Foreign property an attractive investment option for SA residents
Rand strength, historically low international property prices and relaxed exchange controls have combined to make this a good time for South African investors to look overseas to diversify their property portfolios.
According to Eric Fisher, Director of Stonehage Property Partners in London, there are good opportunities to invest in various classes of property abroad. “With prices significantly down from their highs and property markets in many countries at an inflection point, foreign property purchases continue to be an effective hedge against currency risks.”
Bernie Herberg, Director at Stonehage Financial Services, noted that South African resident individuals may be permitted, on application to the Surveillance Department of the South African Reserve Bank (SARB), to invest in a holiday home or farm in any country that is part of the Southern African Development Community (which includes Angola, Botswana, Congo, Madagascar, Malawi, Mauritius, Mozambique, Seychelles, Tanzania, Zambia and Zimbabwe), or to acquire any other investment property abroad.
“Should the application be successful, individuals do not have to avail themselves of their foreign investment allowance for this purpose,” he noted.
But certain restrictions may be placed on these purchases by the South African Reserve Bank. The proceeds on disposal of the property and any net rentals earned during the currency of the investment must be remitted to South Africa. Rental income will be subject to tax and capital gains tax may be payable on disposal of the property. The property will also fall into the investor’s South African estate for estate duty purposes.
“Aside from potential good value, certain of the SADC countries like Mauritius and Seychelles have an added attraction for South African investors because residence is offered where property is acquired through certain approved projects,” Herberg said.
“Should South African resident individuals not wish to make special application to SARB they will need to utilise their R4 million foreign investment allowance (FIA) to part finance these acquisitions, and fund the balance of the purchase price of the property with a foreign mortgage without recourse to South African assets.”
The profit on sale of the property would be subject to CGT, unless the property is acquired through an offshore vehicle which has been correctly structured for South African tax purposes. The proceeds can remain offshore but there may also be estate duty implications for the investor depending on how the property is held offshore.
Eric Fisher commented that international property investing will require both a specific geographical and sectoral approach in the current ‘low capital growth’ market.
“The USA, UK and Europe are still in the midst of a major deleveraging cycle with the banking sector dictating the outlook for the coming years. This will be based on the pace of refinancing and release of ‘distressed opportunities’ either directly or indirectly onto the market. Cash rich equity investors with the ability to close deals will be the winners.
“It is our view that secure income will be the key factor in an environment where property yields will continue to be significantly higher than cash deposits. Investors should remain weary of excessive leverage to ensure they’re able to weather any further turbulence. Prime residential properties have outperformed and, in the case of London, this could well continue.”
