Finding the Value: Is offshore property a sound investment?

With many exciting offshore opportunities available, the key is to seek out sound advice and find regions or cities undergoing growth and transformation…

While ongoing political uncertainty is spurring fears of further declines in the rand and credit ratings downgrades, high net worth South Africans are pursuing ways to invest beyond the country’s borders. In many cases, such investment will include investing in stocks in other countries, such as the UK, USA, Cyprus and parts of Europe, with more stable currencies and projected growth proving attractive. Increasingly, however, investing in offshore property is becoming a savvy move for South Africans with the means to do so – with the opportunity to gain significant value over time, and rental income also being an option. Indeed, not only does investing in offshore property allow South Africans to have a base of wealth outside of the country, but in some cases it also allows families and business people to enjoy greater mobility and ease of movement around the world – as well as potential access to overseas educational institutions for young people.

So how does one approach the task of actually purchasing offshore property, and where do the better opportunities lie at the moment? Last year, property experts reported significant interest in the acquisition of property in countries such as Malta and Cyprus, with the accompanying benefit of an EU passport. In addition, there were some major acquisitions in commercial property in Cyprus by South African companies, specifically in the retail sector. London has also always proved attractive for South Africans, particularly given the historically close relationship that South Africa has enjoyed with the UK. New opportunities in the UK outside of London are now looking more feasible, as London undergoes its own political and economic shifts.

“London was the main focal point for foreign investment, as that was the city most people were familiar with. However, it has passed its saturation point, and prices are sky high. The Northern Powerhouse Initiative has created a hotspot of growth in the Manchester, Liverpool and Leeds triangle. There isn’t a day that goes by where I don’t find reference to the fantastic growth statistics and forecasts for these areas.” commented Holly Weaver, Managing Director of Vantage Investments Portfolio Ltd (VIP).

“In addition, the types of investment opportunity with the increase of Purpose Built Student Accommodation (PBSA) means there are now different price points available for UK investment. You don’t have to be a multimillionaire to get a foothold into the UK market and start receiving regular monthly income in a rand-hedged currency. However, you need to be aware of what you are trying to achieve and what the pitfalls are.”

“South Africans still like London but it is really expensive at the moment, and a far better bet would be Berlin, the capital city of the largest economy in Europe,” notes Chris Immelman, MD of Pam Golding Properties’ International & Projects Division.

According to Immelman, Berlin is currently going through a major regeneration, offering investors some juicy opportunities. The city is an attractive work destination for young and upwardly mobile people, with a bustling technology scene fuelling growth.

“With prices still well below those of Munich and Frankfurt, we see long-term upside here,” he says. “The factors that we look for in investment decisions are things like rentability and desirability for tenants (in Germany, Berlin is the most sought-after city to work and live in – thereby ensuring tenant demand which will help the rental yield and long-term capital appreciation). Any city going through major regeneration, like Berlin and Lisbon, would normally offer long-term upside. We have seen this in Lisbon where our investors have benefited from fantastic growth over the last few years, and we see the trend continuing…”

 

Do your homework

Yet while it is all well and good to have identified savvy offshore investment opportunities in up-and-coming cities, the critical step is to find the right scheme and secure a fair deal upfront. With so many South Africans scouring the landscape for opportunities, getting sound advice and taking the rights steps are imperative to avoid losing money on investments that seem too good to be true!

“Whilst there are many investment schemes on offer with guaranteed rentals for a certain period, one needs to consider this very carefully and ensure that this investment return is not built in and ‘front-end loaded’ as you would be overpaying for the investment,” advises Immelman. “However, some schemes are genuinely interesting and can offer some comfort in the first few years.”

He points out, for example, a scheme involving Martinhal in Cascais, Portugal, which has been identified as a sound investment in hard currency (4% net guarantee for 10 years). A major benefit is that one would be eligible to apply for the Portugal EU Residency programme, as the investment value is in excess of € 650 000.

As with any investment, there are always risks attached, and downsides that should be carefully considered. Arguably, the overarching risk is that you overpay initially, and fail to recover from the initial outlay. To avoid this, get sound advice and also ensure that you buy in an area that offers exit possibilities. Also, be aware of the fine print and hidden costs, which may include capital gains taxes and wealth taxes on non-domiciled residents.

