Investing in property in South Africa
South Africa has been formally asked to join the BRIC group of major emerging markets, including Brazil, Russia, India and China. South Africa's inclusion into what will now be referred to as BRICS will commence in 2011. According to Maite Nkoana-Mashabane, South Africa's Minister of International Relations and Co-operation, the invitation, 'legitimises South Africa as a future global power and as an investable country - bolstering its position as Africa's gateway and champion.' Nkoana-Mashabane says, "This will help South Africa project itself as a first tier emerging market rather than its current second tier status. We bring the most diversified and most advanced economy on the continent."
Even prior to the BRICS announcement, South Africa has been enjoying a surge in investment from foreigners - from big names in business to single investors looking for an investment in property with good returns as well as an aspirant lifestyle. According to the Sage Property Report in September 2010, from the Standard Bank, one of the largest banks in Africa, 'confidence in the South African property market is returning.' This is confirmed by the 8.3% y/y growth rate in the median property prices in August and 7.3% y/y in July and given rise to the prediction that the average nominal growth will be around 6% for the year.
The tide may have turned generally for property values but they weren't in any particular jeopardy in the first place in high value areas. Despite the recession, Clifton on the sought after Atlantic seaboard, which is rated the top suburb in South Africa, saw prices rising by 48% last year to an average of R16.2 million, according to an article in The Financial Mail in July 2010.
Ten years ago, property developers Lace Market Management, originally formed in the United Kingdom in 1991, has focused its attention on exclusive developments particularly in Camps Bay. Brothers David and John Higginson operate Lace. David says, "We came here 10 years ago, fell in love with the Cape and wanted to spend time here. As property investors, this location and lifestyle would have been the ultimate buy for us when we came here in terms of investing money, getting a return and getting usage."
Lace's South African operations began with the extensive refurbishment of a 240m2 penthouse in Camps Bay in 1999, which was sold in 2004 for an area record of ZAR32 000/m2. Lace has a long history in the hospitality industry in the UK and South Africa. Lace UK has won a number of design and operational awards for its 29-bedroom boutique 5-star hotel located in the CBD of Nottingham. The company's flagship product, Ebb Tide, on the edge of Barley Bay has structured a unique product aimed at foreign and local investors looking for a blue-chip property investment with solid returns.
In the first two years, the brothers would leverage their experience in the Cape market to manage EbbTide as a blue-chip, self-catering apartment for overseas visitors and the well-heeled Gauteng market. The EbbTide apartments are priced between R10million and R17.5 million and designed to operate as either self-catering luxury apartment businesses or as homes, or a combination of both.
Ebbtide consists of ultra modern, north facing units - two simplex units of 150m2 with two bedrooms and two bathrooms, as well as two duplex units of 250m2 each with three bedrooms and 3 bathrooms. Ebbtide was designed by Greg Wright Architects and built by DDC Construction. Adding to its value was the fact that Ebbtide was certified as a green building, featuring energy conserving devices such as smart lighting and tinted glass paneling, and generated its own electricity which was stored in batteries for uninterrupted power supply in emergencies. What makes this investment even more attractive is the guaranteed 8% return on investment for the first two years. David Higginson, describes the turnkey property as the ultimate holiday home. "I can't think of a better buy, where you're getting R800 000 in the bank every year for the first two years (based on a purchase price of R10-million) as well as capital growth - a growth which had averaged 12% over the last six years in Camps Bay. The owners get usage of the property from the date of transfer and after two years have the option of contracting out the management of their properties, retaining Lace to operate the apartment as a business, operating the business themselves, or simply maintaining the property as a holiday home or retirement residence. Higginson says, "This is a hassle free investment for two years."
Lace will manage the property for the owners, overseeing rentals and general maintenance. "Over 10 years we've built a niche clientele which trusts our product's offering. They know that when they come here, that this is actually something pretty special and they know they're going to get good service.
We have people coming from Johannesburg two or three times a year, and Europeans coming once a year. When they're picked up at the airport, right to when they're taken back to the airport, it's a total package, it's a good, clean product," David Higginson said. After two years all income would revert to the owner.
"We've built half a dozen guest houses and sold them and we now manage them for the owners who profit from the income. Generally, however, takes two to three years to establish this kind of business." And the future of property in South Africa? "The big slingshot effect we've had over the past five years where you've seen property prices jump by 50 to 60%, which I don't believe is healthy for any environment, has stabilised now, and top blue chip property investments should stabilise to between 8% and 12% and I think that's a very fair assumption to make, and quite conservative at that," John Higginson said. There were other positive signs from other underlying drivers of investment performance.Build costs were already being factored at a 9% increase per annum. "The cost of raw materials will continue to grow, cost of replacing this property, year on year, is going to go up I don't see construction prices, leveling out or dropping, and certainly people in the profession, quantity surveyors and architects, certainly don't seem to intimate that either."
"The fundamentals of the South African property market are sound. But we're not only after growth. We are investing in key areas. We've always said that the scenario for is always location, location, location. We'd rather buy a garage in Mayfair than a 10-bedroomed house in Luton. Camps Bay, Clifton, Bantry Bay are all key areas for us," David Higgins said. What about investor confidence in South Africa? "I often get asked the question: What about tomorrow? And I've always said the amount of money I've invested is nothing compared to large organisations like Barclays Bank. Those guys do serious due diligence. They spend more money on due diligence than we would ever think of investing - they obviously have confidence in South Africa. South Africa's inclusion into the circle of BRIC countries is only going to strengthen the attraction for investors." He dismissed concerns about the volatility of the rand. "This is perhaps the biggest concern for a foreign investor. Yet, the rand has been one of the best performing currencies in the past three or four years and it has been pretty stable. I always say that by bonding 50% you are hedging your currency, and there is a way of forward buying as well." "However, the best part of the investment was actually spending time in the Cape and Camps Bay. You're investing in a lifestyle, in a blue chip, north facing location. You can walk to the village, you have Theatre on the Bay there, you've got numerous coffee shops, a supermarket and fantastic restaurants. "You don't really need a car. You've got beaches and the mountain literally on your doorstep. You have everything you can dream of within walking distance. Spending time here will add 10 years to your life," David Higginson said.
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