Investing in offshore property can be a daunting decision for South African investors, especially if they ‘do it themselves’ rather than utilising a financial advisor or fund manager. However, because of similar taxation and legal structures, many feel far more comfortable with UK real estate.
It is always important to remember, as with every investment class, that there are aspects you should be aware of before committing your money.
Propwealth, a UK-based property business run by South Africans, has been investing in the United Kingdom for nearly 10 years and has seen the market change and adapt, with new opportunities arising.
Anthony Doyle, director of Propwealth, says they are asked regularly by South African clients “how to reduce their risks being long-distance investors”.
“We always advise that one should keep your risk exposure low, go for the simplest property types and always take a long-term view on real estate,” he says. “Buy-to-let is not a quick-return asset class, but will always pay dividends, both in cash flow and capital, if you’re focused and patient.”
Doyle has the following advice for investors:
Make sure you have a good idea of your cash flows – which costs that can be deducted for tax purposes and hidden expenses like maintenance.
Interior upgrading generally needs to be done every 5 years, as wear and tear will occur. Allow 2% of gross rental, per annum, for general maintenance as a guideline.
Also be aware of initial property set up costs like stamp duties (transfer), legal and accounting fees, tenant finders’ fees, landlord licenses, and council tax. These will affect your initial period just after transfer, and therefore your yields, until the property settles, usually after 3-5 months.
Always try and invest in regenerating areas where there are plenty of tenants. This guarantees good yields and capital growth in the long term. Local knowledge is very important here as postcodes can seriously affect prices in the UK
Property investment types
This investment class became very popular late last decade when demand for individualised and co-living spaces for students was virtually non-existent, says Doyle.
“Since then, every developer has jumped on the bandwagon to maximise building space and therefore returns.
“If one invested early in the cycle (and especially in dual zones’ units allowing normal residential and student tenancies) you did well. Currently the market is oversaturated, returns are dropping, banks will not finance student pods and exit strategies are severely limited.”
Guaranteed Rental Returns
“In our opinion this investment style is a bubble beginning to develop, says Doyle. “In order to sell new builds in a slow market many developers and estate agentsare offering ‘guaranteed’ rentals for a period of 2 to 5 years. This seemingly makes it very attractive to the buyer as they are told that they will enjoy rental regardless of if they have a tenant or not.”
This appears to reduce risk. However, he says this simply means that the risk is passed down the line until the guarantee runs out. There are many reported cases of people overpaying for property because the rental guarantee period is simply built into the property price.
Often the rental stated far exceeds real market levels and when this period expiries investors find themselves with an overpriced, low yielding unit, says Doyle. Also there have been numerous UK developers who have been declared bankrupt because they run out of cash in these schemes.
“It is important to let the current actual rental market dictate the price of the property, not an estate agent or developer.”
Houses of Multiple Occupation or ‘HMOs’
There are many websites extolling the high gross rental returns on this style of property. Indeed, says Doyle, with HMOs, the best is to manage the property yourself and be prepared for high overheads, extensive ongoing maintenance and frequent tenant turnover.
“Even with these costs, the yields can easily exceed 10-5% net. However, the truth is that you simply cannot run these properties long distance as an overseas investor, and although they do offer higher net returns, HMOs should only be invested in if you live close to the property.”
Land and hotel rooms
“If the land doesn’t generate cash flow, stay away,” Doyle warns. “There are many costs involved in holding this asset class. Many green belt developments never see the light of day owing to council regulations and some can take years while your money is tied up with the developer.
“Hotel room investments cannot be financed by high street banks and are difficult to resell, so be aware of these important pitfalls. Promised marketed high yields mean high risks, and overpriced rooms, if you take into account price per square metre.”
This is by far the best type of property in which to invest. Lack of housing, a growing UK population and lack of first-time buyers are all factors pushing up rental yields. This bodes well for the buy-to-let investor as demand outstrips supply.
“As a guide, it is best to purchase one or two bed flats only, in regenerating areas, aimed for the general long-term tenant,” advises Doyle. “The tenants tend to never be buyers, and they will rent for many years. Any exit from this type of property will either be to another investor or to a first-time buyer on a mortgage, as banks will finance these properties. This is always a benchmark indication for a low risk investment, as banks prefer this approach.”
In summary, regardless of which type of property you invest in, it all comes down to reducing risk, having strong management and good rental agents in place, he says.
“Also a further warning,” says Doyle, “is that investors think they can ignore their properties if they have rental agents in place. Keep a watchful eye on your portfolio and use the management agents to deal with the day-to day affairs. The better they are, the more time leverage you have. Finally, always keep your property class simple.”
Typical entry-level and London properties that South Africans can invest in:
- – Keel Wharf holiday let apartmentsconsist of 17 units in a development in the new area. Prices start form £160 000, they can be mortgaged and have net yields of 10%. The development, which has been successfully run as short-term lets previously, is currently undergoing a huge redevelopment and upgrade, and will be ready in 2020.
- – Liscard House is a unique development with a Victorian terrace building, which consists of three studios and a one-bed flat, which is being totally refurbished and upgraded. Prices start from £52 000 with yields of 6% to 7% net. This building is situated close to a massive regeneration program called the Wirral Waters, a £200 million development.
- Manchester– A new build and off-plan bespoke development in the city centre will also be launched in August. Prices are from £200 000.
- London– New builds on the River Thames in zone 4 are priced from £400 000 and located on the new Cross Rail system.