With regard to financing, Immelman says that South African banks will not offer finance for international purchases.

“Local banks would normally offer finance of about 60% loan to value, and some banks in France are offering mortgages at 2% fixed for 20 years,” he says.

In short, investing in offshore property requires not only a healthy bank balance, but also a healthy appetite for risk and the vision to see the longer-term benefits…

One route to offshore investment is to find yourself a brand- agnostic advisor. All too often the market is flooded with developers or their subagents focused on selling that one development. Find an advisor that you can be with for the long haul. You need a hub of information about the market in general, the pitfalls, case studies of the good, the bad and the ugly, and some of the critical ‘how to’s’. This should all be available to you before you are force-fed a ‘good investment’.

Most importantly you should be aware of what to look out for in the offshore market. As mentioned before, it is necessary to do your homework, but what should that homework consist of? For the first-time offshore investor this can be daunting and you could be relying solely on one advisor’s commission-biased insight. Below is a list of the most critical things you should be aware of:

 

Top 5 things to consider before investing offshore:

• Who is the developer?
• Where is the money going?
• Does the sales contract match the marketing material?
• What is the exit strategy?
• What are the hidden costs?

 

Who is the developer?

This is a critical point. You may be provided with material from an agency that is saying great things about the developer – but please ensure that you know the make-up of the actual company behind the development. A lot of developers create shell companies for the specific project build. They offer guaranteed rental income, and yet when they don’t deliver on the guarantee, there is no asset in the company to litigate against. Check their track record. How long have they been around and what is their reputation? What is the age of the company registered as the development company? What assets are there to secure your guaranteed income, where are they stored and when would they get released if a project were to be late in delivery?

“I now only work with developers that I have met, have had results with and know I can trust. Most noteworthy of those are Alliance Investment, the leading development company in northern UK, who have time and time again proven their commitment to quality product and ethical sales and support,” commented Holly Weaver of VIP Ltd.

 

Where is the money going?

This should actually read: where is the money going and for what purpose? This is more of an issue for off-plan developments where investors pay in instalments against the project build. Most often, the payment plan is a legitimate way to finance the build of the project. There should, however, be careful guidelines about what the deposit money can be used for and what quality checks are in place for that money to be released. There are instances where the small print says, ‘and for marketing purposes’. This is a warning sign, because marketing activities cannot be as stringently audited as a building’s milestone construction mark. There are instances where client deposits have been used to fund the sales team marketing tours, and often for developments other than the one the investor is committing to. To avoid such pitfalls, do a full investigation into the trail of the money for each tranche of deposit required, and request clear documentation of what protection there is against misuse of deposited funds. It is worth noting that rogue developers who steal deposits are few and far between, but you should know what to look at regarding their ‘health check’.

 

Does the sales contract match the marketing material?

Should a development not go according to plan – either it is delayed in build, or rents are not as high as predicted, for example – you may want to start looking back at what you were promised. Please note that the only legal document that will be considered is your sales contract. There is no point in going back to a marketing brochure to say, “But we were told …”

In the UK, you have 28 days from the receipt of your initial reservation deposits to scrutinise all the contracts associated with that purchase. You will be provided with a buyer’s solicitor, and this is the time to really put them to work. Ensure that every point in your brochure is matched in your sales contract.

 

Critical points to look for:

• Timelines of dividend payments – is it stated specifically and watertight?

• Length of guarantee periods and leaseholds – do they match?

• Expenses – what is actually written into expenses covered by the guaranteed net income; don’t let there be any grey area around council tax, ground rent or service charges; be clear upfront on who is responsible for paying what, and in what circumstances those obligations can change.

 

What is the exit strategy?

It is assumed that most offshore investment property is going to increase in value – otherwise, what is the point? This is not so much the case for PBSA in the UK. Student accommodation is a very popular asset class, but serves a very different purpose from residential property investment. PBSA provides a steady monthly income, with dividends being paid usually quarterly in arrears from the date of first occupancy.

