Overseas property markets offer opportunities despite high interest rates and inflation
South Africans are increasingly realising that offshore property investment is a good idea, as it provides a hedge against local volatility. Megan Copley, Director of Offshore Real Estate Investment at Sable International talks about what offshore property investment has to offer South Africans and why it is not as daunting a concept as it may seem.
Using overseas property investments to hedge South African portfolios
It's kind of a daunting concept, and I think a lot of investors that I speak to on a daily basis own property in South Africa. It's what they like to invest in. It's in their blood, they're property people and they come to speak to us about what the pull factor are in the UK. I think a major reason at the moment is not so much the pull factor, but it's the push factor in South Africa that we're seeing that people feel the need to have an option, to have a hedging strategy between their portfolios in South Africa and the same asset class – property – but underwritten in a different currency like the pound, euro, or dollar.
Is the UK still the market to look at?
We actually work across the UK, the US, Europe, and Mauritius. I think the UK is probably where we see the most demand for many reasons. South Africans historically have a big draw towards the UK. We have a massive diaspora in the UK, so people feel safe going across. It's English speaking, which is a very important consideration when buying property overseas and having contracts to consider in ongoing property management, even if that is done by an outsourced business. So, I think the UK is a really good place to consider. The pound has always been a strong currency on the world stage versus the euro, versus the dollar. The UK is probably one of the most mature markets, a stable market, a secure market. Somewhere that you can rely on the asset; you could rely on finding a good tenant and there's fantastic property management services available. If someone is to work with Sable International, we would take them from the beginning to the end. The beginning being opening a bank account offshore to transact for that property up until the ongoing management of the property through the lifespan.
UK loans from about 87 private lenders readily available despite recent rises in interest rates
Not many people know this, but property mortgages or bonds are readily available in the UK, should you qualify and those are generally available from private lenders. So, that lending space is also mature. You've got about 87 different lenders in the UK that do loans against a property that is for investment purposes and is to be rented out.
Inflation has been good for foreign property investors in the UK.
I think if you're looking to invest into anything at the moment, you'd consider inflation and interest rates. Just before I joined this call interest rates in the UK went up by a quarter base point. What this means at the moment for banks, is that the base rate is higher. When it comes to securing mortgages, we often look at private lenders and those lending rates are relatively good at the moment. Recently I've seen around 5.5% for foreign investors. Now, inflation drives rents up. So, rents are between 20 and 30% higher than a year ago. Your rate on your property annual yield at the moment can far exceed interest rates. So, inflation has been good for us and the maturity of the lending market has kept interest rates relatively low as these are businesses fighting for business. So the investment case in property in the UK still makes sense to an investor. You can still come out at the end of the month neutral or cash-flow positive, but it shouldn't cost you – provided you buy the correct property with the right advice.
Muted property market growth in the UK takes pressure off
I think we've seen a little bit of muted market growth in the UK recently. That's not a bad thing. The property market in the UK, with the lack of supply, has always been a very competitive market for purchasers. It's a market where you've had to make quick decisions, often land up in bidding wars for properties and it creates a level of desperation in the purchaser. I think now the ability to take your time to do it, to get the right advice (from taking your money out of the country, structuring the purchase, understanding your tax obligations in-country and from South Africa, and what property you purchase and where) gives you a chance to do the research without having this pressure to purchase. I think the muted growth means that it's affordable. Property is still being built. Developers are still able to build in a market where there is high inflation – still secure good sites. We're not talking about buying any property in the UK, we're talking about buying premium rental property. That is not necessarily premium in price, but premium in condition, premium in quality, build and the lifespan of the property for the ten years that you have a developer warranty needs to stack up for the investor and they need to have lowest possible maintenance bills on the property as well. I think from that point of view in the UK, let's look at all of the factors and understand what property prices look like. If you're looking to sell in the UK now, you'd probably sell and buy in the same market, but if you didn't need to sell, you probably wouldn't sell at the moment and if you're looking to buy, it's a great time to buy, low competition.
Mitigating the risks around buying property in a market where there are fundamental differences
One fundamental difference is in the first six to eight weeks of the transaction, neither the seller nor the buyer is committed to the other so either party can withdraw from the sale with no penalty and the other party would lose significantly in funds or legal fees or survey fees and so on. So we are there as a service to mitigate that risk. We work in all types of property in the UK. It really just depends on the investor's profile. We're very much an advisory service for our clients.
Firstly, we try to feel out the seller to see what his motivations are for selling. Is he a real seller? What are his plans? Where is he going? Is he under offer? How long is the chain? These answers will give us, with our experience, a very good idea of how stable that transaction is or if we should possibly steer our client towards another property. Because going down that road – it's an emotional process. It's an expensive process. In the UK, because the properties are so old, "voetstoots" does not apply. We do all of that work before one gets to exchange contracts. You'll have a survey on your property. You'll know if there's any immediate requirement for works. If there is, this something we could negotiate with the seller? What does that look like? We can get out the right professionals to provide quotes. We'll know what's being said in that survey whereas somebody who's looking to buy property for the first time in the UK may find that information overwhelming as it's just so different to South Africa.