Why South African Investors Are Diversifying with UK Property

Why South African Investors Are Diversifying with UK Property

Ahead of elections, and with the ongoing economic negativity, many investors in South Africa are taking action by moving their money abroad. Here’s why property in the UK can help you to reduce your portfolio’s risk and grow your wealth in the long-term.

This election could prove critical for South Africa’s economic future.

South African’s are set to hit the polls on 8th May amid the backdrop of some of the worst economic conditions the country has faced in over a decade.

High levels of inflation. Poor wage growth. Rising unemployment.

In March, ratings agency Moody’s spared the country’s credit rating from junk status, maintaining its still lowly Baa3 score. Both Fitch and S&P, the other big international rating agencies, moved South Africa to junk status in 2017.

Future projects do little to ease concerns, either. The South African Reserve Bank forecasts that the national inflation rate will overshoot its target of 4.5% until at least 2021.

South Africa was also listed third on Bloomberg’s recent Misery Index, which ranks inflation and unemployment levels of 62 of the world’s slowest economies. Only Venezuela and Argentina were deemed to be worse off.

No matter where your support in South African politics lies, it’s clear that whoever succeeds in the election will have an extremely tough task of fixing the current economic situation.

Many investors in South Africa have, for some time, been taking action. Moving their money out of the country and into more secure assets internationally has helped them to achieve strong returns, while also enabling them to reduce their level of exposure to the concerns being faced domestically.

As one of the most popular booking centres for generations of South African investors, the UK continues to be where many are moving their wealth.

And it’s UK property, in particular, that many are diversifying with.

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Mature, Stable and Proven – Why South African’s Trust UK Property

Over two centuries, UK property has become one of the world’s most trusted investment assets.

  • An asset of high national importance
    • UK property prices can have a huge impact on national wealth. Therefore, the country’s property market is of high importance to the UK government.
  • A comprehensive legal system
    • Unlike some international property markets, the UK has a clear and comprehensive legal system. Britain is a primary centre for global litigation, with UK law often regarded as the best in the world.
  • Performance determined by supply and demand
    • Unlike equities and other investments, UK property performance is underpinned primarily on supply and demand fundamentals, rather than wider external economic factors. Right now, the UK is only building a fraction of the 300,000 new homes it needs each year.

With these key fundamentals, it’s an investment that continues to deliver year-on-year growth for investors across South Africa.

At Select Property Group, we have sold £42 million (R777 million) worth of UK property to South African-based investors in the last 13 years, with the demand from our clients for UK property prompting us to make regular visits to cities across the country each year.

What About Brexit?

Firstly, it’s important to remember one of real estate’s strongest qualities. Unlike other investments, such as equities and gold, property is much more resistant to wider economic changes. It’s one of the main reasons why investors choose property, particularly in the UK.

To date, unlike stocks and other investment sectors, Brexit has not had a detrimental impact on the UK property market.

Why?

  • The UK is currently suffering a housing shortage
  • Housebuilding is significantly below the 300,000 new homes the government outlines is required each year
  • This has not changed
  • Regardless of wider economic concerns, this does not alter this supply and demand imbalance in the UK’s property market

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Indeed, the latest index figures from Halifax show an uplift in price growth in the lead up to the UK’s initial Brexit deadline on March 29th:

  • Nationally, the average property price in the UK rose by 2.8% in the 12 months to February 2019
  • Prices also increased 5.9% month-on-month and 1.8% based on the previous quarter
  • This is the first-time average values have grown on a monthly, quarterly and annual basis for the first time since October 2018

However, growth has been strongest in key regions, such as north-west England, and market experts are advising investors not to make the distinction between poor performance in London and high growth in other UK cities.

Brexit Update: What You Need to Know

On Friday 29th March 2019, the UK was due to leave the European Union (EU). However, at the request of the UK government, the deadline has since been extended on two occasions.

Now, the UK is scheduled to leave the EU on Wednesday 31st October 2019.

