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56 | SOUTH AFRICA MARKET REVIEW WORDS | Francine Carrel


www.opp-connect.com |MAY 2013


Back in business? S


outh Africa is a tempting prospect for many lifestyle investors (providing one stays in the safer


cities or gated communities). It has a temperate climate, 3,500km of coastline, 21 National parks and a huge range of ‘adventure’-type activities available; from shark-diving to wine tasting.


So far South Africa’s property market has had its shares of ups and downs. During the most recent housing


boom in the country (from 2000 to 2006), house prices soared – achieving an average rise of 20% a year. As is so often the case, a larger and stronger middle class (in this case, bolstered by a new generation of fi nancially stable, black South Africans) was one of the main driving forces behind what would turn out to be a bubble. Post-Apartheid, security and


stability across the country helped to strengthen the economy. South Africans who had cash stored offshore during the Apartheid were required to bring it back into the country by September 2004. A lot of this money went quickly into real estate. Last but certainly not least, the Financial Sector Charter (introduced in 2003), gave a big boost to mortgage loan growth, the benefi ts of which still linger. ZAR 42 billion (USD 5.45 million) was committed to the low income market in the form of housing fi nance. Transfer duties on properties was also lowered – one big part of this was the change that meant no transfer duty is payable on properties valued at ZAR 500,000 (USD 63,500). The boom peaked in October 2004, recording an annual growth of 35.7%. As I’m sure you know, though, this


wasn’t to last – the global fi nancial crisis in 2008 put an end to the astounding growth in South Africa’s real estate market. Economic woes and confi dence crises caused by corruption and a worrying political situation meant that the market looked dismal. According to www. globalpropertyguide.com: • In 2008, house prices fell by 0.5% (-9% in real terms) • In 2009, the property market remained


depressed, with house prices rising by a meagre 0.3% (-5.4% in real terms)


• In 2010, house prices increased by


2.3% (-1.1% in real terms), encouraged by South Africa hosting the 19th FIFA World Cup • In 2011, house prices rose by just 1% (-5% in real terms), due to lower economic growth, rising infl ation, and political corruption concerns Looking back decades, the value of


real estate took two major and similar blows – a slump after 1981 following massive growth and, as mentioned, the same after the boom in 2004. These instances, though 23 years apart, highlight the cyclical nature that is common in real estate markets – and give current experts reason to believe that a real recovery is forthcoming, albeit slowly.


Foreign investment


It is currently pretty easy for a foreigner to buy real estate in South Africa. ‘Legal aliens’ can apply for loans of up to 50% of the purchase price and foreigners can own and register a mortgage on immovable property in the country without restrictions. However, the property must be


endorsed “non-resident” and all foreign funds must be declared and documented.


“Investment: It is currently pretty easy for a foreigner to buy real estate in South Africa”


The market is largely dominated by a relative few, trusted estate agents and the property registration system is lauded as one of the most secure in the world.


Construction Industry fi gures suggest that the construction sector in South Africa will be steady in coming years. Construction works will probably


drop from historic highs, despite government promises of huge new investments into infrastructure (ZAR 827 billion over the next three years), due to the completion of some huge projects, including new airports and stadiums. Other negative effects may come from an expected raise in interest


‘07 ‘08


Nominal Real


‘09 ‘10


South Africa is the biggest economy in Africa. It is also a country in recovery. In Q4 2012, the economy recorded a real GDP growth of 2.1%, up from 1.2% the previous quarter, according to Statistics SA. However, overall growth was down 1% year-on-year – from 3.5% in 2011 to 2.5% at the end of 2012.


House Price Change, Annual (%)


30 25 20 15 10 05 00 -5


-10 -15


‘11 ‘12 ‘13


Source: ABSA


rates in 2015, according to data from the South African Reserve Bank. Nevertheless, BMI Building Research Strategy Consulting Unit have forecasted a 34.7% rise in gross fi xed-capital formation (GFCF) for construction, and 26.95% for total building and construction GFCF from 2012 to 2020 – though Llewellyn Lewis, principal consultant at the fi rm, has suggested the near future will be “volatile, uncertain, complex and ambiguous”.


REITs


The National Treasury published REIT (Real Estate Investment Trust) tax legislation for South Africa in October of last year. This will come into effect on 1 May 2013, after six years in the pipeline.


It is one of the most fl exible REIT


regimes globally – and an important development for the country’s real estate sector. REITs own and operate income-


producing commercial property. Over 25 countries already use a similar REIT, including Australia, Hong Kong, Singapore and the UK. “Because the SA REIT dispensation


provides many benefi ts, the foremost of which is tax certainty, it is likely that all qualifying South African listed property entities will make


application to the JSE to become a REIT,” Estienne De Klerk, Chairman of the SA REIT Association Committee and Executive Director of Growthpoint Properties, told SACommercialPropNews. A REIT in South Africa must own at least ZAR 300 million (USD 33.4 million) and earn 75% of its income from rental, property owned or investment income from indirect property ownership. It must pay at least 75% of taxable earnings to its investors. The new tax rules mean that a South


African REIT can fi le all cash paid to shareholders or linked unit holders as expenses – meaning that if a REIT pays all its distributable earnings to shareholders, it won’t have to pay tax. According to Estienne de Klerk,


chairman of the Property Loan Stock Association’s REIT Committee and executive director of Growthpoint Properties, the tax advantages of the new structure will also make the listed property sector much more attractive to foreign investors. Investors will no longer have to pay securities transfer tax on listed REITs.


For foreign shareholders, a dividend


withholding tax will be applicable after 1 January 2014. The current rate is 15% or the applicable double tax agreement rate could apply.


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