Non-Residents can feel comfortable when investing in South African property as the property market for overseas buyers are well regulated in South Africa. No significant restrictions apply to non-resident property buyers in South Africa and the overseas buyer can enter the South African property market with confidence.
Buy Property in Own Name or Through Legal Holding Entity
A non-resident buying property in South Africa has the option of buying the property in their own name or through a legal holding entity such as a trust or company structure. Some non-residents prefer buying property through a legal holding entity for taxation, management and asset protection reasons. You should consider, through consultation with a lawyer or property expert, which option will suit your individual circumstances the best.
South African Property Ownership Methods
Share block, freehold, leasehold or sectional title are the methods of property ownership in South Africa that non-residents can choose from. Most non-resident property buyers choose the leasehold method of property ownership as this method of transfer is much more flexible than the other methods.
South African Exchange Control Regulations
Generally overseas property buyers who retain their non-resident status can remit and repatriate funds freely overseas, this includes capital gains made after the deduction of taxes due. Once an individual becomes a resident in South Africa he/she may only remit and repatriate funds for a period of five years before he/she falls under the exchange control restrictions imposed on South African residents.
South African Property Contracts and Documentation
When a suitable property has been found and a price has been agreed upon, either an ‘offer to purchase’ or a ‘deed of sale’ can be signed. Both documents are legally binding and it is advisable to consult legal advice before signing either of the documents. In fact it is a good option to have the services of a lawyer to assist throughout the entire conveyance and purchase process to check any contracts and to carry out title and land registry searches and checks.
Transfer and Registration of Property
The transfer and registration of property is usually handled by the seller’s conveyance lawyer. The seller will give the lawyers power of attorney to handle the process of registering the property at the Deeds Office in the name of the non-resident buyer.
South African Property Taxes, Fees and Charges
When property is purchased in South Africa transfer duty is levied by the government; the duty is charged at a variable rate of between 1 and 8% for private property ownership or 10% for a property purchased via a legal entity. Other fees involved in buying a property in South Africa include transfer costs of between 1 and 2%, mortgage costs, lawyer’s fees and estate agents fees which are normally included in the purchase price.
Stay Informed of New Property Developments
New property developments are usually quickly snatched up by investors with the right connections long before investors new to the game have an opportunity to find out about the property. The serious property investor needs to have ongoing contact with estate agents in South Africa who have good contacts with developers and is able to inform the investor timeously when property become available.
Build Up Available Capital
If you are serious about becoming a property investor you will need a certain amount of available capital to start off with. Many developers will require a deposit from a buyer to ensure that the investor is serious before agreeing to the sale; as an property investor you do not want to be in the position of having a excellent property investment opportunity but no cash deposit to secure it.
Obtain a Pre-Approved Home Loan
Be prepared for when a property investment opportunity comes your way obtaining a pre-approved home loan. This will ensure that you now exactly if you can afford the property and what information the bank requires from you.
Property Investment With Friends
If you cannot afford to invest in a property on your own you can form a syndicate with friends. You can co-sign for the home loan in your individual capacities or form a closed corporation.
Property Management Company
Find a good property management company to manage your tenants. They will be responsible for finding a suitable tenant, drawing up a contract, regularly inspecting the property, collecting the rent and the paying levies on your behalf.
Long Term Property Investment
The full potential of property investment is seen in the long term. While good profits can be made in the short term the big fortunes are acquired over long periods of time.
Investing in property within South Africa is still a sound option for serious investors. The following points highlight the reasons why you should invest in property and in particular South African property.
Property Is a Relatively Stable Investment Option
Although stock market related investments can at times bring forth very big returns, it is also very unstable and there is the possibility that you can lose a portion of your capital. It is advisable that you balance your investment portfolio with a relatively stable option such as what is available in the South African property market.
Shortage of Property in South Africa
South Africa’s political past has left the country with a shortage of good housing and the South African government has made fixing the housing problem a high priority. The housing policy of the South African government will lead to a long term structural growth potential within the South African property market with migration to better neighborhoods and better property set to continue for a long time.
Property Cycles in South Africa
Most people long to have their own property and the sense of security and comfort of having a growing asset that goes with it. As young people leave school and start to work they enter the property cycle through renting a flat, buying a flat, selling a flat and then buying a small house or townhouse. As they become more financially secure they will invest in their dream property which they are likely to sell when they go in retirement in order to move into a smaller house or townhouse. A South African property investor benefits through out the property cycle due the ever present demand for property in South Africa.
South African Property Market is Relatively Stable in an Unstable World
Globally many countries have become targets of extremists with terrorist attacks having negative effects on the economies and stock markets of the countries affected. South Africa has a relatively balanced position within global opinion and is one of the countries least effected by extremist activities. This position of balance is causing a lot of investors abroad to start looking at South Africa for property investment opportunities.
