Key considerations for non-resident property investors

Key considerations for non-resident property investors

Private Property South Africa
Kerry Dimmer

Regardless of the current economic downturn, South Africa may be considered an attractive property investment destination for it remains an emerging market that, coupled with rapid population growth, provides fertile ground for real estate investment.

For one, rising population and rural-to-urban migration can cause a housing shortage in major cities. That, in turn, has the potential to cause real estate value to increase. Emerging markets have also traditionally been considered a dependable hedge against inflation, and in some cases, property returns may also be considerably higher than the rate of inflation.

Overall, many seasoned foreign investors buy property because of the attraction of being able to diversify domicile currency owned and realise a foreign currency return if the property is rented out, while simultaneously diversifying their investment portfolio.

Okay, so there are risks in South Africa, not least of which are political and business. However, KPMG in collaboration with Business Leadership South Africa (BLSA) recently released its South Africa’s 2021 CEO Outlook, which reveals that business confidence levels are back to pre-pandemic levels, which may be an encouraging selling point if estate agents need a new angle to encourage a foreign property investor. Regardless, macro- and micro-economic factors are crucial factors when such investors look at the SA property scene.

To explain is Paul Roper, who is not only an Advocate of the High Court of SA but also a Certified Financial Planner with a Masters in International Trade Law and International Tax. He is also a published author of a number of books on SA wealth, tax, and structures for expatriated and current resident families.

Upfront a non-resident is going to consider the prognosis for the country given that immovable property tends to be a long-term investment.

So, will the investment be secure and safe, and similarly so from a personal perspective when the investor and family visit the property?

A relative consideration is the controversial land expropriation bill that may impact a property purchase.

“The Expropriation Bill of 2020 needs to be considered as it is aimed at providing the mechanisms for and the circumstances under which land may be expropriated with and without compensation as envisaged by Section 25 of the Constitution,” says Roper.

Section 25 as it currently stands does, by implication, provides for expropriation without compensation in circumstances where a court could hold that such expropriation for nil value would be just and equitable in the circumstances. Nevertheless, there is the Amendment Bill, which seeks to create certainty by amending Section 25(2)(b) to include a provision to the effect that: ‘Provided that in accordance with subsection (3A) a court may, where land and any improvements thereon are expropriated for the purposes of land reform, determine that the amount of compensation is nil.’

Another macro influencer is the expectation of returns.

Consideration should be given to the Rand that has fallen on average by five percent a year in the past 30 years, and which Roper believes is unlikely to change or reverse in forthcoming years.

Micro-economic factors are germane to specific property locations and what opportunities lie therein says Roper …

bearing in mind that generally speaking, the property purchase is usually a lifestyle asset so the value is less relevant than the fun factor.

The search for such a property and finding of one is, however, potentially where the fun stops in terms of transactional implications!

For example, if the non-resident wishes to apply for a mortgage there are limitations. “Under South Africa’s Exchange Control Regulations, so-called ‘financial transactions’ which include the purchase and sale of unlisted and listed shares, are subject to the 1:1 rule,” explains Roper. “In essence, the effect of this rule is that a foreign investor may only borrow funds in the SA market to the extent that they introduce an equivalent amount.”

Regardless of whether the property is to be mortgaged or paid for in full, a South African bank account is not an absolute requirement, but as Roper explains, it is useful to have such because it can save international transfers costs.

It will also mitigate the costs associated with ongoing Client Due Diligence every time a transfer is made from outside the country.

“It further ensures one does not have to be constantly concerned about currency fluctuations. And, importantly, if the purchase of immovable property by a non-resident foreign investor is undertaken through a locally-established company - in respect of which the foreign investor must appoint a SA resident public officer, such as a director - the company will need to have its own bank account, which will be used to facilitate the property purchase.”

Although such money transfers can be actioned by finance houses or Money Transfer Agents, Roper recommends bank-to-bank transfers as preferable for they are bound by the country’s financial regulations that are well-established and secure.

Foreign property investors are also well-advised to consider the implications of tax and other duties that will influence their monetary transfer decisions.

First is income tax, which applies when a property is rented out, with the rental income subject to income tax.

Capital gains tax comes into play if the foreign investor has purchased shares in a company that buys a property. “At the time of the purchase, 80 percent or more of the market value of such shares was attributable directly or indirectly to the movable property, meaning there is liability for capital gains tax. However, a foreign investor may find relief from double taxation under an applicable Taxation Agreement.”

Another form of tax that may be applicable, says Roper, is that of estate duty. “If the shares in the SA company are held directly by the foreign individual rather than through a trust structure, or if the property is held directly, the property/shares will have a value in a deceased state. Estate duty is applicable on estates over R3.5-million, with the rate charged at 20% up to R30-million, and 25% beyond. Whatever is bequeathed to a surviving spouse is not, however, subject to estate duty at that time."

It is recommended that estate agents advise the purchaser to check whether Double Estate Duty applies, dependent on their primary domicile.

Many financial analysts suggest that investing in emerging market properties, when an existing portfolio already contains investment in developed market properties, may reduce the overall risk of the portfolio.

Market speculation, socio-economic and political risks are obviously factored into the engineering of any well-developed and diversified investment strategy, but it is worth noting that SA’s long-term economic elevation is going to be driven by government-promised recovery plans.

Is it enough to attract foreign property investors? Time will tell …

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