Sterling returns

My brother, who lives in London, decided to sell his flat earlier this year. He, like many property owners in the United Kingdom, panicked about the fall in property prices. The idea was that he would sell the flat, rent somewhere else for less, build up a deposit and then buy a new flat at a far lower price.
Although he found a buyer fairly quickly he soon discovered that he could not rent for less than he was paying on his now greatly reduced mortgage.

So it was with interest that I attended a presentation by Barnard Jacobs Mellet (BJM) Private Client Services on investment opportunities in commercial property in London. BJM argues there is a once-off opportunity to invest in commercial property in London, partly because the pound is so weak, but mostly because prices have fallen so dramatically (more than 50%) and interest rates have been slashed to historic lows. This means the yield income from commercial London property is now higher than the borrowing costs (interest), whereas the reverse is true in South Africa.

British Capital, the joint venture between BJM Private Clients and property asset management company Cornerstone Asset Management, will buy blue chip commercial property in the greater London area. The fund will focus on warehousing and office space, which it believes it can—with selective buying - find at yields of between 7% and 8%.

British Capital aims to raise £100-million from investors and will finance between 50% and 70% of the properties’ value to enhance capital appreciation. The fund expects to be able to pay investors an annual dividend (paid twice yearly) of between 3% and 5% in pounds. This is before any capital appreciation on the buildings themselves.

There is also the currency play. With the pound depreciating significantly in the past year, it is likely that we will see a recovery in sterling that would add to the rand returns of this investment.

According to Gary Fisher of Cornerstone Asset Management, London has many advantages as a property investment destination. It accounted for 60% of all the EU’s commercial property transactions in 2007. The typical 10-year UK lease length is much longer than the European average so the tenant is locked into the rental agreement for far longer. UK leases also provide for a five-year “upward only” review. This means the rent cannot be negotiated downwards.

In the UK, tenants, not landlords, are responsible for dilapidation, repair and liability insurance and landlords receive net rental income in advance every quarter.

For investors, the risk is that the economic downturn could worsen and London does not see a recovery for the next five years. If this is the case, few investments will be able to deliver. At these prices fixed property is less volatile and risky if you have a five-year view.

Jan van Staden, chief executive of BJM Private Client Services, says the credit crunch has seen many forced sales of properties in London, which has led to the dramatic fall in property prices. At present the rental yields are relatively attractive to the capital value of the property. Average yields are around 6% compared with 4% in 2006.

“From an outsider’s perspective, London property fundamentals today look more favourable than at any time since the early 1990s,” says Van Staden.

The other risk investors need to keep in mind lies in the asset manager’s ability to purchase quality buildings at the right price.

The opportunity in the London market is not exactly a secret and there are reports that many European asset managers are also looking to London as a great property investment opportunity.

The directors at Cornerstone have a track record in property as the former executive team of CBS Property Portfolio and are joined by Liliane Barnard, a well-known property analyst. The team says it is well connected in London and will use these connections to find opportunities before they come to the market.

For investors with £10 000 (R135 000) or more who are looking for income and growth, this could be worth investigating. You don’t have to use your foreign investment allowance because the investment is in the form of an asset swap and all income is repaid in rands.

Salient facts
Minimum investment: £10 000 (about R135 000) invested through an asset swap capability provided by BJM Private Client Services.

Costs: no upfront fee on initial investment. There’s a 1.5% management fee a year, 2% fee on acquisition of property and a performance fee on the sale of the property.

Term of investment: five years with an extension of a further two years if the investors agree.

Targeted return net of costs in pounds: 10% to 12% a year of which 3% to 5% is paid bi-annually as a dividend.

Tax: dividends would be taxed in South Africa as foreign dividends.

Validity: offer closes on August 31 2009.

Help is at hand for debt woes
Financial assistance is critical in South Africa, where about 179 000 people have lost their jobs and many more households are struggling with high levels of debt.

Statistics from the end of December 2008 reveal South Africa has more than 17-million credit-active consumers and 42% of these accounts are recorded as being in arrears.

FNB Credit Card division announced that it is offering internal debt counselling to its customers.

According to FNB’s debt relief statistics, additional customers are applying for debt review. Nearly 60% of the applicants are male. Forty percent of the applicants are between the ages of 30 and 40. More than 60% of the applicants are white and about 40% of them earn between R150 000 and R350 000 a year. This suggests the economic downturn is not hurting only lower-income earners.

The National Credit Act caters only for customers who are already in debt, which leaves other credit users uncertain about how to relieve their financial strain.

  • FNB credit card holders who are struggling with their card repayments are classified as follows:
    customers who are effectively managing their debt
  • ;
  • customers who have lost their jobs or have been retrenched
  • ;
  • customers who are in a debt crisis
  • ; and
  • good customers who are on the verge of a debt crisis if they do not get some relief

Barrett Whiteford, marketing head of FNB Credit Card, says once a customer has been classified he or she is advised to follow one of the following four options before approaching a debt counsellor:

Straight-2-budget: requires moving your total straight balance into your budget facility;

Credit card assist plan: allows consumers to choose a repayment period that is suitable for them;

b: helps consumers construct a budget plan so that more money can be available to improve their credit rating; and

Balance transfer at prime: you can transfer all your outstanding debt (retail debt, short-term loans, personal loans and other credit card debt) into the budget facility of your credit card and pay it off at an interest rate of prime -1% over nine months, after which ruling interest rates will apply.

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