“Free” rent for 2-5 years, no capital growth for 5 years: offshore warnings for South Africans.
With the rand’s strengthening relative to harder currencies like the UK pound and the euro, offshore investment providers are coming out of the woodwork touting their wares to South Africans eager to venture offshore – just as they did earlier this decade.
Beware. The characteristics of other markets can be very different to South Africa. An offshore property investment is not to be undertaken lightly.
Take UK commercial property, which is high on the menu of offerings to wealthier South Africans contemplating international diversification of their real estate portfolios.
In South Africa, you can expect steady rental income streams from commercial real estate. And, as it is a tenant’s market, you can expect the annual escalation to be favourable. Vacancies are up, but aren’t giving the average commercial landlord a major headache.
Values here are faltering, but only just. The IPD report for commercial direct property investments showed South African non-residential real estate producing a miserable -0.8% for the first six months of this year.
In the UK, on the other hand, if you are the proud owner of a commercial building in which a lease is about to end, you’d better brace yourself for a financial shock.
Property values have fallen by more than 40% off peak prices. If that’s not enough of a nightmare for real estate owners, tenants these days are scoring a staggering two to five years of “free rent”, delegates were told at the Sanlam Private Investments Offshore Property Seminar in Cape Town this week.
The first time Marco Rapaglia, of Athanor International, threw that astonishing fact out into the audience some potential offshore investors took a double-take, thinking they had misheard.
But Rapaglia repeated his message later, urging investors: “Buy (a building) with a lease of 18 years. Don’t buy with short-term leases, because the cost of negotiation will vary between two to five years of rent ‘free’.”
Rapaglia told Realestateweb – property news division of the listed Moneyweb group – the reason some landlords are agreeing to such deals is because tenants in the UK pay for most of the costs associated with owning a building and landlords would rather have the building occupied, with costs covered, than empty.
Bargain-hunters fortunate enough to find a building with a quality long-term tenant in it have another obstacle to encounter: finance.
Said Lukas Nakos of MAS Property Advisors: “Interest rates are at an all-time low, but banks are charging margins of 2-5% above that low interest rate, so 7 to 7.5% is the cost of finance. We believe interest rates are likely to stay low.”
Nakos also isn’t hopeful capital values for UK commercial property will tick up until the next decade. He said: “Our forecast is for no capital growth for the next five years in the UK.”
The situation doesn’t look grim for all UK investors, though. Jonathan Osrin of Stenham noted that his organisation has snapped up a number of prime properties for magnificent discounts in the heart of London and is eyeing other properties.
He produced a slide of a small office block in London’s Mayfair – which he said was valued in 2008 at £57m – which Stenham bought for £25m from under the nose of another buyer which had put in a bid for a few million pounds more. “We could undertake to get cash to the seller within six weeks, so they came to us,” he said. The building was 40% vacant, he said.
Stenham’s money comes from investments in a closed-end property fund.
Pondered Daniël Kriel, CEO of Sanlam Private Investments, out-loud: “This is an exceptional market, at an inflection point. Perhaps it is time to be brave?”
While some market watchers are trying to figure out whether the UK economy will recover in a V, W, L or U shape, or even a lop-sided U-shape, Anthony Rosenthal of Taviton said he is wagering on a “corrugated iron” pattern – essentially bumpy along the bottom of the cycle for a protracted period.
Which led Kriel to comment: “I get the message there is no rush to invest. There will still be good opportunities 12 months down the line.”
The offshore property seminar, offering a generally dismal outlook for UK property, provided excellent fodder for investment experts whose bread-and-butter is domestic equity investments and who would like their clients to keep money invested in South Africa.
Look at a 50-year asset class performance, said Alwyn van der Merwe, director of investments for Sanlam Private Investments. “The best performer was equities, then property.” Nevertheless, Van der Merwe doesn’t write off real estate. “Property is much less volatile than the equity market. That’s why it deserves a place in any investment portfolio,” he says.
Emphasising the point that investing at home has been more lucrative for South Africans, Van der Merwe said that over the last 10 years the return from UK equities was flat in rands. South African listed property was up more than 20% a year over this period on average, he said.
Van der Merwe agrees with property investors who reckon that more important than “location, location, location” is the “price, price, price”. “If you buy a poor share and you buy it at a cheap price you will make money” he said. The same goes for property: “Don’t overpay and you will make money.”
Is UK property “dirt cheap”? “I’m not so sure,” added Van der Merwe.
One thing that is for sure is that even if UK commercial property is “dirt cheap” right now, it comes with lots of strings attached. It’s certainly not for the risk-averse.