However, buy-to-let property value is based on the rental income a property can command. Student income is not going to rise suddenly, but will increase at a slow, steady pace according to what the student body can afford. Therefore the asset values are going to stay very steady too. Residential, on the other hand, will rise in line with the projected rental market in a given area. Manchester is the hottest market in the UK for rental growth. See the JLL 2017 Residential Forecasts Northern England for an expert’s insight! (Or email me for a copy: holly@vantageinvestmentsportfolio.com)

So – the advice is, be very clear about what the purpose of your investment is. Do you just want to start building a good rand-hedged pot, or are you really looking for the long haul and high uplifts? Make sure your advisor understands your requirements so that they bring you the right type of asset.

 

What are the hidden costs?

The costs associated with the investment should be clearly laid out in your sales contract. In some cases, some of these are absorbed by the developer or letting agent when providing your dividend. Most usually these are the service and management fees and insurance. In some cases the ground rent is included too.

Be sure to get a clear picture from the start of what they pay and what you pay.

Know that they are only taken care of by the developer or letting agent for the time of the guarantee, if there is a guarantee period. Otherwise, you as the investor will be expected to pay for the service charges, management fees, sometimes contribute to insurance, etc.

 

Some unexpected costs:

• Stamp duty (UK specific) – it is better to assume that, in all cases, stamp duty is going to be due. This is 3% for anyone purchasing a property who already owns property ANYWHERE ELSE IN THE WORLD. The bands then increase to 5% and 8% as the property price increases. In some cases, student property is not liable for stamp duty – but this is a very grey area, and it is better to assume you will be paying it. A reputable advisor should be advising you of the stamp duty status.

• Council tax (UK specific) – in residential properties, the tenant will pay the council tax. Students in the UK are exempt from paying council tax. However, if you purchase a student property and it is not tenanted, you as the investor may be liable for council tax. Check with your solicitor as to who is liable for the tax should the property be delayed in completion, and be unoccupied during your guarantee period – council tax is not usually part of the net income calculation.

• Solicitors’ fees – these are usually due around the time of exchange of contracts, and will not necessarily have been quoted for upfront. For a UK student or residential, this is approx. £ 1 000 per property.

• Furniture packs and parking – different vendors approach this in different ways. Sometimes furniture pack is included, sometimes it is not, and sometimes it doesn’t exist. Don’t get caught out by a £ 3 000 mandatory furniture pack line item after you’ve signed! Parking and bike storage should be transparently quoted, but it’s worth checking if parking is available, the rates, or if it is mandatory.

• Admin fee – in some cases, sales agents insert a £ 1 000 administration fee. This means that when you pay your first reservation fee of £ 5 000, not the full £ 5 000 will go against your deposit. In some cases, £ 1 000 is kept for administration purposes. This is a legitimate cost, but worth noting, so that you don’t find yourself £ 1 000 short at exchange of contracts. It should be transparently noted if this is the case.

Finally, one key point to mention regarding risk and reward and heads up: look at the type of property you are investing in. Off-plan has some very credible benefits, but also comes with certain risks. If you are more risk averse and do not want to be worried about whether the build is going to happen on time, for example, you could consider the renovation market.

 

Paradigm Properties

Paradigm Properties, a partner of VIP Ltd, offer already renovated and tenanted properties. Sales cycles usually last 5–6 weeks, with income starting to flow within the month after sales completion.

“I took my time to review the US market after a very unpleasant experience with an unethical developer, Greystone Home Builders. However, Paradigm Properties are a breath of fresh air. We share the same business ethics and customer values. The company is small, so you’re not covering large overheads to pay rooms worth of salaries. The CEO, Deon Elliott, has created a very workable model for sourcing stand-alone properties ripe for renovation. His team then work their magic, producing a high-quality rental property with all the right guarantees in place. More often than not, the unit is already tenanted before the purchase takes place. Most importantly, the whole team are approachable and reputable, which makes all the difference,” comments Holly Weaver, Managing Director of Vantage Investments Portfolio Ltd (VIP).

 

For more information regarding credible global offshore property agents contact Estate Living.