  • This extension is designed “only as long as necessary” and will be “no longer than 31 October” to allow for the UK to agree a withdrawal agreement to pass in Parliament
  • Theresa May said the UK would still aim to leave the EU as soon as possible
  • Cross-party talks between the government and Labour are also due to continue in order to try and find a collective agreement that could be passed through Parliament
  • If MPs can pass an agreement through Parliament anytime between now and 31st October (and if approved by the EU), then the UK can leave the EU prior to 31st October

Why Now Is a Good Time for South African Investors to Buy UK Property

Some investors have been, and may still be, waiting until more time has passed post-Brexit before entering the property market.

However, the subsequent fall in the pound against the rand over the last three years since the EU referendum has also led many other South African investors to take advantage of this currency opportunity by buying property now.

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Recent historical data, published by Savills, underlines why it’s investors who are “brave” during these times of wider economic changes that will achieve the highest returns in the long-term:

  • Between 2004 and 2018, it was investors that bought UK property in 2009, amid the fallout of the global financial recession, that achieved the biggest returns when selling their property in 2018
  • On average, those buying UK real estate in 2009 made £93,378 (R1.7 million) when selling their asset last year
  • This underlines the importance of purchasing with the right market conditions – and taking advantage of wider economic uncertainty

“Over the last 15 years it really has made a difference as to when and where you bought in terms of the profits you’ve made. It reinforces that it’s not a one-size-fits-all market. The mortgage markets (in 2009) were locked up, but I also suspect some of this is about whether people were brave enough to do it and whether some people in 2009 had enough accumulated equity at that point to be able to make the move.”

Lucian Cook, Residential Research Director at Savills

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Why South Africans Choose UK Student Property

A British education is considered to be one of the finest by employers around the world – and even with the prospect of Brexit, the demand to study at UK universities is showing few signs of slowing:

  • 36% of A-Level students in the UK applied for higher education courses in 2018 – a new record
  • Applications from outside of the UK increased by 7.6%
  • Over 200,000 18-year-olds and 70,000 international students accepted a place at a UK university for the 2017/18 year, the highest on record

With this world-class reputation for education, demand to study in the UK is predicted to always be high:

  • Both domestic and international students will want to study at British universities, particularly elite Russell Group institutions
  • Even during times of external economic uncertainty, people will still want a higher education
    • Indeed, global employers will demand graduates and skilled workers more than ever
  • It means demand for student accommodation will also remain strong
  • And, when the pound loses value against the dollar, it makes studying in the UK even cheaper for international students

“The (UK student property) sector has also shown itself to be largely ‘recession-proof’, if the economy should begin to falter. During such periods, higher education has traditionally benefited from young people deciding to enter college and university rather than a fragile jobs market. Older workers often look to retrain in new skills.”

KPMG

Indeed, following the 2008 global downturn, UK student property was one of the UK’s best performing assets.

Why?

  • Student numbers at UK universities increased during this time
  • More people looked to attain a higher education to be better qualified when the job market picked up again
  • This, in turn, increased the demand for student accommodation, growing returns for investors

With rising student numbers, particularly from non-EU international territories, it’s fair to assume that demand for student property is likely to remain high after the UK leaves the EU.

In Summary: Why South African Investors are Diversifying with UK Property

With a weakened economy and poor growth projections, investors in South Africa continue to increase their efforts to move their wealth overseas.

Even with the dawn of May’s key election, much work is needed by any new government, meaning it could be years before confidence returns to South Africa’s future economic forecast.

Many have acted by investing their money into the UK property market:

  • An asset renowned for its strength and ability to generate high, long-term returns
  • A significant housing shortage and increasing level of demand is driving property prices and rents

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  • The fall in the value of the pound against the rand following the Brexit vote means its now 18% more affordable for South African-based investors to buy UK property
  • With a track record of growth, even during the 2008 global recession, UK student property is a sector that South African buyers are trusting to deliver long-term stability and security

Select Property Group is returning to South Africa from 29th April to 5th May, meeting new and existing clients in Johannesburg. Do you want to protect your wealth by diversifying with property in the UK? Click here to book an appointment with one of our expert UK property consultants in South Africa and explore your options.

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