Should you invest offshore or not?

Should you invest offshore or not?

Private Property South Africa
Scott Picken

Lea Jacobs from Business Day interviews Scott Picken, IPS CEO on investing offshore

  • Has there been an increase in South African’s investing in offshore property? If so, what do you believe is driving this?

International Property Solutions (IPS) has been helping investors invest overseas since 2003, and during these times we have noticed significant trends in people investing overseas. Ironically people tend to want to invest overseas when the Rand devalues sharply or there are problems in South Africa and not when the opportunities are present. In an article by Real Estate Web, it reported research which says that over 80% of South Africans who invest overseas actually lose money. I personally believe it is actually higher than this as investors don’t have the right partners, the right knowledge or information. However I believe the most important reason for these losses are that people make panic purchases, rather than strategic investment. In the last 18 months we have noticed a significant increase in people wanting to invest overseas, however I believe for the right reasons. They understand that asset values in first world countries are undervalued, yields are good and the Rand is also strong. Due to economic uncertainty, people are now doing allot more research, getting all the right information so that they can make far more educated decisions. We have noticed a marked increase in demand, but people are still very hesitant to commit, until all their concerns understood and fore filled. I believe this move to strategic investment will ensure not only that investors make money, but that they will achieve their goals of growth, asset preservation, a Rand hedge and most importantly peace of mind.

  • What countries are proving to be the most popular?

In the last 3 years it has been very interesting to review. In 2008 there was a strong bias to London as the interest rates were lower and so the cost of capital and the yields allowed investors to see cashflow positive returns from day one. Then towards the end of 2008, with the Global Financial Crisis, there was a significant swing to Australia. Australia was the only economy in the G20 last year to not go into recession and their property market also grew by 8.6% in 2009. For this reason investors strongly sort opportunities in Australia. In 2010, it has returned to a far more even spread of 50 / 50 for London and Australia. They both have key differentiating factors and it ultimately depends on what the investor is trying to achieve which determines the best destination for them.

  • What types of properties generate the most interest?

In London it is apartments in the more established (well known) areas. In the past 12 months there has been a significant interest in existing properties, where there is real value. In Australia, the focus is on 4 bedroom, 2 bathroom houses in the major cities. 85% of Australians live in the middle class and it is the Australian dream to own a home. Based on this, these properties provide the best rental prospects and also the best returns.

  • The European economy has been under the spotlight in recent days. In your opinion, is it currently the right time to invest in a property on this continent?

As with any property investment, it is unwise to look at markets holistically. You need to look at each and every opportunity and analysis whether it suits your investment requirements. Obviously the fundamentals are very important and I would certainly spend a tremendous amount of time understanding all the risks, as there is allot of uncertainty in that market at the moment. As we have learnt recently though, in amongst uncertainty also lurks allot of opportunity if you know how to find it.

  • Do property transactions conducted in an overseas country have to be cash based, or can finance be arranged?

Typically in first world economies you can borrow 70% from local banks in those countries. The lending criteria varies from country to country and you require experts to assist you with this to ensure you get the best financing options. It is not about going to the local bank you have a current account with. In some countries, if you have cash, there can be significant opportunities from being able to act quickly.

  • Why should investors consider the overseas property market and not stick to SA properties?

I am so passionate about South Africa and started IPS, selling South African properties all over the world. I believe we have one of the best emerging economies in the world and with the market fundamentals of growth and the Black Middle Class, I believe there are better opportunities to create wealth in South Africa than anywhere else in the world. I also believe as locals we understand the markets and therefore can manage the risks better. I invest the majority of my wealth in South Africa as I believe I can get far greater growth, but I also believe it is not only prudent, but wise, to invest some of my wealth overseas! Any sophisticated investor would understand that it is essential investment strategy to have some diversification. In my opinion if you are looking for growth and emerging economies then there is no where better than South Africa. However when you are looking for strategic investment, asset preservation, Rand hedge and stable incomes streams, then you need to be focusing on First World Assets, First World Incomes and First World Currencies. This will not only balance your portfolio, but it will give you peace of mind that you are covered for every eventuality. Two final things to say on this, you cannot rush this and make brash decisions when you suddenly panic about something like currency, political or economic developments you are not happy about. You need to plan and make decisive, strategic approaches which ensure you long term future goals. Secondly this is not something which only South Africans have to think about. International Property investment is a trend which has been happening for over 300 years. For years, investors from around the world, especially the British, Irish and Australians have been investing in various international property markets where they can achieve their investment objectives long term.

