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Why are the buffalos heading north? – The hidden benefits of investing in UK property

The Telegraph newspaper in the UK recently announced that the ‘British pound is expected to soar’ and that sterling is trading close to a one-year high against the dollar, a result of a more resilient housing market and strengthening economic activity. Ten years ago £1 was R13 and today it is more than R24. South African investors have a prime opportunity to hedge against the rand’s further depreciation and diversify their property investments offshore.

There has been a fair amount of negativity on South Africa in the press recently. The scandal of South Africa’s alleged arms to Russia, the rand hitting a record low, the increase of the interest rates; dare I mention Eskom. Whilst South Africa news headlines report that the “rand sets a record low” and “volatility is seen ahead” the UK headlines paint a different picture. However investors are now spooked, and will continue to exercise caution around South African investments, especially if there continue to be unwise decisions made by the government.

The opportunity

This month I thought it would be helpful to compare the difference between buying a 1 bedroom apartment in the UK to buying a 1 bed apartment on the Atlantic seaboard. I mentioned this comparable to a South African friend of mine and they replied “surely you cannot compare apples to apples because it is not possible to buy a decent one bed in the UK for the equivalent of a one bed here at R2,500,000”.

Let’s compare the two investments:

South African investment

On the Atlantic seaboard you can buy a 1 bedroom apartment for R3,047,500. With a 70% bond, transfer duty and bond costs you are looking at a cash total of R1,361,625.If we look at the bond repayment on the Sea Point flat, which based on today’s rates would be approximately R18,000, and if you are achieving the same rental as the UK apartment, R17,000, then you are in a cash negative.

I moved to Cape Town in 2021 for a 3 month stint from London and I am still here. I love Cape Town, it is the most wonderful place to live (aside from the lack of electricity). This negative news is disappointing for those of us who live here but quality of life is important and that is what we get in Cape Town. That being said, I remember a quote I read by Magnus Heystek, Director and investment strategist for Brenthurst; and I could not agree with him more. ‘ The Cape Town property market is performing well and like the UK there is huge demand for rental property. However, the capital growth on the UK property will be more significant based on the currency play alone.’

“As far as wealth creation is concerned there is nothing better than an asset class that grows in a hard currency when you are living in a soft currency country”

UK investment

In the UK we are selling 1 bed apartments in a beautiful listed building in the north of England, 75 minutes from London. We sold the entry level apartment, priced at £117,500 (R2.8m) so for arguments sake I will compare the Sea Point apartment to an available 1 bed priced at £132,500 which is R3,047,500, the same price as the Sea Point flat. If you took a UK bond at 70% (South Africans can borrow up to 75% from the UK banks, interest only), added the transfer duty (stamp duty tax) at R152,375, the UK legal costs and bond costs, you would be looking at a cash employment of R1,340,900; slightly less than the Sea Point flat.

The fundamental difference being that because South Africans have access to UK bonds which are interest only, your monthly repayments would be R8,204 per month. The UK rental market is pumping and this UK apartment would give you a rent per month of approximately R17,000 (£700). This would cover the bond and the management fees, leaving you with a surplus R8000 per month. (*based on a UK bond rate around 5.25%). In the long run, a house or flat in the UK will not only save your money from inflation, but also generate a significant gain if you decide to sell it.

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