By Joan Muller

Senior writer

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INVESTORS in South Africa are back in the overseas property market. Or so it seems, considering the sudden surge in offshore property sales reported by SA real estate groups. Why now, one may ask? Particularly as most housing markets worldwide are perceived to be overvalued. The rand’s about-turn since 2002 has also made returns on offshore property less than impressive over the past three years.

One reason for SA investors’ renewed appetite for overseas property is the opportunity to take advantage of a strong rand to spread assets geographically. But analysts say that currency hedging is no longer the only rationale for going offshore. The perception that the SA property market may be peaking is also driving overseas property sales.

Peter Butcher, who heads Pam Golding Properties’ British investment division in London, says that many investors believe it’s time to take profit on their SA properties and use the proceeds to buy overseas – particularly those who already own a number of properties in SA.

Butcher says that makes sense, as SA house prices have already had an exceptional run (growth of 150% since 2000, Absa reports) and may peak soon. Though rising interest rates have cooled the British and European property markets somewhat, resulting in slower capital growth and softer rentals, Butcher maintains that investors can still expect total average returns of 10% to 12% (rental income and capital growth) over the next 12 months in both markets.

Says Butcher: "Rental yields are expected to increase over the next year or so as more and more first-time buyers are priced out of the market. Any rand depreciation over time will, of course, further boost returns. It’s also still much cheaper to finance property offshore than in SA."

In Britain and most European countries, banks will currently lend at an average 6% to offshore buyers, compared to SA lending rates of between 9,5% and 11% (and possibly rising). But Butcher cautions investors to be very selective, not only in terms of where they buy but also what they buy.

The Pam Golding group is currently marketing opportunities to SA investors in Britain in areas other than central London "which offer lower entry levels and better value". These include Bristol, Nottingham, Manchester, Birmingham and Glasgow in Scotland.

Says Butcher: "In most of these areas buyers can pick up one-bedroom flats in prime areas from £120 000 (R1,36m) and two-bedroom units from £200 000 (R2,28m). In central London entry levels are already around the £300 000 mark."

But some analysts believe that developing property markets offer better growth potential than more mature markets, such as Britain, Europe and Australia. China, Dubai and Mauritius in particular are being punted as the "next big thing" in terms of global property investment destinations. Until a few years ago both Dubai and China were closed to foreign buyers. In the past Dubai only allowed limited property ownership to nationals, while in China all property belonged to the state. p> That’s no longer the case. Freehold property in Dubai is for sale to all residents and to non-residents in dedicated developments. In China, both residents and foreigners can now invest in property via leasehold title agreements of up to 70 years.

Though China has strict mortgage lending criteria for individuals, there’s strong demand for housing, with prices in major cities such as Shanghai and Beijing rising at around 20%/year over the past three years. The Chinese government has also started introducing more flexible regulatory and tax policies to make foreign property ownership more attractive, especially in Shanghai.

In Mauritius foreign investors were, until recently, only allowed to buy property if they invested a minimum of US$500000 (R3m) into the island’s economy via a business or other direct investment. That law was recently amended to allow foreigners easier access to real estate.

SA property investment consultants Leitch Chance recently launched buy-to-let opportunities in Shanghai. The 55 units marketed to SA investors, all offering a three-year guaranteed rental return of more than 6%, were sold in less than two months.

The response has been so overwhelming, says Leitch Chance partner Toby Chance, that they’re launching another Shanghai development at end-March. Fully furnished two-bedroom units of 100sq m will sell for about R1,25m (all costs, such as transfer and management fees, included). Leitch Chance guarantees a net rental income of 6,175% on the buying price for the first three years, while capital growth is expected to top 15%/year over the next three years.

Chance says that South Africans qualify for 70% mortgages at interest rates of around 5,3% in China. That means if investors pay a 30% cash deposit, rentals will cover mortgage and all other costs.

Chance believes that rapidly developing economies such as China and Dubai offer property investors better growth potential than developed markets. China’s economy is growing at 9%/year, and Shanghai in particular is estimated to be growing at close to twice that rate.

