Ian Fife

SA spoilt for offshore property choices

Rand hedge the last reason to go there

“Frankly, they wait until the rand is collapsing, panic and move their money into offshore apartments as it hits bottom”

— SCOTT PICKEN

The quickening pace of globalisation offers SA investors properties almost anywhere. Apartments in London and on Australia’s Gold Coast, offices in Chile, shopping centres in Romania, Germany and Britain, listed funds in New York . and on and on.

But is this the right time to move your money offshore? The view of

In fact, he says, investors have been disappointed over the past decade by underperforming offshore returns. “Instead, offshore diversification should be used to hedge future rand depreciation and diversify through access to large global companies.”

James Templeton, CEO of listed fund Emira, has just put R117m into an Australian property fund, but he’s not following Fenwick’s advice.

“The rand played this much part in our decision,” he says, holding his thumb and forefinger 2mm apart. “We bought because of the opportunity to get a blue chip offshore investment on a 10% yield.” That’s more than you will get from an SA property.

Templeton made his investment on fundamentals. “We had a checklist of requirements and our choice — a 6,4% stake in Growthpoint Properties Australia — ticked all the boxes but one. The fund has 54% loan to value, which is higher than we wanted, but the rest is so good we went with it.”

Many South Africans remain obsessed by the threat of an ever-depreciating rand. Financial advisers like Fenwick and property promoters constantly play on this and reinforce it. Linked to political fears and Afropessimism, the rand in decline can become a beast driving investors into making bizarre decisions.

International Property Solutions CEO Scott Picken sells UK and Australian residential property to SA investors and SA property to South Africans living in the UK and Australia. He says SA investors have little interest in buying flats and houses in London and elsewhere in the UK.

“Frankly, they wait until the rand is collapsing, panic and throw their money into offshore apartments as it hits bottom,” he says. “Most investors have lost money offshore in this decade.”

Comparative data shows that they would have made much more money over 10 years measured in sterling by buying an average house in Johannesburg in 1997 than buying one in London at the same time.

The rand has certainly been volatile in the past few decades but the real effective exchange rate between the rand and sterling (see graph on next page), adjusted for inflation, looks like it will end this decade where it started in 2000.

Research by London consultancy Capital Economics shows that currency shifts have played a minor role in international investment demand. “The time series on cross-border commercial property investment flows suggests that exchange rates are a far less important influence than relative value and economic fundamentals,” says its report. “Overseas investment in UK property surged upwards in 2004, while buying by UK investors abroad rose sharply in 2006 and 2007. Yet these flows came despite the pound being stable for a full decade between 1997 and 2007.”

And despite the pound plummeting over the past year, foreign investment in UK property increased from £8bn to £9bn in a year.

So if you’re not investing offshore to negate the possibility of a collapse in the rand, is there any other reason to invest offshore now?

Commercial property seems to offer the most immediate potential. The recent meltdown was more a financial crisis than a property one, though it showed many property markets to be enormously overvalued. And property’s decline was amplified by the clever financial structures that banks used to fund investors.

The UK commercial market was worst hit because only 15% of finance was “vanilla”, in the guise of straight-up long- term mortgages. The rest had to be regularly refinanced. This has been almost impossible as banks are overexposed to property and any portfolio faced with refinancing has plummeted in value. Even blue-chip listed funds like Capital Shopping Centres fell in value by up to 80%.

This situation has been a godsend for SA property funds that have low debt to value, and have local banks willing to lend to them, enabling them to fund the refinancing of offshore properties they buy. Growthpoint, SA’s biggest listed fund, was able to enter Australia by snapping up at a bargain price what is now its Sydney-listed subsidiary.

Redefine is doing the same through its London-listed Redefine International Resilient has New Europe Property Investments (Nepi), which mainly owns shopping centres in Romania. Nepi and Redefine will be listed on the JSE main board soon.

Investec Property Investments has unlisted funds buying property in Europe and the Americas, and Catalyst has an unlisted fund of global listed property funds. British Capital, run through Barnard Jacobs Mellet, has just bought two offices in the British Midlands on yields of over 7,2%. Stanlib has offshore unit trusts.

It was a smart move of Emira to buy into Growthpoint Australia. Why bother to set up your own offshore fund when somebody’s done it for you? Similarly, retail investors don’t have to go to the trouble of finding illiquid flats in London or Sydney with sub-4% yields when they can get onto the Internet and buy liquid offshore property giving yields of 7,5% or more.

They are not without risk. The recovery is frail. Global investor Blackstone’s Simon Davies says: “I’m concerned personally that I could be 47 — not 37, which I am this year — before we actually feel there’s sustainable economic growth.”

Residential property has little going for it. Capital Economics and estate agency Savills predict falls in London property this year and little growth before 2013. The US house market, which affects the whole world, is going into reverse again as you read this.

“Right now SA is the best place to invest,” says Picken. Too right (see page 40).

Source: Financial Mail