Rental Property in South Africa
Obtain a South African home loan and invest in property which you then rent out. The rental from the tenant will help you pay off your bond and the value of the property will keep on increasing.
Withholding body corporate levies because of personal financial strain places the building in a precarious fiscal position, while jeopardising the property investment and its long-term viability.
Andrew Schaefer, MD of national property management group Trafalgar, warns many new developments are under strain as numerous owners lack sufficient knowledge and information about body corporate levies and their purpose, and so fall into arrears.
He believes many investors are experiencing negative cash flows on their property investments compounded by the challenging economic climate. Consequently, estate agents should provide estimates to ensure buyers can accurately budget for monthly bond, levies and municipal payments.
“Developers should consult managing agents before the sales launch to prepare accurate building maintenance and operational budgets and levy schedules (calculating future budgeted expenses plus reserve requirements pro rata for individual sections),” he says.
Owners underestimate the costs associated with property ownership – transfer and bond registration fees and monthly bond repayments, municipal rates and body corporate levies – leaving them struggling financially.
Buy-to-let investors using managing agents also contract to a monthly collection commission fee for rental collections. Schaefer says vacancies, unexpected maintenance and special levies are realities for buy-to-let owners, meaning they must anticipate absorbing and sustaining intermittent negative cash flows.
“Particularly buy-to-let investors either miscalculate when investing in properties or do not secure the rental escalations or occupancies that cover their associated costs in a high interest rate phase. Yet, in skipping the body corporate levies, they jeopardise their investment by potentially throwing the body corporate into the red and initiating a ripple effect on maintenance neglect, poor service and ultimately, an unattractive rental asset,” he says.
Schaefer says owners who generate levy arrears only escalate their problems by incurring interest payments on those outstanding amounts and potential legal costs in recouping their debts as well as prompting the knock-on effect to the body corporate.
The long-term outcomes are properties that attract lower rentals due to deteriorating infrastructure as well as the risk the body corporate may initiate a sale to recoup the debt. That means the investor loses both his investment and capital as the sale falls short of input costs.
On the other hand, Schaefer urges body corporates to swiftly approach defaulting owners to prevent the problem escalating where it affects cash flows or where legal action is necessary to recoup large-scale arrears.
“Like other assets, property follows cycles and although current prices have fallen from the stratospheric levels achieved several years ago, it remains a long-term appreciating asset and making every effort to keep financially balanced in the short-term pays future dividends when the market turns and the financial strain eases,” he says.
Levels of activity and price growth in the South African residential property market have slowed down considerably over the past year on the back of sharply rising inflation, which caused interest rates to have been hiked by a cumulative 500 basis points since June 2006; the full implementation of the National Credit Act about a year ago; and the recent tightening of credit criteria by some banks. In view of the impact of these
developments on the property market, many people, including homeowners and prospective homebuyers, have become uncertain whether residential property can still be regarded as a sound investment.
An important consideration with regard to any investment is the return (a regular income and/or a capital gain after taking into account the effect of inflation). Although nominal house prices in the middle segment of the market (houses of 80 m² – 400 m², up to R2,9 million) have increased by about 12% per annum over the past twenty years, real prices have risen by only about 4% per annum over this period, mainly as a result of high levels of inflation at certain stages during this period (see table). Over the past few years since the property market recovered in 2000 after a long period of mediocre performance, house prices have surged by about 19% per annum in nominal terms, while in real terms, prices have risen by around 13% per annum. The past eight years since 2000 were marked by significantly lower inflation compared with the 1980s and 1990s.
Residential property has performed particularly well in comparison with other asset classes over the past number of years, based on the gross internal rate of return (IRR), which excludes deductions for maintenance costs, commissions and rates and taxes. The IRR includes the capital appreciation as well as the income that can be derived from the asset. Over periods of five, ten, fifteen and twenty years, an investment in residential
property in South Africa has beaten most other asset classes, as well as inflation (see table and graph on the IRR by asset class). This only applies to the situation where a house is rented in order to earn an income.
Based on the latest trends in house prices, as measured by the monthly Absa House Price Index, property owners who bought a house during the past year, are not expected to realise a sizable profit in nominal terms, if any at all, if they decide to sell now. In June 2008, nominal house prices were up by just 3,8% compared with June last year, with virtually no growth recorded since the beginning of 2008. In real terms, property prices have already declined since late last year, which implies that, on average, a property owner who has bought property during the past two years, is set to make no profit, or even a loss, if he sells now. However, property owners who have bought 5 or 10 years ago, will probably still realise an acceptable capital gain in both nominal and real terms if they sell their properties today, although profits may now be somewhat less than what they would have been had they sold their properties a year or two ago.
On the back of the current as well as expected economic conditions over the next 12 to 18 months, nominal house price growth is expected to slow down to a level of about 5% in 2008 and 4% in 2009. In real terms, however, house prices are forecast to drop by around 6% in 2008 and another 3,3% in 2009. With the residential property market expected to slow down further towards the end of 2008, bottoming in 2009, it will in the second half of this year and in 2009 be the time to buy property, especially from an investment and buy-to-let/rental point of view.
