LONDON — As uncertainty around Brexit clears, so does the investment appeal of the world’s oldest democracy. Especially in property, the asset that relies most on a stable political, legal and social environment. London-based Saffer Arran Kerkvliet has specialised in safe but high yielding niches in the UK, winning numerous awards for his work in the student accommodation and home care property segments. In this interview he looks back at changes proposed in the recent Budget Speech and highlights opportunities that will appeal to South Africans wishing to safely diversity their portfolio into the UK. – Alec Hogg
This interview is brought to you by OneTouch Investments.
I’m with Arran Kerkvliet, the MD of One Touch Investments. Aaran, we’ve spoken a few times in the recent past. The South African community is quite interested in investing in the UK here in London, where you’ve been helping them. What kind of interest have you seen lately?
Well, there generally has been a move away from London. It was really from the last budget speech, before this one, they increased the purchase fees for overseas investors, which is a 3% stamp duty – so that’s like the transfer duty. With the property prices being in London, over £450.000 that obviously has made a big impact so, what we’re seeing is where people are buying residential properties, it is more towards Manchester and Birmingham with average purchase prices around £200.000, so there’s not that much as an impact. But the bread and butter of the business is still for people looking for a high yield and the properties we have are commercial properties like retirement homes and the student properties, which the stamp duty doesn’t apply to commercial properties under £150.000.
So, there’s lots of demand for that but you’ve mentioned the budget. We’ve just had the latest UK budget. What was in there that investors need to be taking note of?
Well, I think one of the good points is that everyone gets a personal allowance so, the first £11,850 of income is tax free. As a couple, that’s a lot of Rands that they could earn tax-free.
If you invest from SA, you would also qualify for that tax-free allowance?
Yes, that’s correct. Let’s say they purchased a property, which was £100,000 and they got an 8% yield. That £8,000 income would be tax-free.
What else was in the budget that we need to take note of, from a SA perspective?
I think it’s looking at most South Africans that we speak to and who are investing with us they’re looking at investing in the UK as a safe haven. So, what they’re looking at is for some level of income but also capital growth so, what we’re seeing is that there’s a drive to improve the amounts of land, which is being released to the market for development. But we also noticed that aside from the budget is that the construction industry is in recession so, it means that a lot of the contractors aren’t being awarded jobs, which means that construction isn’t really taking place at the level, which government is aiming for in their budget. So, where there’s a less supply and demand is growing with the increase population and there’s still migration because the NHS doesn’t have enough workers and so forth. That demand is really going to drive up prices where there’s no new houses being built.
So, there isn’t a flood of new properties onto the market and if you’ve invested in one in the UK your returns will be fairly well secured?
Yes, they’ll be solid. I think it’s always with these budget speeches they’re saying that developers, once they’ve got planning permission they would need to start building property within a 3-year period and not the 5-years as before. In reality, they can say that it’s not commercial or commercial point for them to be able to do that and no one can really force them to do it because another developer is going to have to come onboard and he’s also going to want to make the same profit margin. So, what’s policy and what actually comes into effect, are always two different things but I think, on a whole, there wasn’t any real surprises. The economy is doing very well. There’s only a 4% unemployment, which is the lowest since 1975, and wages are increasing. They’ve just increased the natural minimum wage to £7.83 per hour. So, yes, from that perspective, the economy is still purring along. They do say it’s only going to increase by 1.5% per annum but I think with the way the economy has been going there’s a lot of smaller businesses and start-ups and we’re not doing a lot of manufacturing so, from a highly skilled point of view, there are still a lot of technology jobs, not only in London where Google has increased its staffing at Kings Cross. They’re building new offices there. You’ve also got whole new districts in Manchester being developed. There’s Allied London, who’s developing the St John’s Quarter in Manchester, which is a 10-year scheme where they’re regenerating a whole area, creating new industries, business incubation hubs, hotels, schools, and everything like that. So, what that’s doing is buoying the economy and buoying the small businesses, which I understand is over 3 million small businesses, which are the main driver of the economy. So, on the whole, I think it’s quite a good place that we’re in, at the moment.
From a South African perspective, you also are investing Rands into Pounds, and of course there was the big shock of Brexit, where the Pound fell very sharply. What’s the outlook on that side?
