Investing in offshore property: potential and pitfalls

Private Property South Africa
IPS

November, 2011

80% of people who invest offshore lose money

and the investment becomes a tremendous headache

in a short space of time.

When deciding whether or not to invest offshore, having the right information can make you financially healthier – but acting on the wrong information can financially ruin you. For example, in the last few months South Africans have bought $184-million-worth on Australia’s Gold Coast. But Peter Dunn, CEO of OzInvest, a company that spends millions on research, says that these “deals” are offered “every day” and he is not currently presenting them to his investors as there are huge vacancies and the property values are in real trouble. Ditto for Manchester and Leeds, where South African investors believed that they were buying real value but there is oversupply, banks are not lending and there are rental problems. And then there’s the Dubai property market …

When vetting an offshore property consultant, you need to be sure of several things:

  • How much does he spend monthly on research?

  • How is this research communicated?

  • Is there research from an entity that doesn’t have a vested interest in selling the property, and is it substantiated?

  • How often does he visit the investment destination?

  • How long has he been helping people to invest internationally?

  • How many people has he assisted to invest in this specific country?

  • Is this his core business?

  • Does he personally own an offshore investment portfolio?

The offshore rental market

Property investment fundamentals are based on cash-flow. Experienced property investors understand this and thus succeed in all property cycles. Inexperienced investors tend to chase bargains, only to realise afterwards that there is no rental market for their properties.

In Manchester, for example, you can get discounts of 60 percent but the market is oversupplied by 2 000 units. The same applies to Dubai – and the numerous developers who offered rental guarantees but have gone bust are testament to this. In Las Vegas, the average discount is 70 percent but 5 000 families are leaving the area every month as tourism is down by 60 percent and there are 32 000 homes on the market.

So be sure to ask your consultant whether or not:

  • He can ensure long-term, sustainable, market-related demand for your property when it is ready to rent.

  • He is prepared to assure this demand.

  • He can sustain this assurance in the long-term.

Local is lekker – especially as far as salesmen go

Many salesmen will travel to South Africa, put on a classy presentation, sign you up, take your money and then leave. It becomes problematic when you then can’t get hold of them. You need to ensure that the partner with whom you choose to invest has fully-staffed offices in the foreign country as well as in SA. You should also visit a property before making your decision, and need to ask who is available to show you around.

Financing your investment

In recent years, investors have bought off-plan as they could put down a deposit and then wait for up to 30 months for the property to be developed – hoping for capital growth during this time. But, when investing in international property you can only secure financing six months prior to the transfer and so, although you can get a guideline early on, it is not binding until you actually apply.

Sometimes, the contract and purchase are not subject to financing and, if you cannot complete (or settle or transfer) the property, you will lose your deposit and can be sued for damages by the developer. Sometimes you can get 70 percent loan-to-value from banks in the destination country, which can greatly reduce your capital outlay. This can be risky, however, as it is impossible to predict what international banks will be doing with regards to lending in the distant – or even immediate – future. So ask your prospective consultant:

  • Who will be organising the finance.

  • What his experience was during global financial crisis and what he did do to secure financing during this time.

  • How he will mitigate the risk to me.

  • How he helped to finance his “trickiest” client?

  • What his average is in helping people get finance and how many fail.

  • Whether or not you can invest subject to financing.

After-sales support

Many investors focus on the purchase and forget how important it is to manage the sale, and salesmen are often only interested in closing the sale. Many companies claim to provide full service but it is important, when investing from afar, to know where they are based and how they are going to do this.

It is vital to ask how big the aftersales team is and who will ensure that the property transfers timeously into your name. You should also ask who will assist you in terms of inspections and so on. Do not be shy in asking to see referrals from other clients.

Written by Scott Picken of IPS International Property Solutions

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