The relative weakness of sterling against rand, and higher exchange-control limits, suggest this may be a good time to source properties and conclude deals.
According to Broll investment broker David Adams, commercial property capital values in the UK fell by between 40% and 50% from peak to trough in the current cycle. These values then rose in the latter part of 2009 and during the first half of 2010. “It’s estimated that pricing has recovered by 20% to 30% from this position,” Adams says.
Since the UK general election, the amount of activity in the market has reduced and values have stabilised.
“The prospect of rental growth exists in central London and other parts of the UK over the next five years as rents recover following the downturn,” Adams says.
Investors should consider “passive investment” in investment-grade properties with lease structures in excess of 10 years and fully repairing and insuring (FRI) leases. While the availability of debt in the UK is generally restricted to institutional grade investments with strong property fundamentals, the all-in cost of debt, based on a five-year fixed rate, is available at attractive levels of between 4,5% and 5%.
This means that direct commercial property can be acquired for yields significantly above the cost of funding.
Of course, South Africans are not alone in seeking to benefit from this opportunity and, as a result, the supply of stock to market remains relatively constrained.
“The UK’s developed economy and minimal risk is central to it being a sensible diversification destination for South Africans wishing to hedge local investment risk,” says Adams. He points out that the UK has strong and understandable property ownership laws and is easily accessible from a language, travel, time-zone and experience perspective for South Africans — particularly those with family and friends there.
Taking advantage of the recovery cycle might be a smart move for investors — returns will derive largely from net yields available as a result of the positive gap between rental income and the cost of finance, which means capital growth is not all-important. Risk is therefore somewhat reduced.
Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information