The most recent memory I have of the South African Rand falling through the floor against the British Pound was sitting at Newlands cricket stadium. The Proteas were playing against the English, and all the Barmy Army could sing about was ‘1 pound, 1 pint’. Fast forward and the currency has fallen to similar levels again but One Touch Investments founder Arran Kerkvliet says this time it’s different. An own goal in Nenegate fuelled the previous sell off, this time it looks structural. Arran spoke to Biznews founder Alec Hogg to look at investment opportunities on the back of this weakness. – Stuart Lowman
This interview is sponsored by One Touch Investments. It’s hello to Arran Kerkvliet. It’s amazing Arran how technology has advanced. We’re looking at each other now, however you are sitting in London and I’m in Bryanston. Today we are having a serious conversation. Over the years you’ve been telling the business community how property investment in the UK would be good for them, and the way we’ve seen the Rand dropping against the pound I’m sure you’ve got a lot of happy clients in this part of the world.
Yes, definitely. There’s been a lot of activity dating back to when we got started in 2013 (helping South African clients). We initially found that it was mostly people who already had some investments overseas, the early adopters or super wealthy. More recently it’s been people that are wanting to sell a house or some of their current investments in South Africa to invest overseas but they’re a bit nervous and saying they should wait for the Rand to improve. Looking back over this period, it stays stable for a while but it doesn’t improve.
I guess it is a thought that South Africa’s exchange rate is now 24 against the pound, has it got that bad?
Yes, it has got to that level. A lot of people are looking at it like the Nene incident. When he got good fired the rate went to 24, by August that year it went back to 17.5. But this is not the same circumstance. Before I gave you a call, I had a chat with the MD of Sable FX – Andrew Rissik he said: “The rand is trading at historically low levels against the USD and the Euro and it’s perceived to be undervalued. However, we at Sable believe that it’s going to take longer to recover because South Africa’s GDP relies on exports of commodities and obviously with the world economy slowing down, the trading partners will demand a lowering of these precious metals and goods which are required for manufacturing.”
That’s a good point when it has blown out in the past, it has always been through an incident in South Africa, but this time it’s Covid-19 and it’s a global phenomenon. The question has to be, will this country’s spending, that is we spend 25% of the national budget on Covid-19, going to be in line with those of other countries or worse, or is it going to impact the Rand in a positive or negative way. And I think is what Andrew Rissik has articulated and he seems to encapsulate it quite well.
Definitely. We don’t really know where things are right now. It’s all about perspective over time. One might think it’s expensive now and then in five years’ time it’s not that expensive. We don’t really know exactly where the Rand is going to go and I’m not saying that I could predict that either. All I can show is what people have invested before. We sell off-plan property and back in 2013 it was student property that was all the rage that people could buy a studio in a student town like Sheffield, purchase it off plan and over the period from 2013 to 2014 pay their deposit. In 2013 the rate was 14/1. The returns start when the property is built, and the student properties were getting on average 8% returns.
So when you look at the exchange rate over time, in 2014 the rate was 17.8, in 2015 it was 18,3 and 2016 it was 17.1 so over time the returns were actually higher than the 8%. Some people say they could leave their money in a Money Market account. But what these investors are now doing; they are not bought by people who will live in them so you don’t generally get a bigger appreciation because over time. You have to reinvest to get the property painted and redecorated and so forth. It’s a rental property, right? So by the time you’ve looked at those costs even if you do sell it after the five year holding period (which is the rental guarantee period) and you achieve just the sales price that you paid for it – which was 65,000. Because the Rand at this stage is 20 to 1, the investment is R916,000. You would have got R463,000 in terms of your rental returns and then another R422 000 your capital growth uplift, which is really just the rand exchange rate and that your adjusted
annualised return works out to 19.3% because of the exchange rate.
It’s extraordinary when you start working in the impact of a declining currency. Clearly Rand’s likely projection forward would not be to strengthen. Is that what the people like Andrew Rissik are telling you?
Yes, that’s what their view is. The rand has maintained its value against the pound but obviously the pound has had its challenges. What he indicated is that although the pound has had its challenges with Brexit and Covid-19, and has experienced credit downgrades. However, it’s still well above investment grade. We’re in different times but if you look at what happened following the last credit crunch, 2008 to 2010, by mid 2009 the UK essentially got out of the recession and by 2015 was the fastest growing G7 country in terms of economic growth.
If you looked at the past, which is not always a predictor of the future, but what we have been able to do previously is recover. What we’ve got now is a lot more decisive government with conservative majority on Brexit. It may not look that way when you look at Boris Johnson’s turnaround on Covid-19. You’re asking economists and people like that also to make judgments on the medical side of things that it’s challenging for every country to get the policy right, for example your talk about Sweden’s view on lockdown.
Yes, its fascinating that they are allowing the herd immunology to come through. But when you look at the printing of money and South Africa is now literally going to be borrowing something like R400bn to fight Covid. Is it something similar in the UK, and does that affect the relative values of the currencies?
Yes. I think everyone’s got the printing machines going again. The UK had done what they call quantitative easing (which is the printing of money) beforehand during the 2008 crisis. In general, when you print money you should increase inflation, however prices did not go up that much when people printed money because global inflation was down. In the UK, a lot of people have got quite a lot of assets, over 50% of people have paid off their homes and also people have got quite a lot of savings. So when inflation goes up on people that are asset rich, they benefit from the increasing inflation.
Whereas in South Africa, according to Oxfam, there’s 55% of people are living below the breadline or in poverty. So increasing inflation (where) they don’t actually have any assets that are increasing in value. So what you’re doing is making everyone (the majority) worse off in the future. So quite a dangerous thing to be doing. I’m not an expert on it but if you look at South Africa being one of the highest Gini-coefficients on inequality, where inflation goes up where the people have got assets, they will see their financial assets go up but it’s not going to help the impoverished people. It will be more expensive for people to employ people and this will increase the un- employment rate.
Which it is already, so it is something to consider. What about the impact of Covid-19 on the UK property market?
The banks are concerned about the values of the residential property. As a property investment company we source a range of assets which includes high yield properties like a student property, care homes and residential properties in Manchester and other places like that. For the UK investor, they would generally be able to – on buy-to-let property – get a loan to value their mortgage, put down a 15% deposit and then they could get the rest on a mortgage. But with the lenders being more cautious, not only are they going to be telling the surveyors to down value the properties, they’re also asking for people to put down 25% deposits. When you look at average UK prices at GBP265 000, and London prices near GBP500 000. The demand is going to be slow in terms of people purchasing.
We deal with property developers who have already completed developments and that’s great. The share prices of the UK property developers have plummeted about 30 to 40 % because they don’t have an active workforce to build the properties. There is a dramatic shortage of properties. If you look at the rental values over the last year, because of taxes, actual rental values have gone up by 13%. So where there’s less demand from people buying, means that you could probably negotiate a slight discount as an investor. You know your target market which are the renters.
On the Care Home Investment side there’s a lot of press at the moment which has revealed that there are over 4000 more deaths in care homes this last year in April compared to last year. But there are opportunities in the medium term when we have a clear idea and the UK also starts to get things under control.
Where you’re going to place your money as a South African investor and looking at the returns, not just in terms of percentage yield but also what the currency is doing, and later on when you’re bringing the money back you could have a higher income to be living off in South Africa.
You may wish to arm yourself with the information available in UK property investment guides. There are useful tips that may help you formulate a property investment strategy so that when the time is right to start building a property portfolio you can take the decision with confidence and ease.
