Arran Kerkvliet: Property buy-to-rent income yields far higher in UK than SA

South African Arran Kerkvliet, a property specialist who relocated to the UK well over a decade back, enjoys the advantage of being able to directly compare returns from the two countries. In this special podcast he explains the differences in the yield in his area of specialisation, buy-to-let properties: concluding that in addition to its hard currency shield, the UK also delivers a substantially higher yield than SA. – Alec Hogg

This special podcast is brought to you by One Touch Property Investment whose investment director Arran Kerkvliet joins us now from London. I’ve seen some of your research recently about investing in rental properties in South Africa versus the UK. But before we get into that – and there’s surprising results that you’ve come to – are you coming out to Sunny South Africa soon?

Yes indeed. We’re going to be out there between the 3rd and the 14th of February. Cape Town, Durban and Johannesburg.

Is there still a lot of interest from potential clients when you come here?

Yes significant interest. A lot of people – over the last 3 years – have already invested. As power cuts and everything else set in, people have decided to continue investing elsewhere, certainly in the UK.

Let’s talk about that rental income. This is a market that you know very well. People can hear from your accent that you are South African, living in the UK. You’ve been there for a long time, but the immediate assumption would be – in a developing country like South Africa – you’d get a far better return on investment if you buy rental property here than you would in the UK. But from the numbers you’ve done, this is actually not the case.

Yes, that’s correct. I conducted the research on that segment of the market, comparing areas like Paulshof in Sandton with the suburb of Manchester which attracts similar young professionals. It’s not the prime city centre, it’s just outside where young professionals rent and purchase their first property.

Pounds are clearly very expensive in South African terms, so you’re going to be paying more for the property, around three times more – that’s the starting point – but there are certain things that you have to pay for in South Africa that you don’t have to pay for in the UK and vice versa. Just take us through that.

As you said, property prices are more affordable in Rand terms, so looking at Paulshof for instance, you are obviously going to get a bigger sized property but you’d be looking at putting down a 35% deposit on a R1.7m two bedroom – just under R600,000 – which would generate R114,000 of income. Letting fees are pretty similar at 10%. But you’ve got taxes which the owners pay, whereas in the UK the tenants pay what they call a council tax. In South Africa – your levy – known as a service charge (in the UK) – communal grounds, security of the estates and so forth – whereas in the UK it’s just the upkeep of the communal areas. It’s R29,000 in Paulshof where as a property in Manchester for instance – which is almost R5m – will have a service charge of only R23,000. So there’s quite a marked difference from that perspective. In the UK you don’t have sectional title, what they have is the land owner will retain the ground – which is underneath a block of flats – and then charge rent to all of the owners. It’s a small amount, R4,200 which in Pound terms is quite low. Not only do you have your development but you have your areas obviously cordoned off and you have to pay for private security which we don’t have in the UK.

The security issues are one that I think most people can relate to, but something that you haven’t put into your calculations are inverters and generators, things to overcome loadshedding.

I certainly haven’t even factored that in, but even looking on a normal basis, what was quite surprising was to see that in Paulshof, on that R1.7m 2 bed, you’d be getting a net income of just over R50,000 which is only a net yield of 3% and if you consider mortgage costs at let’s say 9% if someone got just under prime, it’s R128,000. So your actual net cash flow for the year – and putting in 35% deposit is R77,000 so you’re contributing to an investment. Whereas other places where South Africans are traditionally comfortable investing in, is in Manchester for a property – let’s call it R5m – you’d get gross income just under R300,000 and then a net income of R235,000 which actually is a 4.7% yield. The real benefit is that you can obtain “interest only” mortgages as a foreign investor, the interest rate is higher than what we (UK residents) have, but it’s still only 4.5%. So what you generate from the net cash flow perspective is actually R157,000.

So the yield on the property – forgetting about capital gains which we’ll talk about in a moment – in South Africa you’d be happy to get 3%, in the UK you’re talking (in Manchester anyway) about nearly 5%, but more important is that you have a positive cash flow, which I suppose is key for South African investors. They don’t have to keep funding an investment into property in the UK whereas in South Africa, you probably would have a negative cash flow. You’d have to keep investing just to retain the ownership of that property.

Yeah that’s exactly how it works. Of the 5 properties that I’ve got, I’ve taken interest only mortgages so the income is paying for itself and I’m choosing – at my own accord – to use that surplus to pay down the debts on the property which obviously is something still to consider. But for South Africans it’s ideal because you don’t know to what extent the currency is going to fluctuate. So for an investor – let’s talk about what they’re putting in – in Manchester on a 2 bed property of R5m they need to put in R1m plus purchase costs and in Birmingham it’s very similar. That is essentially what you’re putting in – obviously keep a little bit on the side for in case there’s a vacancy or there’s some repairs that needs to be done – but what you then benefit from is that positive cash flow but you then have the benefit of capitalising on this growth, which in Manchester for instance has been an equivalent of 7% over the last 5 years of capital growth per annum. Birmingham has seen a slightly lower growth – between 3% and 5% because of the changes in the transport links and job creation.

