Arran Kerkvliet: Take advantage of strong rand to lock in yield of 8% in Pounds

One Touch Property’s Arran Kerkvliet explains why the recent strength of the Rand offers an opportunity for South African investors to lock in a running yield of between 8% and 10% on a niche segment of the UK property market. The founder of a highly rated UK property brokerage unpacks the reason why his company has focused in specialised areas – student accommodation and care facilities – and why, despite Brexit, returns are set to continue growing. – Alec Hogg

Well, I’m at the offices of One Touch with Arran Kerkvliet, who is the Chief Executive. An interesting company name, where did it come from?

I chose the name for trying to make things easy for people and also to have that connection with someone. It was One Touch Solution, actually, but we’re trading as One Touch Property Investments and just to try and embody the services and the connection we have with people.

I hear a very strong South African accent.

Yes that I’ve managed to keep even though I’ve been here for near enough 14 years now.

You’re also looking to develop property or a property solution for people all over the world, or I suppose going back to your roots and going back to South African and talking to people there too.

Definitely, we help a number of investors located all across the globe. We have many people from the Middle East or Hong Kong and so forth, South Africans have been a lot more interested in investing overseas; they’ve traditionally been more nervous than other countries like people in Hong Kong, they’re accustomed to ordering many things on the internet and they’ll quite easily invest in property worth £300 000.00 without ever having seen it or met the individual. But I think with South Africans, they’re more traditional. They like going to the shopping mall and it’s almost like the touchy feely scenario and for that reason they’ve been a bit more hesitant. More recently, they’ve been more inclined to look at things maybe because of the South African political climate at the moment.

Your background: what got you into property?

I was passionate about property from when I was in my twenties. I had a small portfolio of properties that I purchased when the interest rate was very high in South African and when the interest rates lowered, there was significant growth from that. At that same time I was doing my degree in economics and then came to London and started working in boutique property portfolio company where we helped individuals to build up their own portfolios. So, it’s been really from my early twenties that I’ve loved property because I’ve seen how it’s helped me and my financial situation.

You say boutique, well you do focus in a particular area of the property market.

Yes, definitely. We’re really focused on investment properties; we’re not an estate agency. We source high yield investments from reliable developers. These include student’s accommodation and care homes and some buy-to-learn investments in cities where there’s a good probability of capital growth like Manchester and Liverpool and Sheffield and Birmingham for instance.

Student accommodation?

The asset class has been very popular since 2011. Unlike South African, many of the overseas students, they’re accustomed to almost a higher standard of living in that the traditional halls of residence that they’re in the first year, the university provides, but the years thereafter, instead of living in a student house or a digs, they would well live in a purpose built student block. Many of these blocks traditionally were built by property investment funds and that’s still the case. Many of them own blocks and institutions like pension funds own them, but many people had a distrust of fund managers and realised that they were getting paid lots of fees and many parents, particularly in the UK had sent their kids to university and they paid between five and eight grand a year on fees. So, they really understood the concept and felt much more comfortable in actually owning the asset directly.

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So, how it’s evolved and how we help people is that they would come to us with their requirements and we would advise them on various projects that could meet their outcomes. What they would then purchase is an actual property like a studio which is typically 25 to 30 square metres, it comes fully furnished and it’s key ready opportunity whereby the property manager would look after it and they would be paid an income, which is typically 8% net per annum.

Is that a ready market, because every year there are new students who are coming in to study?

Definitely and at the UK, with the Pound falling, it means that it’s become more affordable for many people to study in the UK. Some people were concerned about leaving the EU, whether there’d be a fall in numbers, but it hasn’t been the case. There’s actually been a growth. The EU students actually only make up 6% of the total student population, so it hasn’t been a dramatic impact. The reality is that, in terms of the top 100 universities globally, the UK has 18 of the top universities and it’s more than just the experience of studying. The students come here to learn English, to make business contacts, so it has been a thriving sector. Just last year £3.5bn was invested by pension funds and so forth, so obviously the smart money’s getting involved where we facilitate individuals getting involved on a more direct basis.

How does that work?

In the UK, there are particular cities that students flock to. I suppose Liverpool comes to mind with the Beatles, the Liverpool football team, a lot of students want to go study there and it’s evidenced in that there are 55 000 students across three universities. Unlike South Africa, where it’s a campus space, the actual city is the campus. So, there are many different buildings across the city and the students will walk from one building to the next. So, the city is the campus and essentially what will happen is that a developer would see a building that was maybe a historic building, for instance, we’ve got one at the moment which is called Sir Thomas House, which was commercial property that then got change of use to become a student property.

