In 2019 it is reported that personal wealth in South Africa declined by 2%. The decline was attributed to the faltering residential property market and a lack of new business growth. House prices are expected to fall by another 5% this year due to the Coronavirus pandemic. The 2% decline is not adjusted for inflation of 4%, so the real decline was 6% in one year.
Many high net worth individuals have already moved overseas or have secured citizenship by investment. The sentiment is become ever more negative, enquires to emigrate have increased by increased by 70% according to Sable International. With the decline in the number of high net worth individuals comes decreased tax revenues, the number of business closures resulting from the impact of the Coronavirus pandemic, the bailout of poorly-managed state-owned enterprises which thereby increases the personal tax burden of South African citizens will paint a gloomy picture for the residential property market in 2020, and further decline in personal wealth. Is it time for South Africans to hedge their funds by investing overseas?
Over the years, the rand has lost its value to the pound and other currencies. In 2012 it’s at 14:1, in 2016 it crept up to 17:1, in 2017 it was 18.5:1 and now in 2020 it has soared to 24:1. This is due to a number of issues, from the recent pandemic meaning South Africa was unable to trade, to the failure to stamp out corruption in government and state-owned enterprises.
Moody’s also downgraded South Africa’s credit rating to “junk” in March of this year meaning that South Africa will have to pay more in debt servicing costs and have less to spend on infrastructure and social initiatives – two things it desperately needs. The downgrade, by all three rating agencies, decreases inward investment as well as the demand for rand denominated bonds thereby decreasing the value of the rand. The cost of imports rises. This in turn makes the cost of living in South Africa more expensive and thereby decreases people’s standard of living as ever rand they have is able to buy less of the products they enjoy.
One tool at the disposal of the South African Reserve Bank – is to raise interest rates – which is unlikely to happen given the poor growth rate of businesses already teetering at the edge of administration.
Business confidence levels are low; South Africa resource dependent exports will be hampered by global slowdown. Foreign investors have sold R20 billion of South African government bonds in June20 alone. There is a question mark over South Africa’s ability to repay it debt as the budget indicates the balance of payment gaps widening.
Not only are foreign investors moving money out of South Africa, but many South Africans are thinking of leaving… or have left the country. Around 25,000 South Africans emigrate every year, and 1,000 – 2,000 of those are very wealthy and able to buy their way into other countries. Where will this vital tax revenue be replaced by?
Eskom is South Africa’s state-wide power provider but due to corruption in state-owned enterprises there are frequent power cuts which makes it difficult to conduct business. Being a state-wide electricity provider, South Africa cannot afford for it to fail so the burden falls on consumers to provide extra funding. This has meant that tariffs have increased. In fact, between 2007 – 2019 electricity tariffs increased by 446%, whilst inflation was 98%. Based on previous increases, by 2021 the total increase would be 520%. This means that electricity tariffs would have eventually increased 5-fold in fourteen years. Eskom is in considerable debt and consumers will continue to have to shoulder the cost until it is restructured. The likelihood of Eskom being restricted to make it more economical is minimal.
South Africa’s economy depends on exporting its natural resources which has been severely restricted during lockdown. Even if South Africa is willing to export resources, it is not always been the case that countries it trades with have been willing to import them.
The issue of corruption in state-owned enterprises, a poorly performing residential property market combined with the devaluing of the rand, may make it more difficult for people to sell up and move abroad. The high cost of electricity is already eating into the savings of many people and therefore impacting the attractiveness of investing overseas. As we mentioned above, many people have already emigrated to other countries. Some estimates have suggested that South Africa has lost 4,000 HNWIs over the past 10 years which negatively affects how much revenue can be collected through tax. Skilled workers are also emigrating which negatively affects economic output.
The Coronavirus tracker suggests that South Africa is yet to flatten the curve of new cases of Coronavirus. Predictions suggest it will be difficult for economies to operate as usual unless the number of cases has been controlled which may delay South Africa’s economic recovery. The higher end of South Africa’s property market is propped up by foreign investors looking for a second home, and as active Coronavirus cases in South Africa increase we predict buyers will be reticent about moving ahead with a purchase or visiting the country.
South Africa’s property market is almost the mirror opposite of the UK’s. In South Africa, it is a buyer’s market. Supply exceeds demand and buyers are in a better negotiating position. In the United Kingdom, demand almost always exceeds supply. According to research by Heriot-Watt University, England has a backlog of 3.91 million homes. This means that 340,000 new homes need to be built each year until 2031. The government never achieves its target of 300,000 – so the gap keeps widening. The percentage of 25-34-year olds who own their home in the UK plummeted from 67% to 38% since 1991. With a whole generation locked out of ownership, the rental pool for existing homes is bigger than ever. As homes are in scarce supply in the UK, Savills is expecting a quick recovery after the Coronavirus pandemic has subsided. Savills estimates that transactions with recover by 60% – 80% by January 2021 and that the pandemic will have short-lived consequences on the property market. In contrast, predictions are that the property market in South Africa will be suppressed for at least the next 18 – 24 months.
It is a shame that individuals feel their only option is to leave South Africa to pastures new. South Africa is home to some of the most breathtaking landscapes in the world with the Winelands, Table Mountain and God’s Window to name but a few. It also has an attractive climate, averaging 2,500 hours of sun every year and warm, friendly people. Although many South Africans are planning to leave or have left already, that is not the only option open to those wishing to safeguard their savings.
There is action South Africans can take with a rand hedge. Having income generated in a more stable environment could give South Africans an opportunity to travel or live abroad if things get much worse. Those who wish to remain in South Africa will be able to earn more in another currency that they can then use to fund their lifestyle.
There are several good reason why investors are choosing the UK property market in a post-pandemic Brexit world: By 2015, the United Kingdom was the fastest G7 country to economically recover from the 2008 crash. Without the constraints of the EU, the UK can negotiate its own trade deals. The UK government has provided significant support packages to help businesses keep people employed by paying up to 80% of their wages. Easy to arrange bounce back loans of £50,000 are provided with no interest for 12 months and 2.5% thereafter. Businesses are opening at the end of June because the infection gap has flattened. The property portals are showing significant buyer interest and pent up demand for UK Property.
South Africans can choose to keep the money in a UK bank account, earning interest and transferring it back into rand at an optimal time when the exchange rate is high.
With the rand exchange rate already performing poorly against other currencies and projections looking gloomy for it improving anytime soon post-Covid, perhaps now is the time to consider investing in other countries before it gets even worse. For those who are curious how to invest in UK property they could download the useful buy to let property guide which covers everything from the fundamentals, purchase process and potential returns. Take the first step and speak to an UK property investment consultant today. They will share their expert knowledge to help you take a decision with confidence and ease.
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