Just to clarify, we’re talking R1.7m not pounds?

Yeah, that’s right.

That comes within the exchange control allowance.

Yeah I think the allowance is R1m each. A lot of them are off plan – and I know South Africans don’t like things that are long term off plan – so we’re really focusing on ones that are going to be completed within 6 months. As a couple you wouldn’t even go and no need to go through the exchange control hoops.

You mentioned Manchester and Birmingham, many South Africans who have lived in the UK – either temporarily or while they were younger or just visiting families – would know London a little better. Are there any similar opportunities in the London commuter towns?

Yes certainly. I think that’s where the opportunity is and it’s really looking at the fundamentals behind that which is driving the growth towards the commuter towns. As you’ve lived in London before, even getting from Wimbledon – where a lot of the South Africans live – to the City of London, you’re going to be commuting 45 minutes on a good day. So a lot of commuter towns like Luton and Reading you can get to London in just 35 minutes. If you look at what mortgage lenders, their typical first time buyers are earning £40,000 a year which is – at the current exchange rates – R13m as a couple, as a single it would be R750,000. So as a maximum mortgage, which is really what affordability is all about, is that you get 5 times earnings. So the maximum mortgage that you could get would be R6.5m or R3.7m as an individual. But the problem is that London property prices, are R12m which is £640,000, which is out of the reach of the first time buyer. So what are they going to be targeting is places of affordability where it’s easy enough to get to work.

It would be those commuter towns that you’ve mentioned, not necessarily Wimbledon but Luton and Reading.

Yeah, the towns are popping up and people are considering them more. We’re talking about the ones that are outside of the Greater London circle that with the use of the railway, you can actually get to London quickly. So for instance, Reading is to the west of London in a place called Berkshire, that’s only 27 minutes to London Paddington. It’s already got a lot of tech jobs and companies there – Microsoft’s head office, Procter Gamble – and not only is it great to commute, but you also get access to the south coast which is fantastic for summertime holidays.

This all sounds really interesting. It sounds a bit like when you’re investing in the stock market that you’ve got to go for your stock picks. You’ve got to be very sure exactly where you focus on. But what about Britain after Brexit. Living here in South Africa we get a very confusing picture. Is it likely to impact the capital value of properties and certainly the growth?

Yeah, most South African investor concerns have really been more on the currency fluctuation – if Britain leaves the EU how much is the rand going to devalue. What we saw preceding Brexit was that whenever there was a delay, then the pound was falling down. When there was any indication of a hard or soft Brexit, the pound would appreciate. When you look at property prices, you’ve got a local demand rather than an international demand. So the shortage of houses in the UK has been well published – particularly in London – they need to be building 250,000 homes and they’re only building 170,000, so this is the reason why there’s been such an increase in the London prices. Its not just London, most of the metropolitans have a shortage of property and that’s what really drives the growth. So what the investors are really more concerned about is the currency fluctuation. The conservatives which Boris is leading have a 48 seat majority, which is significant and they’ve got a very clear mandate to “get Brexit done”. I think they really are driving towards that.

Reading development images

So you take the uncertainty out of the situation – it’s likely that the property market might not boom but certainly it will be stable – so this “buy to rent” that you’re talking about, which would be something that would appeal to South Africans, how popular is it? How much stock is available to do this?

There’s a lot of American investment funds investing billions. There’s $3bn that they’ve invested into what they call the “build to rent” market. So what they’re doing – the likes of Greystar and Legal and General – they’ve set up pricing funds or rates where they would take rich family investments and basically invest in development by development. They would basically build a whole development in Birmingham – which they have done – and sell parts of that because they see it as a great rental opportunity, because of the supply demand fundamentals. So if the smart money is coming in, it’s certainly worth considering but they would buy the whole block and then manage it themselves. Investors can follow their lead and purchase the property and then have it managed.

That’s what you do, that’s how you help South Africans invest?

Yeah, One Touch Property has been trading for eleven years. We source property investments across various sectors and then we’d come to South Africa and meet with investors to help them choose the property which is most closely aligned to their investment objectives. Our residential properties compare well because they are different. You benefit – not only from the income which is as we’ve illustrated, the positive cash flow – but also there’s a prospective capital growth. The commercial properties, which instead of buying a whole block, you could buy a studio within a block and have them fully managed but that’s more tailored towards someone whose dividends pay for their children’s studies abroad or maybe looking for retirement income. It doesn’t necessarily fit with people who are in the prime of their business career and earning a lot of money and don’t know what to do with it.

Considering the UK property rebound?

UK house asking prices have risen by 2.3% in the two months following election as confidence return to the market. To explore how you could take advantage of the growth and purchase cash flow positive properties, arrange a meeting with one of our specialist property consultants visiting South Africa from the 5th February – 14th February in Cape Town, Durban and Johannesburg.