Sir Thomas House

Therefore, from a development point of view there’s less risk because it’s an existing property and a shorter development cycle, but in many instances the banks don’t fund the developments or the cost of funding is rather high even though the interest rate is low. They would approach investors to purchase off-plan and make stage payments towards acquiring the property and that would mean that typically, they would pay R70 000.00, they may pay 50% deposit initially and they’d get, call it the exchange of contracts, they’d obtain the titles for it and then make a stage payment once at roof height, if it was a new-built property or where all the fixtures and fittings were put in and then the balance of completion.

So the money’s safe in a way that it only gets transferred to the building contractor for the actual work that’s done, not just paid to the developer and then on that basis, both the developer and the parents achieve their outcome in that for many overseas investors, they can make stage payments and it makes it more affordable and the developer reduces the cost of funding which thereby makes the property cheaper and better yield for the investor ultimately.

Just going back to South Africa, you have the one million free ride, if you like, before we have to go and ask for exchange control permission, do you work in that market up to the R1mn investment, or above that?

Our range is typically within that sphere and the properties range, specifically on the student side, between R50 000.00 and around R80 000.00. So, for the higher priced one’s in the central locations, they may well be R80 000.00, but as a couple, that million Rand is individually, so most people can facilitate that and it’s also in a single year. A development may start in July this year, but only reach completion July next year, so it’s quite easy for South Africans not to have to go through the process of getting exchange control permission and so forth and we have a team that handles every step of the process, including some external advisors that can help you create a tax efficient portfolio.

So, the idea is that it’s an investment, but your son, daughter, granddaughter, grandson could also go and spend their time when they’re at university in England if they were to so wish or is it in an investment pool?

No, definitely. It can be used for dual purposes in a way that if a student wants to study, then they can stay in the property and there’d only be the block management charges which is your service charge or community levy. The good thing is that students actually don’t pay any council tax, which is your property levy, but it would be limited to students. You know, we wouldn’t really want the parents to come and stay there on a long-term. It’s for students and that’s what creates the entire atmosphere. But from a perspective, it is an investment property because parents are looking for an outcome and even though they may want to send their children overseas, which more and more parents are looking at, they don’t know which university the student’s going to be accepted to.

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The rationale is that in choosing the best located student properties like we do at One Touch in the cities with the highest demand, what we should be able to do is get a really secure investment paying a high yield in the same currency as your children’s cost. So, if considering that the Rand is in a relatively strong position against the Pound, it’s a good time to invest because if the currency changes in the future, which there’s all indications of that happening with many of the challenges faced in South Africa now, that it might leave parents with a shortfall in the future and by securing the assets giving income in the Pound denomination, you’re matching your liabilities… which is what pension funds do.

Maybe let’s just dwell a little bit on the Rand and the Pound.

Yes, I think it’s a difficult one to call. I’m not a forex trader, but I looked at just last week the volatility in the Rand and then one day it was between R17.15 and R17.65. When you have a lot of volatility, what it generally shows is, there are many differences between people’s perceptions of the outcome for the currency. So, there is a lot of negative perception and I think where the currency is being temporarily falsely propped up, is that internationally, the Sovereign Treasury or Treasury bonds of first world developed countries are paying a very low interest rate and in Germany’s case, a negative interest rate. Therefore, people have been prepared to take on more risk, which means that they’ve invested in Treasury bonds in South Africa and other emerging markets.

An employee holds South African Rand notes in this arranged photograph in London, U.K. Photographer: Jason Alden/Bloomberg

There is the call that potentially there could be a bond market crisis with the availability of cheap money as a result of the quantitative easing, which as you may well know, is when the governments are buying up currency. My rationale is that if the bond markets crash, which there’s good indications that that could happen from the Pento report, that it may well mean that the interest rates in the developed world will increase and that will see a rapid return of funds to the developed countries. What that means for South Africa and the Rand in particular is that the Rand would quite easily go back to the R20.00, R24.00 to the Pound mark.

I don’t think there are too many people, if you took a ten-year view, would say that the Rand would be stronger then that it is today, particularly against the Pound, but you mentioned the Penta Report. It’s a book by a guy called Michael Pento called ‘The Coming Bond Market Crash’. Do you read books like this to educate yourself?

I did a degree in economics, I understand the concepts, and I read the Financial Times on a daily or weekly basis. In terms of the global economy and where you’re advising people, I think you do need to have a grasp of the challenges faced in each country. The reason is that a person in Hong Kong may be investing in the UK; it’s going to be different from South Africa. In Hong Kong they have inflated property prices. They’ve spoken over the last four years about a potential crash there, but it just skyrocketed on 20% year-on-year increases in some instances and with a very low yield, so those investors are particularly interested in getting involved in the UK property as well.

