WITH the global village fast becoming a reality, Scott Picken, CEO of IPS, says it is important to diversify an asset base and take advantage of other markets.

“Investors worldwide are doing this in all asset classes. South Africans live in politically and economically challenging times and must be astute enough to invest part of their wealth in other, stable jurisdictions.”

Mike Dicky, director of Colliers International, a local and offshore real estate group, says: “Investing offshore provides diversification that is a prudent and important component of any investment portfolio and a hedge against the variables of the domestic economy and exchange rates.”

Dicky says that South African investors should remember they are also able to invest in offshore commercial property and are not only limited to residential.

“There are various investment avenues to offshore property exposure through offshore listed or unlisted funds, locally listed funds with offshore property holdings, or through direct property purchases. Whichever avenue is chosen, that real estate can be cyclical but superior capital appreciation over the long term is well proved.

“Take UK commercial property, for example. There is a window of opportunity at present for investors as prices have dropped by as much as 30% to 40%. This means yields have moved out to 7,5% to 9,5% on properties with 10 to 15-year leases or longer, and with tenants paying all property expenses so management is minimal. Lending rates are around 5,75% to 6,5% dependent on equity contribution and tenant covenants. Loan to value (the amount of the loan advanced to the value of the property) is now about 65%, but this will improve as bank lending improves in line with the global rescue measures being implemented.”

Dicky says that all these conditions mean that an investment will be cash-positive on borrowings and equity.

“Rental escalations are ‘upward only’ or linked to CPI during the course of the lease. These same properties were selling at yields of 4,5% to 5,75% only 18 months ago, and a return to these levels, once global conditions improve, is inevitable.”

David Adams, of Broll Property Group international broking division, says: “The current international commercial property market has been hit very hard by the credit crisis wiping up to 50% off the capital values of some prime properties, creating a once-in-a lifetime buying opportunity for investors with equity to enter the market. The UK commercial property market has been as hard hit as any and is accessible to South Africans from a language, cultural, travel and legal perspective.”

Adams says that the UK market has long leases that allow investors to buy commercial properties with more than 10 years remaining “term certain” to solid tenants.

“For investors it means taking advantage of the depressed property market while being sure of keeping the tenant until the property market, and capital value, bounces back. It mitigates the risk of losing a tenant through bankruptcy and therefore being unable to service the bank debt and losing the investment.”

Adams says that the current positive difference between the net initial yield (starting yield to the investor after all expenses) and the all-in lending rate (total interest rate for borrowing money against strong commercial property) is at an all time high.

He says that Broll is concluding two deals where the properties bought are yielding close to 9%, have strong tenants with more than 10 years left on the leases, and bank debt was arranged at between 5,5% and 6% (all in) at about 65% loan-to-value of the property.

“This leaves the investor with a cash return after interest and before capital repayments and tax of about 10% in pounds, while waiting for the market to come back and hopefully selling with further capital growth.”

Adams says that the entry level for buying a strong leased commercial property is usually about £2m, requiring about £700000 in equity and a significant amount of set-up cost, administration and property expertise.

“Many investors have preferred to buy smaller parts of properties in structures already set up. While some of these syndications have attracted a bad name in the market due to lack of control, they can work well if the properties are well chosen.”

He says that the syndication route also attracts a higher level of costs than direct investment.

Gareth Katz, director of Shorevest, says: “On the commercial front there are some exceptional opportunities available in the current market.

“We have identified the UK government as the tenant of choice given the risk environment. Although these opportunities are difficult to come by, a lack of liquidity in the market means that not only are there more of these opportunities available, but they are also very attractive on a yield basis. In addition, we can source mortgage finance through UK banks at favourable lending levels and low interest rates to package an excellent commercial opportunity for investors.”

Source: Business Day