Well, as the news was today being that the Brexit so-called divorce settlement has been agreed, and to the tune of £45bn, which is going to be paid out and that’s over a substantial period of time. If you consider that the European Bank has still got something like £30bn which they’re going to have to repay. It’s almost like, ‘well we’ll pay you back that.’ So, the net amount isn’t that extreme but for sure, UK still wants to work with European businesses and it’s a good signal… and you’ve seen the Pound strengthen. I think what a lot of South Africans have been worried about is the entry point of where they’re going to get involved, is are they going to buy now and then the Pound falls further? I think this gives it now, a new base level. Brexit isn’t still, all the final terms are going to be still negotiated but I think it’s going to increase that base level, where the Pound is, which will make the South Africans hopefully feel more secure as a store of wealth. But I think what people is, they’ve got a more level of comfort with property as opposed to other investments because property is normally a long-term asset, where it is a store of wealth. Compared to what’s going on in SA where everyone is kind of waiting for the 16th December, when this big vote is going to take place, and we’ve seen a lot of volatility in the Rand. I think it’s a good time to start investing in the UK to minimise those falls and as a store of wealth for your money right now.
You look at particular niches. We have spoken before about the care homes and about student accommodation. What kind of returns are they generating for the clients who’ve now invested with you from SA, in Pound terms?
The returns are 10% and the typical entry point is between £60,000 – £80,000, and that’s on the retirement properties.
Just put that into Rand terms.
I think we’re looking at about R1m and you could be getting R100,000 as your income. So, I think where South Africans have always enjoyed a high level of return, even in your money market accounts, if you look at what the medium-term projections are for the Rand, that if Cyril comes into power, it could appreciate by 6% but if he doesn’t, it would devalue by 20%. So, people are getting involved in currency hedging and other things like that to protect their wealth. Whereas, obviously, you could get involved with property here now, and it would be paying you the same returns as you would get in SA, and you’ve got this extra added security of the store of wealth in pounds whereas if you do get that 20% drop in the Rand. All of a sudden, you’re earning 12%, in real terms, and that’s what’s attractive for the investors.
So, they like this and they know the story?
Yes, I think the story speaks for itself. The UK has got an aging population. There’s more people over 65 then there are under 16. For large parts of the country where people are retiring, it’s to sunnier parts of the country where there’s restrictive planning permissions, small villages along the south coast. So, what the developer we’re working with is doing is they’re converting period buildings into retirement homes.
What’s period buildings?
Yes so, a stately home. It might have been some rich aristocracy who might have had a 15-roomed luxury home that they couldn’t keep – as the upkeep was very expensive. So, they would then sell it and the care home operator would purchase the property as a whole and then separate it into 15 or 22-individual, one-bedroom apartments. Then then would re-lease it back from the purchaser for a 10-year period and pay them an attractive return of 10%. The attraction for South Africans is that they don’t have to manage it like they would on a buy/to-let property. That they’ve got the actual lease agreement with the operator, who takes care of the day-to-day activities and finds the tenants, and everything like that, so it certainly offers a greater peace of mind than other investments in a sector where the fundamentals are there and in a part of the country where 25% of the population is over 65. In Devon, for instance, 10% are over 80 so, you’ve got a long period of time of a captive audience that people could be renting from you.
Just to go back to the budget briefly, the British budget this is. From what I understand there’s nothing in there that’s going to shock the economy. Nothing that’s going to cause problems to those investing into this country.
No, I don’t really see that and having a look at things. For sure, some people are a bit upset that not more money is being spent on the NHS and that more money was put into robotics development. We are in the age of AI and smart cars are going to be driving us around in the world. We’ve got to be looking to the future to generate more income for the economy and be a growth sector at the advanced stages of technology rather than plugging holes in institutions, which there’s some room for improvement.
It’s a bit farsighted though, investing into robotics. I wonder if we’ll see any of that in the February budget in SA? Probably not.