So, I like to educate myself and read books like this on George Soros and so forth because I think it helps you get a broader perspective. What we’re providing here is not merely a property investment, but a solution to people’s financial outcomes and what they’re hoping to achieve. If you understand them on a global perspective and from a broader economic perspective, it helps you identify good opportunities that will enable them to help them achieve their goals.

Yes, and in South Africa at the moment, there’s a lot of fear, there’s a lot of concern. People want to get their money out. Are you finding when you engage with South Africans that it’s accelerating?

We’ve definitely noticed a marked increase in the number of enquiries and more so the intention. Many South Africans had made enquiries before, but it was more from a general interest point of view, but with the whole Fees Must Fall campaign, you know, parents are really starting to become worried about their children’s future from an educational perspective. That’s where things like student accommodation investments fit in nicely. But with more threats of potential violence and also state capture and the corruption scandals that are going on, more people are thinking “Where would I potentially retire?” and of course, a nice property in George is going to be much more appealing than the English countryside with all the weather that we have here.

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Although, I think people have become more aware of what the possibilities are and taking precautions, so we are also finding that there’s an interest in care home investments as well and which draws some aligned to the student property in that they provide steady income of typically ten percent per annum. But there is the option that if things change in South Africa, obviously for people who do have that visa or ancestral rights they would be able to live in the properties as well.

It’s interesting, you’ve gone for niches, are you finding that those niches are attracting more competition because 8% net on student accommodation, 10% on care institutions, those are really good yields when you’re talking hard currency.

Yes, definitely. The amount of student properties that have been developed has increased, but the funds are typically all competing with one another and they’re looking at things on a scalable point of view. You know, we’re talking about pension funds that are looking to place deals where they won’t look at a development under R30mn. What we’re specialising on are developments which are in superb locations, which are typically between 50 and 100 units. It’s not ones that are under the same radar or microscope as the investment funds. What we’re gaining there, is there’s less competition for those assets that the yields are still around the 8%. For sure you have to be mindful of choosing the best location and the cities of highest demand, but more importantly, it’s about the management companies.

So, for instance, Sir Thomas House, which is the one property that we’re marketing in Liverpool at the moment, the lettings company has been specialised on student lettings in Liverpool for the last 12 years. They manage over 3000 bids in the city, so they know first-hand which are the best developments and which are the best areas and they’ve raved about the property and the location. There are places that we avoid like Bradford, for instance. It’s an area that doesn’t really draw in a lot of international students.

Sir Thomas House

The rankings of the university are outside of the top 100 and many of the local people end up staying at their parents instead of a person who live in London or Nottingham, going to another city to study. So, you have to look at not just the macroeconomics, you have to look at the microeconomics and the fundamentals of each area on a case-by-case basis. I think that’s where we’re going to be able to retain the high yields, is by seeking out the best opportunities with the best management companies so that essentially, people overseas will continue to have a hassle-free investment that’s fully managed, almost like a box that makes the money.

Do they repatriate the funds?

There’s a mixture. Some people look to build their portfolio, so they would retain the funds within the UK. There are various ways to invest. The simplest way for a person just buying one because you’re under the tax threshold of the income, which is £11 000.00 or even on two, you don’t pay any income tax in the UK on that, but where people are looking to build a steadier portfolio or like for the majority of people recently, they’re trying to pay for their children’s study, it makes sense to keep the money in the UK, but we do have partners that can help them either set up a UK company or an offshore company which is tax efficient in Jersey or the Isle of Man, but it depends again. It’s not one solution fits all, we look very much on discussing the appropriate solution with each individual.

So, it’s complex, but yore hear, you’re on the ground, you’re kicking the tyres. People back in South Africa can relax and get the 8% in Pounds.

It’s not just us blowing our own horn. We have won Student Property Broker of the Year in 2013 and we’re runner-up in 2014 and just this year we have a Student Investment Advisor from Property Wire. I think the industry recognises the hard work that we put into sourcing solid developments and as you just suggested from the beginning of the interview, at One Touch, it is about looking after our clients, so we could help you of disposal of the property at a time when you wish to sell. It’s a one-stop service and we do come out to South Africa every quarter. People in South Africa like meeting face-to-face. We’re going to be there this next time between the 8th and 16th of June, so if people want to have a free consultation regarding their potential investment portfolio in the UK they should look at our website, onetouchinvestments.co.uk.

Arran Kerkvliet is the Chief Executive of One Touch and this special podcast was brought to you by One Touch Property.

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