| Property investment: Southern hemisphere’s ‘hot spot’ is not without risks |
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| After the accession countries, South Africa has been identified as the next ‘hot spot’ for property investment. Resident Sheila Killian examines the risks and rewards associated with such a transaction. |
South Africa is experiencing an unprecedented residential property boom. Gross rental returns are running at about 8 per cent per month, with prices rising at a rate not seen here since the early 1980s. In and around the Western Cape, growth is largely driven by foreign investors, many of them Irish. But for anyone joining the goldrush, there are soome risks to be considered.
First the risks, the most obvious of which is currency. You will be buying and maintaining the property, paying most of your transaction fees and ultimately selling, in South African rand. This is a relatively volatile currency, with the exchange rate to the euro varying from R6.87 to R10.40 over the last three years. However, even as a non-resident, you should be able to source up to 50 per cent of your purchase price from a South African bank, providing a partial, natural currency hedge. And the corollary to the risk is diversification. Arguably, if most of your investment portfolio is denominated in euro, some exposure to the gold-based rand may not be a bad thing.
Another problem is security - the poverty is shocking here, and the crime rate correspondingly high. The police force is stretched, and detection rates for property crime run as low as 6 per cent. You need more than bars on the windows and doors and an alarm system, most contracts with security firms offer immediate armed response to intruders. Security will probably cost you more than you expect.
There is also a small degree of political risk. South Africa is a peaceful democracy, which has just come through multi-party elections with a minimum of violence, but the issue of land reform remains unaddressed. With so many homeless, the sight of foreign investors buying up large tracts of the coast has fuelled calls for some restriction of their activities. The most popular proposal is a speculation tax, or levy on foreign investors. There is also some discussion of new rules to restrict foreign ownership, though unfolding events in Zimbabwe to the North make such direct intervention less likely. Still, local empowerment rules already apply to farms, and black economic empowerment is a reality in most sectors of the corporate world. Logically could extend in the future to investment property.
Taxes, both direct and indirect also remain difficult to forecast. Broadly, the taxing principles are familiar, - stamp duty on purchase, capital gains tax on sale. Stamp duty is relatively low, but transfer duty and legal fees could add up to between 6 per cent and 10 per cent of the value of the property.
Expenses of a revenue nature, such as interest on a mortgage used to purchase the property are allowable against the rental income for South African tax purposes. However, any changes in the tax residence rules or to the already complex exchange control regulations could complicate cashflow on an investment. Tax rules change rapidly here. In the two years following the introduction of Capital Gains Tax, there were no less than ninety-nine amendments to the law. Professional local advice is essential.
Having taken those risks on board, though, the value can be outstanding here. See www.pamgolding.co.za/. In and around Johannesburg, the main surge in property is in the new black middle class suburbs of Bassonia, Glenvista and Mondeor. This leaves the more speculative end of the market less crowded than their equivalents in Cape Town. The two main options for foreign investors around Johannesburg are cluster homes in the northern suburbs or fashionable apartment developments closer to the city centre. A good example of the latter is Melrose Arch, offering apartments in a stylish and secure bubble, with chic clubs and restaurants downstairs. The crime levels in Johannesburg, however, make the city less viable as a short-term rental destination.
Durban is the nearest major coastal city to Johannesburg, with lower crime and higher holiday appeal particularly as a weekend and summer destination for Joburg and Pretoria residents.
Property prices here are rising faster than the rest of South Africa, driven mainly by local money. It is a less attractive city for Europeans than Cape Town, however, with a more humid climate and fewer obvious attractions.
There are alternatives. There is a growing market in eco-estates, or sustainable tourist developments, particularly North of Durban and in and around Plettenberg Bay. The time share market is busy, centred on self-contained resorts such as Sun City. Game farm plots are also changing hands quickly, though the unresolved issue of land reform makes this a riskier investment than most.
The real gold, however, may lie in the smaller coastal resorts along the Western Cape and garden route, with unspoilt beaches and lower crime. It can be difficult to find property for sale closer to Cape Town. In Hermanus, two hours from Cape Town International, the average ownership period of a home is over thirty years. Entry level prices for a 500 square metre seafront site has now passed the three million Rand mark. Further East, in the small resort town of Port Alfred, top end prices have increased from R590,000 to R1.6 million over the last ten years. Similarly in Summerstrand in Port Elizabeth, which has the advantage of a well-serviced airport, prices have tripled. Planning regulations may also be a little looser in the smaller centres. While property investors traditionally welcome less restrictive planning laws, it is conceivable that your beachfront cottage in a peaceful little resort town could in the future neighbour a new industrial complex.
The reverse can also happen. A few years ago Alicedale was a typically haphazard, dusty Eastern Cape small town, boasting a few shops and a railway junction. Located on the wrong side of the upmarket Shamwari game reserve, further development was not anticipated, certainly not by foreign investors. Now a Gary Player-designed golf course, five star hotel and theatre and sports complex are planned for the town. Where in 1999 houses sold with difficulty for R15,000, sites now go for R250,000, and locals feel this may still represent good value. Prospects for continued growth are good, driven by the same factors identified by Jim Power, chief economist with Friends First, in the Finance Annual Property Survey 2004. Increased employment and low interest rates drive up local demand, while the poor performance of the stock market makes property look increasingly attractive.
Despite growing confidence in the local economy, many South African investors prefer to buy property overseas, to generate foreign currency. The market for residential investment property is therefore likely to continue to be dominated by foreign investors. There is good value across a wide variety of properties. Irish investors would be well advised to look beyond the immediate vicinity of Cape Town, and, as the Alicedale example shows, to take careful advice on local trends and issues. |
Dr. Sheila Killian is a lecturer at the Kemmy Business School, University of Limerick, currently on sabbatical at Rhodes University, South Africa.
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| Article appeared in the July 2004 issue.
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