  • What are the pitfalls in investing overseas?

As I said, more than 80% of people who invest in overseas markets lose money. I have explained the reasons for this, but without a strategic investment approach, the right information and the right partners, you are destined to make mistakes and unfortunately they are often in first world currencies which hurt allot more. Bottom line is the risks are allot higher and the losses therefore allot more. It is complicated and you need to either partner with the right people or know what you are doing.

  • What are the benefits?

As I have explained for me the major benefits are growth, asset preservation, Rand hedge, income streams in first world currencies, but nothing is as substantial as peace of mind knowing that you have a cohesive, strategic investment strategy which plans for all eventualities.

  • How long have you been involved in selling foreign property?

I have been involved in foreign property investment since 1999, when I moved to London. Although I have been involved and passionate about international property all my life. My visions is that property is going global and I did my undergrad thesis at UCT (1998) on how IT was revolutionizing the property and construction industry, providing a global platform and in the 1990’s creating a paradigm shift. We are developing a solution at the moment for International Property which we believe will do to property what Google did to the internet!

  • You obviously conduct a great deal of research by visiting various countries. In your opinion which country is currently offering the best opportunities? Why?

That is an impossible question to answer. It all depends on the investor and what they are trying to achieve. Each country has its own nuisances and based on these and understanding the investors intention, one can help to devise a strategy which suits those requirements. The beauty with the property going global is that there are so many more opportunities!

  • Should investors consider “going it alone” or should they ensure they use a reputable international real estate broker?

I think I have explained this in depth above, but the bottom line is that most people lose their money when they invest internationally. You can’t use your tried and tested “gut feel” as your South African gut doesn’t understand the international markets. You also have to be very careful about your partner. Are they a company who specialize in selling international property or an estate agent who offers it as supplementary solution. Do they work with “Best of Breed” partners in the respective country to ensure you are getting the maximum returns from that local market? How much research do they do, how much do they spend on research and how often do they travel to those countries to fully understand the markets? Finally do they have local representation and a sophisticated after sales service to ensure you are provided with a key executive who will help you right through the international property investment cycle, not someone who is just focused on the sale? For international property, there is also an international body called AIPP, which is the Association of International Property Professionals to regulate this industry and ensure that clients receive the value they are promised. IPS was the first South African company to join this organization, which is based out of London.

  • We have heard a number of horror stories about investors being taken for a ride, what dangers are associated with buying foreign property?

The biggest issues are if you are paying the market related value, managing the purchase process, getting a mortgage (if you are reliant on this) and then I believe the biggest risk is where the tenant demand is going to be. An example of this in the last 2 years, is that many South Africans invested in Manchester and Leeds in the UK. They were promised that there would be significant tenant demand as BBC would be relocating to Manchester and that there was significant student demand. Well the BBC never moved and the students don’t want to live 15km from campus. Therefore there are over 2000 units standing empty, values have dropped 60%, there are no tenants and no bank will provide mortgages. This is a classic example of the wrong information and the wrong partners.

  • How do SA foreign exchange control regulations affect foreign property investment?

As a South African you are allowed to take out R4 million per person, as part of your direct foreign allowance. As long as your tax affairs are in order, you apply to the Reserve Bank and they will provide you permission to externalize this capital. You can then use this money to invest. Also people involved in property companies can also apply for their FDI( Foreign Direct Investment) and they are allowed to externalize up to R500 million into a profitable offshore business.

  • Could you please discuss the effects the recession has had on property markets around the world highlighting the areas most affected. In your talk you mentioned that Las Vegas had borne the brunt of the slump in the US while New York had emerged relatively unscathed. Would it be possible to give the readers some figures, indicating which other areas have been severely hit by the recession and whether these areas have potential for foreign investment?

I do not know how much detail you want me to go into here and so I have 3 of my latest reports. These are all on our website -

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