A lifestyle relocation factor plays a key role in the investment decision for South Africans looking to buy property in Australia, says Scott Picken, CEO of Investment Property Solutions (IPS).

“Besides being a rewarding financial investment and an effective rand hedge, there is a strong relocation attraction, and between 50% to 80% of South Africans looking to invest in Australian property have indicated they intend to, or may, relocate to Australia.

“This contrasts with the approach to property investment in London, where South African purchasers are only interested in the investment returns — the rental yields and capital appreciation. It is rare for South African investors to occupy the properties they own in London, and a much smaller 10% indicate at time of purchase that they intend to relocate.”

Picken says that when pursuing the purchase of property in Australia comparisons with the UK and SA are inevitable.

“In London, the cost of finance capital is about 6% and yields are 5%. So if an investor puts down a sufficient deposit rental income will cover the mortgage repayments and all costs. In Australia, the cost of finance is 8% and yields are 5%, so the standard mortgage of 80% financing will require investors to fund the monthly shortfall, but there are tax breaks. This rental shortfall is even more acute in SA, where financing will cost about 14% and yields are a very low 6%.”

Picken says that IPS’s approach to potential South African investors in Australian property is that they should “start living before you leave”.

“Owning property in Australia for some time before relocating carries several benefits.

“Firstly, for those moving to Australia on the business visa option, within four years one needs to demonstrate net assets to the value of A250 000, and a personal property can be included in this requirement.

“Secondly, the monthly shortfall between rental income and mortgage repayments can be accumulated for taxation purposes even before one has moved there.

“Any rental losses are accumulated and can be offset against income tax due on earnings when the investor actually moves to Australia and starts working or earning other income.

“If the investor does not relocate the accumulated tax losses can be offset against capital gains tax when the property is ultimately sold.

“There are other tax benefits, such as being able to claim depreciation on building construction and fixtures and fittings, being able to deduct a percentage of acquisition fees and related costs over a five-year period, and even claiming for inspection costs — trips to Australia — before final relocation.

“A third important factor is that one should never underestimate the importance of being able to build up a credit history and rating in a country before actually moving there.

“It is highly beneficial to have a financial history in that country if one wants to apply for credit cards, motor-vehicle finance and other forms of credit. Owning property effectively creates you as a person in the country before you move there and is a significant contributor to establishing a financial presence and track record before relocation.”

Picken says that Australian property finance differs to that of the UK. “It is closer to the South African model, where the banks are focused on what the owner earns and what he can afford as a monthly repayment. By contrast, UK lenders take an asset-based approach and concentrate on the value of the property.

“Australian financiers will look at proved worldwide monthly take-home income and will lend up to 35% of this monthly package.

“The difference between Australia and SA is that the Australian banks take into account 80% of the rental income earned and SA banks consider only 30% of the rental income.

“As a proportion of the fair value of the property, loans are generally up to 80% of the value, with a deposit required for the balance.”

Picken says it is difficult to make generalisations about the Australian property market, which is very state-specific.

“What is happening in Sydney may not be happening in Perth. But overall, demand for rental property is strong and the overall housing market here requires 200 000 new units each year, but only 157 000 units are coming on stream. Rental yields are increasing, and in areas such as Sydney and Melbourne they are in the mid teens, with the country average being about 10%. Vacancy rates are less than 1% in the metropolitan areas,” he says.