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South African Real Estate Property Lucrative for Overseas Investors

The real estate market in South Africa has been a tumultuous one in recent years. The transition from Apartheid, the dark days of the Global Financial Crisis, and the uncertainty created by the Gupta affair have all caused some tough property downturns.

However, there have also been good times, like the commodity boom of the 2000s. With GDP growth ranging between 4 – 5.5% per year from 2000 to 2007, property owners in hot spots like Cape Town saw the valuation of their homes soar. In one luxury condo building, the value of some units appreciated from a low of 1.5 million Rand in 1998 to 30 million today.

Uncertainty has reigned in the 2010s.

In the current decade, economic conditions and the performance of real estate has been volatile. As mentioned above, this was caused in large part by the policies/corruption of now-deposed President Jacob Zuma, but also by the fall of commodity prices. In particular, iron ore and platinum have fallen dramatically in price since 2013. They now fetch a price that is 40-50% lower – this has curtailed profits, which, in turn, has stifled investment and employment growth.

Meanwhile, the Zuma administration was besieged by the Gupta scandal. Referring to a trio of Indian brothers who had become extremely wealthy in post-Apartheid South Africa, the Guptas used their influence in the 2000s and 2010s to interfere politically with the workings of the South African government.  It was revealed they had intervened personally in the hiring and firing of government ministers, presumably to enhance the profits of their business holdings. Add the pocketing of public funds to the equation, and you have a situation that has eroded the confidence of South Africans in the viability of their country. While Zuma has been deposed in favour of the current President, Cyril Ramaphosa, conditions have yet to improve measurably. In fact, the fallout from the scandals and depressed commodity prices have dragged the South African economy into its first technical recession since the Global Financial Crisis.

Sunny days set to return to the South African real estate market

It’s not all bad news, though. While the performance of real estate in South Africa has been underwhelming in the past decade, corruption in ANC-controlled regions has led to a boom in the Western Cape. Administered by the Democratic Alliance and home to Cape Town (a beta world city), domestic investors looking for stability have flocked to this prosperous and visually stunning province. According to First National Bank (FNB), year-on-year price growth has been in the 8-10% range since 2012, even as growth has flatlined in other South African provinces.  

Yet, it’s impossible to deny reality. Tepid growth is projected for the coming year (1 – 1.5% according to John Loos, property sector strategist for FNB), meaning that domestic demand for homes will likely be soft in the near term.

Paradoxically, though, this is the best time for foreign investors to jump in. With a weakening Rand, historically low-interest rates, and a selection of beautiful properties across the country, a strong case can be made for buying in many markets. In this report, we’ll lay out why investing in South African real estate is a profitable play.

The Rand has weakened considerably in the 2010s

As recently as April 2011, $1 USD would only buy 6.5 South African Rand. As of December 2018, a dollar now gets you 14.2 Rand. In other words, the purchasing power of an American here has more than doubled in seven years. Meanwhile, sellers in SA are between a rock and a hard place. The erosion of their currency’s value plus annualized inflation rates of between 4.5% and 5% have led to a decrease in property values of approximately 2.4%, according to FNB.

A combination of enhanced foreign purchasing power and a heightened sense of desperation among local sellers makes it a great time to buy for savvy investors.

The current downturn won’t last forever

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While the economy may seem lacklustre at the moment, things are expected to get better in the near to medium-term. The shock of the Gupta scandal has passed and Jacob Zuma has been ousted. This means the country is on a more stable footing compared to previous years.

Secondly, let’s not forget that commodity markets are cyclical. Gluts in key sectors like iron ore and precious metals will sort themselves out over the next few years, setting the stage for the next boom cycle.

Where are the best buys in South Africa?

For all its problems, South Africa has some amazing buying opportunities. While growth is slowing in the expensive Cape Town market, it still has affordable yet trendy neighbourhoods like Observatory and Woodstock that are set to explode amid the inaccessibility of pricier suburbs like Camps Bay and Bishopscourt. Outside the Mother City, Garden Route communities like George, Plettenberg Bay, and Mossel Bay are also popular, as are properties on the north coast of KwaZulu-Natal, an area often referred to as South Africa’s Florida due to its tropical climate.

While there are legitimately expensive corners of South Africa, the weakness of the Rand has opened up luxurious neighbourhoods that would be out of reach for buyers elsewhere in the western world. When you realize that you can acquire a four bedroom house for only 2.8 million Rand ($204,100 USD) in Plettenberg Bay, which is one of the most scenic, upscale communities on the Garden Route, it’s not hard to see the amazing deals the weak Rand has created for foreign investors.

How to buy real estate in South Africa as a foreign national: a primer

Let’s get this out of the way first: there are no restrictions on the purchase of real estate by foreigners. The law applies equally to domestic and international buyers alike. Having said that, you will still need to get conveyancing documents signed by a notary public or by officials at a South African embassy or consulate in your home country before a purchase can be completed.

The hardest part of buying in South Africa as a foreigner: the down payment. If you are a non-resident that is not employed in South Africa, you will only be able to borrow 50% of the home’s value. The rest will have to come from your pocket. On top of that, homes bought in new developments will have a VAT of 14% applied to the purchase price, while purchases of pre-owned properties are subject to a transfer duty. This means you’ll have to transfer a considerable sum of money from your home country to South Africa to complete a real estate purchase. However, be aware that moving money using your bank can get costly. Many major banks in the USA, Canada, Australia, and the United Kingdom charge up to 3% margin on ZAR (Rand) transfers.

This can wipe out much of the savings caused by the weakness of the Rand. Thankfully, there is a better way – money transfer companies. For instance, consider that Citibank currently charges a rate of 13.88 Rand per USD. Compared with the interbank rate of 14.17, that’s a 2% difference before transfer fees. Meanwhile, Currencies Direct, a leading online money transfer company, offers an exchange rate of 14.12 for a margin of only 0.3%. Add in the fact that they don’t charge fees and you have a deal that any investor would be foolish to refuse.

The time to buy is now for both domestic and foreign home buyers

Foreign real estate investors are slowly waking up to the fact that South Africa has insanely valuable real estate. Despite economic hard times, fundamentals are lining up for a recovery in prices. Domestic buyers sitting on the sidelines waiting for a surge in prices may find themselves on the outside looking in if they don’t act soon. The real money in a real estate boom is made by those who get in on the ground floor, not by those who buy when OG investors are cashing out. As such, it is our opinion that domestic buyers with the means to purchase real estate should do so within the next 2 to 3 years. After that time, enough investors from America, Canada, the UK, Australia, China, and elsewhere will have caught on, driving prices beyond the reach of many locals.

In other words, act now while you have the chance – you’ll be glad you did.   

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