From onshore to offshore – know when to make the leap
There is a lot of economic doom and gloom in SA (and in the world) right now. If you consume enough daily news you might be convinced that the world really is falling apart. Many say another economic collapse is imminent so stand back and wait. The economic downturn will eventually pass, however, most seasoned investors do the opposite in poor economic circumstances otherwise they would not invest and always see opportunity when others see disaster. This brings up another question, which is, where to invest in the world now given the weak local economy, fluctuating currencies, lack of finance for investors, a possible credit downgrade and political uncertainty here in SA. Investing your hard earned money is not always easy. The decision you make today will determine your future results either good or bad.
“Make yourself sheep and the wolves will eat you” – Benjamin Franklin
Some investors have forgotten the fundamentals of investing which is, ‘the action or process of investing money for profit,’ according to Wikipedia. Real estate internationally has the key advantage of being used as a dwelling space, having the ability to borrow against the security of the asset, rental income, depreciation, costs that can be tax deductible, profits sheltered and indexed against monetary inflation. Too many property investors regularly return from their experiences by losing money and coming back with war stories and battle scars. They blame poor economy, timing or on choosing the wrong asset. The more educated savvy investor who invests on the market lows return from their exploits with a different view. Normally it is suitcase full of advice and a portfolio of positive cash flow investment properties generating excellent rental returns.
According to FNB the estimated pace of selling buy-to-let properties in SA remains low, suggesting still-low levels of financial stress and pressure in the market. A lack of exuberance in this market may become supportive of this market, constraining growth in supply of available homes for rental. This coupled with the expectation of increase in demand for homes to rent, could contribute to strengthening in the rental market in the near term. Compared to 2004 where proportion of buy-to-let purchases were 25% of the total purchases today it is only 7,6%. So clearly while there are signs of poor performance in the SA market there are normally great opportunities. This coupled with lack of bank finance locally is forcing many investors to invest offshore in a more stable environment.
It is always good idea to stick to the principles of investing according to international investor and my good friend Dr. Dolf de Roos, which is:
- You make money when you buy
- Always buy from a motivated seller
- Never be the first to name a figure
- Fall in love with the deal not the property
- Be counter cyclical
- Buy with zero or little money down
- Seldom sell
- The deal of the decade comes along once per week
Why the move to offshore investment?
It becomes a symbol of success when your property investment business starts investing abroad. But you also know when to make the leap and why you want to make the leap.
There are lots of considerations to take into account before you invest offshore such as:
- Impact of Currency fluctuations
- Setting up a legal entity in the country you plan to invest
- Opening up bank accounts
- Getting good tax advice
- Finding the right investment property
- Having reliable partners on the ground
- Managing your properties from a distance
- Getting finance
- Time zone differences
- Having good communication channels in place
- Understanding local property lingo and the culture
- Understanding the local property buying process and legal implications
With all that stress why even go global at all?
You can hand your cash over to somebody else to invest for you without all the hassles. Many investors prefer this. Hands off investors like these tend to invest for capital growth in stable, safe haven big city destinations such as London, Sydney, New York, Munich, Dubai and even European countries like Portugal, Germany and Spain in some cases. George Radford, Director of IP Global Africa says, “Real estate investors from South Africa and other African countries like Zimbabwe, Botswana, Zambia and Kenya have consistently shown a healthy interest in the UK and Australia mainly due to shared historic connections.”
According to Linda Muscarello former President of Real Estate Investment Association (REIA) in the US says, “Real estate is a unique asset that is largely misunderstood by most investment advisors, estate agents, financial planners and the general media. It is not because they intentionally want to mislead you to invest. They often don’t know the inherent advantages of these assets are because of how they were educated, the assets they know well, licensed to sell and how they earn their fees. Unfortunately many international investors fall into the trap of buying many of these over-priced investments when they rely on these advisors for direction.”
Muscarello goes onto say, “Historically real estate does appreciate over time in reliable fashion. However, like any other asset like stocks it can be bought and financed badly and cause massive losses for the unwise investor. This is why we are sharing ways to reduce the risk and improve the returns significantly.”
Not everyone wants to invest offshore says, Sean Ryan of Greystone but as long as the investor is aware of the risks and has a long-term approach. The most important thing is ensuring cash flow positive purchases that regular rent keeps rolling in despite the markets then everything should be fine.
