Unlike any other national recession, the coronavirus pandemic has brought about a shift in social behaviour and investor confidence. It has triggered unrest and concerns about economic stability, which is currently too difficult to forecast. Trends are equally difficult to judge; some may reverse for example, others will accelerate. Either way real estate characteristics have and will continue to change, and while there are those who are optimistic, cautious speculation seems to be in play.
But does the current economic distress in SA, and a poor-performing Rand, really create a strong enough case for South African private property speculators to consider investing or expanding a portfolio outside of its borders?
And is Citizenship by Investment, whereby you invest in a nation’s specified property development in return for citizenship, really present a significant and valuable dangling carrot?
I asked Pauline Gallagher, Founder & CEO of Halcyon & Partners, an investment and migration firm, for her opinion.
“Whilst no-one may want or should have to leave their country, overseas property investment that may or may not be linked with migration presents a choice, be that to place funds into a more stable currency base or in having the option of another country to relocate to.
“Other choices that influence this type of decision include safety, children’s education and their future career opportunities, change in lifestyle, uncertainty around a business environment or loss of income, even political instability or uncertainties. That said, South Africans have traditionally been very comfortable and are savvy about their real estate investments, be those local or international.”
South African investors into global markets have traditionally been attracted to domiciles that aren’t subject to currency fluctuations in the same way as the Rand because the international investment is made in, for example, the US Dollar, Euro or UK Pound, which morphs the investment into Randhedge status.
Under current circumstances, given changes in the US political environment, the UK’s second extreme lockdown and in fact the entire world’s economic pressures, nothing is assured in terms of Randhedging.
However Gallagher feels it’s still a safe bet because many overseas property products offer hands-free investment where the investor simply makes a purchase and the property is managed on their behalf, generating between 3-7 percent gross yields (country dependent).
“CBI is however a more sensitive decision because it involves migration along with the acquisition of property, but it comes with the benefit of a second passport. Programmes start from around ZAR3.3-million plus fees and taxes.”
The most popular CBI programmes are currently in North America, parts of Europe (particularly Portugal) and the Caribbean, however Gallagher recommends it is worth investigating any market where there is a well-established real estate sector. “The 2020 crisis has seen prices fall so now really is a buyers’ market for CBI. We are seeing excellent property investment opportunities in the UK, Greece, Cyprus, Turkey, the US and Grenada.”
Closer to home is Mauritius, which has always been a popular real estate investment destination for South Africans. “These purchases are regulated by the Mauritian government that has recently relaxed the entry level to ZAR5.8-milion,” says Gallagher, “but there is a condition that you may only rent out a second property purchase, not the first.”
One of the more stable property investment scenario’s for South Africans, that Halcyon puts on the table is buying two properties, one for cash and financing a second to the same value in the Euro market. “In Europe you can borrow on a fixed one percent rate over 10 years. Both properties yield a 4,5% annual return, the net result being the second property can be paid off within seven to eight years.”
Nadia Read Thaele, is the Managing Director of LIO Global. Like Halcyon, LIO Global offers advice and support in the processing of international property investment and CBI programmes. She says that CBI programs which offer real estate are often a very attractive option for South African investors given the second passport option. “Grenada for example, offers property investment from as little as around ZAR3.6 million (USD 220,000) (around R5.37 million for a family inclusive of costs), which is not particularly high compared to what you will pay for a home in South Africa’s upper income areas. It equates to what you will pay for a basic one-bedroomed apartment in Mouille Point or Melrose Arch.”
Rather than investing in a second property in South Africa, Theale confirms that many of the wealthy are investing in a second property as part of a CBI scheme.
“Aside from the great value and returns, an investment in Grenada for example also means you can get fast-tracked second citizenship in under six months. It is also a very tax and investment friendly country.”
Thaele warns though that any income on an offshore property, less relative incurred property expenses, will need to be declared in a South African taxpayer’s income. “In addition, on the sale of such a property, any Capital Gain is also taxed at the prevailing Capital Gains Tax in the year of assessment that the property is sold.”
Undeterred by tax implications, Thaele says that South Africans are seeing international property investment as a Plan B. “Investors who are looking purely for investment purposes need to be careful however, as many CBI programmes are offered by countries that require capital inflows, meaning there exists the potential for them to get better returns elsewhere. It’s important therefore to define real estate investment in terms of the ‘needs’; residency and citizenship, although overlapping, are not always aligned.”
From an international real estate agency perspective, Chris Immelman, who heads up Pam Golding International confirms that now is a good time to invest in a global property purchase.
“While having part of a portfolio invested in global assets has always been considered a wise decision, the pandemic has shown that events of this nature usually result in a flight to quality.
“Developing countries always bear the brunt of this, manifesting in a weaker currency, which is why harder currencies like the US Dollar, UK Pound or Euro make for a better investment.”
Immelman raises some concerns however about CBI programmes. “Some of the EU programmes are coming under pressure by local authorities, which has resulted in the closure of the Cyprus and Malta programmes, leaving Portugal as the only really credible option for EU citizenship via its Residency programme. It has adopted a very friendly tax regime to entice foreigners to invest or relocate to its country. Its Non Habitual Tax Treaty for example, exempts foreigners relocating to Portugal from paying tax of foreign income for 10 years, conditionally on at living in the country for six months annually.
“The very low interest rate environment that has manifested in the wake of Covid-19 will not be around forever, so my recommendation is that property investors should lock-in now to realise major benefits when interest rates rise again and inflation increases as economies recover. This is when increased rentals will ensure a good return on the property investment,” stresses Immelman.