I hope so. We need to be generating something from productivity and I don’t think that as an economy like SA, the productivity levels haven’t been as high as some other countries so, competing on a world stage with India or China may be a challenge. So, to try and uncover those sectors where maybe in agriculture or things like that; where they could offer some advantage. So, I think it’s very foresighted for the British government to identify that and actually, in fact, in these first stages of space exploration the British were actually, providing a lot of the equipment to the Russians and Americans. It was actually, Thatcher who put an end to that but if that continued there’s that element of robotics and things there, and there are still sectors, BAE that supplies a lot. We’ve got Rolls Royce in Boeings so, I think there’s still a lot of growth in the UK economy but there are still some head wins. There are certain things, which aren’t in the budget but are still, with regards to Brexit are migration and how involved the UK is with international war and that sort of thing but as far as a UK economy, I think things are pretty safe right now.
You’ve mentioned or you’ve touched on intellectual capital with the space programs, etc. You’re also involved in that side with student accommodation.
Yes, I think the students are our future and I think a lot of the international students who come from China, and India, and places like that to learn to integrate with the UK, and Europe for business reasons from that perspective. A lot of universities, 18 of the top 100 universities in the world are UK universities so that attraction is there. I think although the Pound has made some recovery, it’s still a lot cheaper than it used to be in real terms for overseas students to study. Although there was a slight drop of European students, European students only made-up of 6% so that fall in the European students has more than doubly made up by students from elsewhere in the world. From that perspective obviously investing in student accommodation, where you’d purchase a studio in one of the top university towns, which is also taken care of for you and it’s generating an 8% return. It makes sense for the investors and it’s a safe market, and they understand it.
And if you purchase it and you have a family member who might want to stay there one day, how does that work?
Yes, I think a lot of South Africans ask us those questions, particular at the beginning of last year, where the #Fees Must Fall campaign. What we say to them is that it’s a great idea to fix your expenses and your costs for the future. So, if you’ve got a 15 or 16-year-old child, and you’re not sure where they’re going to study. Go ahead and buy a student property in Liverpool or Sheffield, or in one of the other towns that we have and if they decide to study in Birmingham or London or wherever, at least you’ve got the income from those properties, which will cover the cost of wherever they stay in the UK. So, that’s the rationale and people do understand it. People for sure, if they do happen to pickup acceptance in the same town that they’ve purchased the property they can go and stay there but they would have to forego their rental income obviously. They would have to pay the community charge, which is understandable, for the services and communal areas and the fastest Wi-Fi in town. That’s all the things that students want to enjoy in a safe environment, with security.
So, those are two, very focussed areas that you look at and stories that South Africans can relate to?
Yes, definitely. We are a consultative business. We come out to SA every 3 months. We like meeting people face-to-face. I’m from SA. I have the plight and I do understand where people are coming from and we try and look for safe sectors where there’s steady income streams but also, we do cover some element of places where there’s high capital growth, like Manchester, outer-London, and Birmingham residential property where you could purchase it and generate returns between 5 – 6% but there’s more of an element of capital growth there. So, if you’re not looking for an income stream in retirement or not looking to fix your expenses for your kids. You’re looking more for a store of wealth, where you don’t need the income stream coming in. Professionals, such as solicitors or people in finance in SA in their 30s that are earning a lot of money prefer to purchase those types of properties so that they don’t have an extra tax burden but they know that in the future they’ve got a greater potential of capital growth with the extra jobs that are being created in these towns.
How long have you been doing this?
It’s almost 10 years now so, I think next year June it will be 10 years of One Touch and yes, it’s been a great journey.
Non-SA clients as well?
Yes, definitely. South Africans probably make up maybe 20%. UK residents probably another 50% and the rest is from elsewhere.
So, the UK guys also see the attraction of the high yields that are available in these particular pockets?
Yes, it’s also because they understand it. A lot of the investors are just every day people, like our audience. They’ve sent their kids to university and they’ve had to pay for the rent themselves so, they understand that. In the same token, they’re paying £1,200 pw for their great-grandparents or grandparents that’s in one of the retirement homes or care homes for dementia. So, because they understand the concept and they know it makes sense and that’s where they’ve got that comfort level so, South Africans can feel safe in the knowledge that it’s not only South Africans who are just going, ‘we’re investing in this because it sounds good.’ If the UK people, who have experienced it first hand, are doing it then it’s definitely something worth exploring further.
When are you next in SA?
Probably at the end of January, or beginning of February, we’re just trying to fix dates.
Aaran Kerkvliet is the MD of One Touch Investments.