Real Estate Investor Magazine South Africa March 2016 | Page 15

COVER STORY

E

conomic growth is under severe pressure in
South Africa leaving many investors with
limited options in purchasing long-term
investments. 2016 could see South Africa entering
another recession and a ratings downgrade to junk
status as an investment destination is possible.
Stanlib’s chief economist, Kevin Lings says that
“South Africa’s economy is barely growing. While
the country managed 1.3% growth last year, it is set
for 0.5% growth this year and unemployment remains
very high. The consumer held up last year and salaries
rose on average at 7.6% with retail sales growth of
3.3%. 2016 could is looking to be a tough year for the
consumer.”
According to Andrew Rissik, Managing Director
of Sable Forex, the rand does not move in isolation.
“Internationally, there is a lot of uncertainty affecting
how the Rand does against established currencies like
the Pound and the Dollar. In Britain, David Cameron
is trying to persuade fellow conservatives that the
UK should remain in the EU. While in America,
concerns are rising over an election that billionaire
Donald Trump may just snatch” he says.
The effect of this is that more and more local
investors have begun moving their money offshore.
The listed property sector has tended to move closely
in line with bonds as both are income-generating
investments. When interest rates rise, such as they
may in the US in the coming years, bond yields rise
and prices of bonds and property fall.

South Africa’s Investor Exodus

South Africa is currently experiencing a huge exodus
of foreign investors who have seen the plunge in the
rand’s value rapidly eroding their stock and bond
returns.
Africa’s largest economy has sucked in huge
investments in the past two decades, but also has one
of the world’s biggest balance of payments deficits –
over 6 percent of its economy – and depends almost
fully on portfolio capital to plug the gap.
Now a combination of domestic policy fears and
structural problems along with a poor global trade
and investment climate is weighing heavily on the
country’s currency.
South African stocks and bonds have been a
magnet for foreigners who now own a third of the
bond market and up to half the equity free float in
Johannesburg, which is home to multinationals like
SabMiller and Anglo-American and remains close to
record highs. A record 93 billion rand ($10 billion)
www.reimag.co.za

flooded into the country last year, when South Africa
became only the fourth emerging economy to enter
Citi’s key global bond index.
But a ballooning deficit, sluggish 2-3 percent
growth and fears of erratic policy before 2014
elections are weighing heavily on the rand which has
lost 8 percent this year versus the dollar and a fifth of
its value since early-2012.
Investor exits tend to pick up when returns turn
negative and the rand is now perilously near the 9.30
per dollar rate, that analysts at UBS reckon is the
“pain threshold” at which longer-term bond returns
will tip into the red.
“You are seeing rand weakness eating away investors’
returns,” says Manik Narain, who co-authored the
UBS report. He estimates the average rand exchange
rate was 7.70 per dollar over the past four years when
most bond investors entered the market. Cumulative
returns during this time amounted to 20 percent
according to UBS calculations.
“Another 1-2 percent loss on the rand could see
them exit positions altogether,” Narain adds.
Rand weakness also ties the hands of the Reserve
Bank of South Africa (SARB), preventing it from
offering the economy vital monetary stimulus. The
SARB left interest rates on hold this week, noting
the currency’s propensity to “overshoot”.

Important factors to consider when
investing in offshore property
• What is the supply /demand curve for properties
in the jurisdiction?
• How strong is the rental market? Is there a
constant supply of tenants looking for properties?
• How liquid is the market in the event that you
want to sell your investment?
• How does the legal framework protect your
investment while you own the property?

Investing offshore as a South African

The events of the closing months of 2015, and the
volatile political landscape of 2016 have given South
African investors more reasons than ever to move
their money offshore.
Typically, South African investors are taking one
of two routes when moving their money into offshore
property
MARCH 2016 SA Real Estate Investor

13