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Desperately buying Britain

Posted On Thursday, 02 May 2002 10:01 Published by
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SA investors ignore experts, make profits, and big promoters move in
South Africans are in love with UK property. Against the advice of experts, local investors have poured billions of rand into it in three years, mainly into London flats, and have made enormous profits. Now they seem addicted.

Pam Golding Properties (PGP) alone has sold flats worth £100m (R1,65bn). This has enticed large commercial funds into the market.

The first major entry is likely to be Credo, a heavyweight London financial services company run by South Africans (FM Focus November 23 2001). Around July, it will launch a £50m (R825m) central London office fund aimed at South Africans.

Starting out three years ago, Gavin Rabinowitz, Jaques Tredoux and Neil Hasson have gained a substantial reputation in the City for their ability to structure prime investments with strong cash flows. This culminated last year in the sellout syndication of Old Mutual's £94,1m (R1,5bn) London headquarters. The three recently sold one of their properties, close to parliament, to the Labour Party, giving investors a 35% internal rate of return.

Mike Watters, CEO of Coronation property arm Corovest (whose funds include JSE-listed property unit trust Sycom), has moved to London, where he aims to have assembled a R200m retail fund by July.

Cape Town's Louis Group is raising its fund of factories and warehouses to £50m (R825m). Catalyst, also a Cape fund promoter, which has listed Shops for Africa and other funds on the JSE, will soon offer a R100m residential fund. Colliers RMS, which is already selling flats, has called in Colliers International to help it prepare a commercial fund. And PGP is successfully syndicating individual office buildings of around R20m.

Charlemagne Capital, a promoter of eastern European emerging-market funds, was recently in SA exploring the demand for a UK fund to be sold here.

It is not just the allure of the rising British pound - it has soared from R1,70/£ to R16/£ in 20 years - that has created the demand. Residential property prices also continued to rise last year by 16%, against the trend of falling stock exchange prices and economies over the past few years. So South Africans have had a double benefit.

Credo's Tredoux warns that Britain's property law makes it difficult to secure the best properties. 'In SA, you sign an agreement and hand the matter over to a lawyer to transfer. In Britain, you go through a long process of co-operation and continued negotiation before you exchange of contracts that bind the parties.

'So the relationship between buyer and seller and the many professionals required to complete the deal becomes all-important,' he says, 'and the necessity for UK-based property experts becomes imperative.'

Because of this, a practice has developed in Britain in which sellers will limit their dealing only to buyers they know and trust. 'You cannot walk into London and buy great investment properties just because you have money,' says Tredoux.

So the quality of properties is not assured. A promoter must be at the centre of the UK property market, says Tredoux.

Watters agrees, which is why he has moved to London and Corovest's fund will be a joint venture with the Bank of Scotland and Stannifer, a Stratford-based developer and asset manager.

Louis Group is in a joint venture with the Saville family, which has an LSE-listed industrial fund already. PGP is tied up with FPD Savills (no relation).

The funds will offer sterling internal rates of return of between 11% and 20%.

But will the profits keep coming?

A recent study by the London Sunday Times concluded that residential property prices would stagnate over the next year or so as interest rates started to rise. But it added that fundamental demand in the long term would continue to drive the market up.

Latest figures from the UK's Investment Property Databank show that commercial property had no capital gain, despite having outperformed equities and gilts, which lost value.

Ian Playford of property advisers King Sturge says property in Britain has outperformed equities and gilts over one, three, five and nine years. By the end of this year property may have outperformed all the other asset classes over 10 years.

Critics of the rush to buy UK property remain unrepentant - despite the profits that have been made since they last warned investors.

A property investment decision should be made over a 10- or 15-year period, says Charles Diamond, an SA economist based in Britain. 'On that basis, they should be sellers, not buyers. Prices have been rising on the back of record low interest rates. Today's priorities are security and defence and not inflation. Government will intervene more in economies and inflation will be the victim.

Low interest rates invite people to take on debt, he says, and private debt has bearly doubled in two or three years.

'If America's current-account deficit continues to grow at the present rate, in a few years it will be consuming 100% of the world's saving.

'Things cannot keep going up for ever. Interest rates will rise faster than expected and a two percentage point rise will mean a 20%-30% decline in property.'

Whatever the economists say, South Africans want to move out of rand, says Louis Group MD Alan Louis. They have an affinity with Britain and they understand property is a safe haven. So they will continue investing.

Financial Mail

Publisher: Financial Mail
Source: Financial Mail
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