Reits on offer, there are more than 200 publicly traded Reits in the US alone.
Remember that there are tax considerations to investing in overseas property, so it’s important to discuss the implications with your tax professional so the laws don’t act against you. Investigate whether a double taxation treaty applies, and be aware of transfer or stamp duty percentages, Capital Gains Tax, income tax, as well as inheritance tax. Each country has its own laws pertaining to the purchase of property as well, and many are starting to implement investment bans, and controls on mortgage lending aimed at foreign residential property buyers that are already being felt in places as far apart as Canada, New Zealand and Australia, according to Knight Frank’s Wealth Report 2018.
A simpler way to invest in international real estate
Despite the strength of the US dollar, foreign buyers spent over US$153 billion on US residential property between April 2016 and March 2017 according to the National Association of Realtors. YDL Property Investments is focused on helping investors to expand and diversify their investment portfolio through high-quality, profitable, local and international property investment opportunities. When investigating potential off-shore locations that would produce good returns on investment, YDL identified Atlanta, Georgia in the United States as a strong off-shore investment market for our clients.
Our private mortgage lending opportunities help investors to invest in international real estate by providing short-term loans to vetted borrowers who are wanting to buy and renovate residential properties, or those doing new builds in Atlanta, Georgia, USA. Loans could also include wholesalers, who buy property for the purpose of cleaning it up and on-selling the property for a profit. In selecting short-term loans, our offering reduces the risks and produces better returns over a shorter period.
Private mortgage lending is an increasingly popular alternative that gives you the opportunity to invest in property without the need to physically purchase one. Private mortgage lending occurs when a private individual, or organisation, lends money to a borrower, who uses the loan to buy and renovate a residential property, or to undertake a new build.
Suitable as a passive cash-flow generating business, private mortgage lending can generate above-average returns with low investment risk if the correct due diligence is performed. The main reason the investment is low-risk, is because the private mortgage loan is secured by a tangible asset – the physical property that the borrower wishes to purchase – so the investor will consistently retain some value in the event the borrower defaults on the loan.
To learn more about private mortgage lending as an alternative property investment vehicle, read our Insight feature: Private Mortgage Lending Investments can generate meaningful income, or contact us today to arrange a personal consultation, and discover how we can help you expand your investment horizons.
Some Past Deals
- Private Lending-Wholesale (USA)
- Private Lending-Rehab (USA)
- Flipping (USA)
- Buy-to-Let (USA)
- Speculative (SA)
- Buy-to-Let (SA)