Investors in the residential property market should not expect to achieve positive real capital appreciation during
the next 18 to 24 months, but with an increase in demand for rental property, an acceptable income return may be achieved during this period. In view of property being a medium to longer-term investment (5 years and longer), property investors should look through the current downward cycle and focus on income returns, with a view of achieving positive real capital appreciation from 2010.
Economic conditions are expected to improve from late 2009 on the back of declining inflation, translating in
interest rates currently forecast to drop to 14% by end-2009, and declining to 12,5% in the period 2010-2012. On the back of these developments, nominal house prices are projected to rise by 10,8% in 2010, 12,1% in 2011 and 12,7% in 2012. In real terms, price growth of 5,1% is forecast for 2010, rising to 6,5% in 2011 and 7,1% in 2012.
Against the background of the abovementioned trends and expectations regarding the South African housing
market, an investment in property should always take account of the following factors:
• Property is a medium to long-term investment (ideally 5 years and longer).
• The stance of and prospects for the most important external factors impacting the property market (environment, society, legislation, economy, technology, infrastructure).
• The stance of and prospects for the property cycle taking into account the broader business cycle (inflation,
interest rates, economic growth, etc), as this can have an influence on capital appreciation and rental yields.
• The purpose of an investment in property (for instance primary use, buy-to-let/rental, speculation and/or asset
• Specific regional, neighbourhood, sectoral and economic infrastructure (roads, railways, etc) trends,
developments and factors which are having or could have an impact on future values and returns.
• Diversification of a property portfolio (the type of property, such as vacant land, residential, commercial or
industrial; area, such as inland, coastal, rural or urban; and type of investment, such as direct, fractional ownership and listed property (a managed portfolio of properties).
• Liquidity (shares, unit trusts and listed property are more liquid than direct property investments, but may carry a higher risk).
• Buying new (buying off plan) versus buying existing property, or building, taking into account various aspects
related to these ways of acquiring property.
• Location is probably still one of the most important considerations when buying property.
• Tax implications (capital gains tax, personal income tax and estate duty).
• Costs (transaction costs, such as transfer duty, conveyancing fees, commissions, rates and taxes, maintenance and letting costs).
Taking account of all the relevant developments, trends and factors having an impact on the property market and its performance, property should remain a good investment in future.
Authored By: Jacques Du Toit
Compiled By: Absa Home Loans
The move towards “semigration” is growing in South Africa and boosting the demand for property in many smaller towns. The term semigration (from semi-emigration) refers to those who seek a better quality of life away from urban grime, crime, congestion and stress, but who are not prepared to leave South Africa. “And anecdotal evidence suggests that many small, lesser-known towns of the various provinces are now benefiting from this trend, which is at variance with the reports of a new brain drain from the country,” says Realnet property group CEO Tjaart van der Walt.
“Consequently buyers in the quieter country centres cover a wide range of ages and income groups, including young executives who have already made their mark in the business world and are prepared to commute or run ‘virtual’ businesses, and middle-aged ‘retirees’ from the corporate world who are buying or starting up entrepreneurial businesses in their new home towns.
“Others are artists and craftsmen who are flocking to be part of flourishing new or established artists’ communities such as those in Dullstroom in Mpumalanga, Tzaneen in Limpopo and Clarens in the Free State.” Van der Walt says new developments on the Vaal and around Hartbeespoort dam are also clear beneficiaries of the semigration trend, as are the towns of the East Rand, Grahamstown and the charming town of Graaff Reinet in the Eastern Cape, and Paarl, Wellington, Riebeeck Kasteel and Darling in the Western Cape.
“And many other towns along the coast that used only to be holiday destinations are now also experiencing a sharp rise in the number of permanent residents keen to enjoy a better quality of life year-round.”
Published By: Property24
Just one visit to South Africa is enough to convince some property market investors to acquire a home in the country, it has been claimed.
Heath Adamson, sales and marketing director for International Property Solutions, believes most people are won over by the views, the friendliness of the local population and the climate.
The fact that prices are low is also a major draw, Mr Adamson believes, while he also notes that investors are becoming more adventurous and so are looking for something more “exciting” than they have done in the past.
“What we find is that our enquiries come from people who have visited the country and generally one visit is normally enough to win people over,” he commented.
“It is cheap – it’s one of the cheapest markets in the world. If you look at Cape Town on a national scale it’s very cheap, but I think the country all round is attractive; the people, the landscape… just the various things that the country offers.”
Figures released by government agency Statistics South Africa show that the value of recorded building plans in the country increased by 16.3 per cent in the first eight months of 2006 on 2005 levels, suggesting that there is plenty of property for investors to choose from.
Published By: holidaylettings.co.uk