Offshore offers so much more right now than is available in South Africa. Why is there such a divide between the two? ‘The simple answer is in the can-do attitude and mindset of the investor,’ says Sean Ryan CEO of Greystone Residential a US based end-to-end property developer that sell to investors worldwide. Our investors have to do their homework before they buy as they are based in countries thousands of miles away.
Warren Brusse an experienced United Kingdom investor from United Kingdom Property Partners says is it is absolutely necessary to invest with expert assistance and trustworthy eyes on the ground. The DIY approach can be costly if you don’t understand what is a good or bad buy, verify if there is actually a rental demand in the area or if you don’t have a good property manager to manage it for you. Brusse says, ‘as investors they target investment properties in specific areas in the UK that generate minimum 20% per annum on a net cash flow return basis, otherwise they simply don’t make the investment.’
Know where the hot spots are
For decades London has always been the investment destination of choice in the UK. Brexit has changed the investing dynamics in the UK market to a large extent. There is a huge demand in the North where there is a North vs. South divide both in terms of value and returns. The dividing line starts from Birmingham on the West Midlands to Hull on the East coast of the UK.
The old model of investing was finding Below Market Value (BMV) properties where easy credit was available, little or no deposits and the ability to refinance and recycle capital quickly. This was dependent on unsustainable levels of growth
What is more important is to understand the micro aspects of the market. Knowledgeable investors are keen advocate of chasing yields and growth in some of the UK’s booming secondary cities, and profitable returns can be made pretty quickly in these markets. Investors are looking for certainty. But which of the UK’s secondary cities offer the most dependable rental yields and exhibit the greatest growth potential.
Buy-to-let versus House of Multiple Occupancies (HMO’s)
House of Multiple Occupancies (HMO’s) or room rentals as an investment option is getting investors cash flow returns in excess of 15% per annum in many cases and the average investor looks at it and says, ‘it is too good to be true.’ The profits from HMO’s are clearly higher than buy-to-let in the UK simply because the HMO’s have multiple sources of income versus once source of income
What really motivates investors to change strategy has to be higher than average returns with good finance in place, “ says Warren Brusse, of United Kingdom Property Partners. In our opinion, the smart money is on Birmingham, Hull, Grimsby and Cleethorpes here’s why:
- Government backed regeneration and re-development investment
- Employment opportunities has pushed up rental demand
- Prices are far cheaper in the North than the South sometimes even less than half making affordability easier for investors
- Further growth for both homeowners and investors is expected due to upbeat economic activity
Some Risks to be aware of offshore
- Buying a property online without viewing it first
- Bargain prices could disguise hidden maintenance or refurbishment costs
- Cheap is not always better
- Buying a property with a ‘lien’ in US
- Buying a property in the UK with a short leasehold lease expiry date
- Property Managers are in the know in the areas
- Buying in the wrong neighbourhood, street or property
- Not being able to sell if market is distressed
- Knowing what true market value is
Property investing is not just about capital growth but rather a combination of capital growth, insider information and steady cash flow, which is the most critical element of investing. It means having a sense of curiosity, an attitude of opportunity with inherent understanding of the market and knowing exactly where the good deals are. “Herd investors tend to follow the capital growth stats, while savvy investors know that there is a deal in every country, every town, everyday and anywhere in the world if you are driven enough to do the research and leg work yourself as an investor.
Andrew Walker director of United Kingdom Property Partners says that, ‘They have collectively sourced in excess of 500 investment properties and further manage in excess of 300 investment properties for investors.’ He says the best way is to invest alongside the seasoned investor. “We are focused on partnering, investing and managing for the long term, “ says Andrew Walker.
- Strong rental yields in UK and US
- Investor friendly markets
- Attractive lending markets and rates
- Cash flow positive properties
- Strong future capital growth potential
- Low stamp duties
- Low entry costs
Getting ready to turn your investment dreams into reality
- If you are investing for the first time go there and get a feel for the properties, area and neigbourhood before you buy
- Spend a lot of time getting the right Property Manager
- Meet the refurbishment team and ask lots of questions
- Know what the local taxes are. In the US for example they have both federal tax which varies from state to state
- Ensure that you have a thorough property inspection carried out by a surveyor or licensed operator
- Always have an exit strategy upfront