In September, Redefine International acquired a UK portfolio of mostly retail and office assets from Aegon UK, a Scottish insurance company, for R9bn, including the Banbury Cross Retail Park near Oxford for R1.09bn. Redefine’s CEO described it as a “transformational deal … which rapidly enhances the quality and scale of our overall portfolio”. So why, with an exchange rate of R20/£ or R13,5/$, would a major investor want to diversify overseas? Should you think of doing the same?
I do a fair volume of valuation and consultancy work in the UK and the word “quality” in the paragraph above has nothing to do with buildings and everything to do with economics. Generally, SA building standards (with glaring examples like Tongaat Mall excluded) are well up to international standards. In many cases, because we have more available land, designs can be more flexible than the constraints that have to be adopted in parts of the developed world. However, the value of commercial property is down to the throughput of goods or people it can accommodate, be it on a retail, office, industrial or leisure basis. Because that throughput relies on the spending power of the individual or business involved, big differences start to show up when property investment calculations start being made.
The UK economy is growing at 2.8% p.a., the US economy slightly faster and we are stuck on 0% (annualised, just don’t think about the -1.3% in quarter 2 of 2015). Whilst not, thankfully, at the gung-ho debt-driven levels of 2004-7, there is confidence, especially in retailing, and it is this confidence that underlies the flood of money, much of it foreign, being put into UK and US property. Contrast with SA, where the consumer confidence index is at its lowest ebb since 2009. Confidence is a wonderful thing. It makes people and businesses happily invest in countries with interest rates of next to nothing rather than the obviously higher returns available here. The perception is that interest rates in the developed world will rise eventually and that any short-term exchange rate loss will be offset by longer-term stable income generation in a growing economy.
Make no mistake – UK and US property is expensive in rand terms. However, if you take a long-term view, it’s all in your mind, though that mindset has to be of a portfolio, rather like Redefine, that is large and diversified. Don’t put all your eggs in an overseas basket.
By Richard Wade