The group will soon launch buy-to-let units in Dubai to SA investors priced at around R1,5m. Says Chance: "With a growing number of expatriate professionals stationed in both Shanghai and Dubai, suitable rental accommodation is always going to be in demand.

Another developing market that’s attracting huge interest from SA investors is Mauritius. Legislation was only recently amended to allow foreigners to own residential property in terms of what is known as Integrated Resort Schemes.

The Tamarina Golf Estate and Beach Club, launched earlier this year by Pam Golding International, has already notched up sales of more than R220m – mostly to South African and French buyers from Reunion and Madagascar.

Prices for the four-bedroom, four-bathroom villas start at $650 000 (R3,9m), including a $70 000 (R420 000) transfer cost (both buyers and sellers are liable for transfer costs in Mauritius). Owners will be entitled to place their villas in the resort’s managed rental scheme for unlimited periods.

Fabrice Orengo de Lamaziére, manager of Pam Golding International in Europe, the Middle East and Indian Ocean, says that Tamarina offers exceptional value, as one would pay at least R10m for a similar sized and quality property elsewhere on the island.

SA investors qualify for 70% mortgages in Mauritius at interest rates of around 6%. Fabrice Orengo de Lamaziére’s calculations show that a villa at Tamarina could pay for itself if rented for about three and a half months/year, provided buyers put down a 30% cash deposit.

But not everyone believes that now’s a good time for SA investors to buy offshore. Ian Slot, national chairman of Seeff Properties, says that property investors will be better off investing in their own back yards. He says that economists still expect house price growth in SA of between 15% and 20% over the next 12 months, which will probably outpace most housing markets worldwide.

Says Slot: "There’s no need for South Africans to search for offshore opportunities at the moment. Particularly as there’s little sign of any foreign property market starting to take off. So nobody’s going to miss the boat if they don’t buy now. In fact, investors who buy now could be squeezed from both sides: lower capital growth and lower rental returns."

Latest figures from British magazine The Economist confirm that SA is now the world’s fastest growing property market. The magazine’s global house price index, published earlier this month, shows that SA boasted the highest growth of all countries in 2004, with an average increase of 30% (see table). Hong Kong came a close second, with growth of 29%.

However, what’s more interesting is that SA was also the best performing market over the longer term, boasting growth of 195% in the years between 1997 and 2004. This was followed by Ireland, with a 179% increase over the same period.

Foreign property ownership growing worldwide THE relaxation of exchange controls, more foreign travel (facilitated by the increase in low-cost flight destinations) and greater availability of low-cost mortgage finance are persuading more people to extend the concept of second-home ownership to overseas locations.

So says British real estate group Knight Frank in its latest review on global residential property trends. The report shows the trend to buy property offshore, particularly second homes, has been driven by rising levels of affluence and a growing desire to plan for the future – either for investment or retirement purposes.

"More recently, the growing perception of property as a viable investment option – especially in the light of mounting disenchantment with stock market and pension fund performance – has also encouraged a growing number of households across the globe to acquire a second home."

Knight Frank says that overheating in some parts of the British market is also persuading people to consider buying opportunities in other countries. "This can be further enhanced by favourable currency movements, though this is potentially a double-edged sword as exchange rates can weaken as well as strengthen."

Knight Frank expects this trend to continue, but says that buyers will be turning to new, less developed locations offering greater value for money as the more mature markets become increasingly popular and expensive.

New markets that are attracting growing interest from international investors include Dubai, Morocco, the Caribbean islands of Barbados, Bahamas and Bermuda as well as central European countries such as Croatia, Bulgaria, Hungary, Poland, the Czech Republic, and Russia (Moscow).

But the group also cautions investors about the risks involved in buying property overseas. Complications can arise from a number of areas, including:

• Legal matters (establishing a clear title).

• Currency risk (exchange rate fluctuations could either add or reduce the cost of a property depending on completion time).

• Maintenance/security while the property is unoccupied (it will often be necessary to open a local bank account to pay for utility bills).

• Tax implications (with regard to occupation, acquisition/disposal and any rental income earned).

• Changes in local market regulations affecting property.

• Language/cultural difficulties in arranging sales and letting contracts.