With global property investments growing, while local investments underperform now is good time to diversify your property portfolio
Property abroad, particularly in United Kingdom, is showing a clear growth, while the real value of South African house prices is declining making now an opportune time to hedge your SA property investments by investing in UK property.
So says international property specialist and Hurst & Wills director, Lisa Bathurst. “With slow growth at home it’s a great time to diversify into offshore markets, ultimately creating a better global wealth strategy.”
In July, the FNB Property Barometer showed that when corrected for inflation, SA residential properties had dropped in value. The report shows that while year-on-year residential properties grew by 4.1%, with CPI at 4,6% real property prices are decreasing. *According to FNB’s household and property sector specialist Johan Loos, SA’s slow economic growth means we can expect year-on-year house price growth to be adjusted even lower to 3.5% for 2018, down from 4,3% last year.
This negative economic outlook was echoed by Nedbank’s senior economist Nicky Weimar. Weimar said that although Cyril Ramaphosa’s proposed interventions to boost the economy were positive, they failed to translate into economic growth or job creation because he has not been clear on policy, especially regarding the land question. **
“South African’s are vulnerable at the moment,” said Bathurst. “As an emerging market, South Africa’s economy is impacted by external factors out of our control. Add to that the external debt, inflation and low employment figures and it seems likely that the negative growth will continue for the next two to three years.”
At a recent Rode REIM Property conference, Weimar also said that she believed the rand would remain unchanged against the big international currencies for the next few years. “This suggests that it may be unwise to hold off for a few months hoping for a better exchange rate before investing offshore,” said Bathurst. “Especially considering the 31 December deadline for this year’s offshore allowances.”
The South African Reserve Bank allows South Africans two offshore allowances annually. The single discretionary allowance of R1million, without having to obtain a tax clearance, and the capital allowance for up to R10 million that requires tax clearance from SARS. “These allowances can be doubled if you are a couple,” said Bathurst.
“With December 31st approaching, people who want to use these allowances for 2018 need to act fast. With the market factors what they are, this is a good time to hedge your investments with some abroad and some local,” says Bathurst.
The FNB estate agency survey also found that houses on the local market are taking longer to sell. Meaning there is an oversupply of residential property on the SA market. Loos said that the country’s forecasted growth of between 1 and 1,5% is not sufficient to clear this oversupply in the market.
Added to that, says Bathurst, the rental yields in SA are also on the decline. “On first glance they may look more attractive than Europe or the UK, but it’s important to remember that these are first world markets benefiting from good growth,” she says. “Also, the cost of borrowing is much less abroad. Clients meeting the correct leveraging criteria can borrow at UK rates. The current Bank of England rate is at just 0.75%, meaning you will pay about a third of what it costs to borrow in South Africa. In Portugal, we’ve seen bond products of as little as 1%, which of course increases your yield,” she said.
While the rest of the world is growing at an average of 3,1%, South Africa’s latest gross domestic product GDP data shows that SA is in a technical recession, with our economy shrinking in the second quarter of 2018 by 0,7% quarter-on-quarter.
“Even with the uncertainty around Brexit, growth in the UK is at a stable and steady 1.6%,” says Bathurst. “The property market in cities like Manchester is booming. HSBC and JLL have named Manchester as the best city in the world to invest in this decade,” she said.
The Land Registry data compiled by Savills Research*** in the UK shows that house prices in Manchester are up by 32,5%, increasing by 8,8% this year alone. Bathurst said, “JLL have predicted that Manchester property values will continue rising by a further 22,8% between now and 2022. This is higher than the 16,5% for the UK’s North-West and 10,3% growth predicted for London.”
“We have found some great investments for our clients in Manchester. There are beautiful river-side developments going up, completed by reputable developers. We have found these to be excellent investment opportunities, especially for South Africans as they are sought-after and can be fully managed at a net yield of 6%,” she said.