Britain’s cheap – but is it worth buying?
SA bricks and mortar may be a safer bet for now
THE STRONG RAND, coupled to tentative signs that global real estate has turned the corner and trading at what appears to be dirt-cheap levels in many countries, makes a compelling case for South African investors to diversify their property portfolios offshore. However, if you expect super returns from international bricks and mortar investments over the next few years, you’re likely to be sorely disappointed. That was a key message from a number of speakers at an offshore property seminar held last week in Johannesburg and Cape Town hosted by Sanlam Private Investments (SPI), in association with Finweek and Gas Properties.
The British commercial property market – currently being targeted in a big way by international investors, including many opportunistic or so-called vulture funds from SA – appears to be in for a particularly bumpy ride. “In Britain, commercial property values are down 45% from 2007 peaks – but that doesn’t mean values will rise again by 45%,’’ said Anthony Rosenthal, director of British-based property investment firm Taviton.
Rosenthal noted there’s still concern about the health of Corporate Britain. Retail property is probably worse off than the office and industrial sectors, with another 15 to 20 British retailers expected to go into administration over the next three months. Said Rosenthal: “Over the short term Britain’s property investment market won’t be about shooting out the lights but rather about mitigating the risks.’’
Lukas Nakos, MD of British-based real estate fund management company Salt Group, held a similar view. The high cost of finance in Britain, coupled to ongoing bank liquidity issues, make capital growth on property investments highly unlikely. “Our forecast doesn’t assume any capital growth for British commercial property investments for the next five years.”
Nakos said British commercial property investors should also not expect rental growth over the next few years. “The focus is now squarely on securing income streams in prime buildings backed by long leases and strong tenants.”
Marco Rapaglia, director at Athanor, a joint venture company with Pam Golding Properties that sources commercial property investments in Britain for SA investors, said Britain’s commercial landlords aren’t only facing falling rentals but in some cases no rental income at all. He told delegates it wasn’t unusual for commercial landlords to give tenants two to three year rent-free periods just to fill empty buildings.
Alwyn van der Merwe, director of investments at SPI, said SA investors need to carefully weigh risk/return issues before taking the offshore plunge. And he wasn’t convinced SA investors will necessarily make more money offshore than in their own back yard. Van der Merwe said over the past 10 years, most SA asset classes outperformed their offshore counterparts in rand terms. For example, while the SAlisted property index was up an average 23%/year over the past decade, an investment in British shopping centre owner Liberty International delivered a return of just 2,2%/year. Similarly, SA equities were up 18%/year while returns on London’s FTSE were flat.
Latest figures from Cape-based Catalyst Fund Managers support the view local property stocks are generally delivering better rand returns to investors than listed property overseas.
Catalyst’s October overview on global listed property reports investors have earned a total return of 9,63% on local property stocks (SA-listed property index) in the year to date (January to October), compared to a total return of only 2,41% from global property stocks, as measured by the UBS global investors’ index over the period. The latter comprises listed real estate markets in the United States, Britain, Europe, Asia and Australia.