South Africa Property Fund Overview

An increasing number of our readers are interested in spreading, diversifying and reducing their overall risk of direct exposure to certain property markets and one of the most talked about of these markets is the South African real estate sector which offers potentially lucrative returns over the longer term, but which could suffer the slings and arrows of outrageous fortune in the form of short term knocks and destabilising over-reactive behaviour. This article therefore provides a South Africa property fund overview with the angle of a comparison to direct market exposure for our interested readers.

Looking positively at South Africa one can see an emerging nation that is developing tourism, working to reduce crime and poverty levels and actively participating in international economic and political life in a bid to develop a stable nation. It is a country rich in natural assets and beauty, one that has a growing economically advancing middle class, a country where more businesses are establishing operations, where foreign direct investment is quite strong and where there is a very broad demand for property.

Looking more negatively at South Africa from a property investor’s angle one sees a nation where the 40% annual gains that made its residential real estate market world famous are gone, the affordability that drew many overseas buyers has been eroded, a global trend for seeking lesser risk investments is intensifying and ultimately there has been a deterioration in outlook relating to both the inflation and interest rate fronts meaning that more people are nervous of directly entering the property markets in South Africa and exposing their personal capital to an illiquid and volatile asset class.

But as stated – there is a very broad demand for property in South Africa which means that there is potential for a property investor: -

The demand for residential property for sale in South Africa comes from both its white and black citizens who make up the aforementioned affluent middle classes, it comes from tourists seeking property rental, it comes from international businesses looking for short and long term corporate lets, it comes from migrant professionals in the major cities, it comes in part from a strong overseas interest in holiday or retirement homes in South Africa and there is also an incredible demand for basic housing for the poorer citizens of the nation who have a right to accommodation but who are suffering from the fact that there is a large deficit of affordable and state housing.

The demand for commercial property in South Africa encompasses the retail, office and industrial sectors and the sectors’ successes are firmly embedded in the fact that the South African economy is expanding in a constant and currently sustainable way. There is an additional factor that could push up value, cost and yield in the commercial property market and that is the constraints affecting the expansion of the sector. Basically the cost of land in South Africa is rising especially in and around the main commercial arteries of the nation which means that fewer commercial building projects are coming online which will ultimately restrict supply. Additionally the government of South Africa is currently re-zoning and reclassifying land and this could have a negative effect on commercial developers seeking new and affordable sites for development as land for commercial use is likely to be in short supply in the most popular and profitable areas.

So the question is: how can and should an investor tap into this great demand for property in South Africa to achieve gains and yields but at the same time limit direct exposure to negative corrections and fluctuations and overall risk…?

The answer increasingly seems to lie in the form of listed property or property funds in South Africa.

From the real beginnings of the property fund market in South Africa back in 2001 when there were 4 choices for an investor, the number of funds available to investors today has risen to 24, and of the funds available there are a number of fantastic, well researched and managed options that offer great diversification, low entry levels and strong yet seemingly sustainable returns.

The popularity of property funds in South Africa is evident in the findings of the Association of Collective Investments which recently showed that the amount committed directly to real estate funds had risen from 1.3 billion Rand in 2001 to 15.6 billion Rand in 2006 – but ultimately an investor must remember that while listed property will offer him diversification through the fund’s ownership of a broad array of underlying assets, the factors affecting South Africa and its real estate market can still impact property funds.

All of this means that those looking for the lowest risk approach to this potentially lucrative market have to be prepared to commit for the long term and be comfortable riding out short term extremes of movement whether they commit directly or they take a circuitous approach to property investment in South Africa.

House Purchase Process In South Africa

The purchase process for real estate in South Africa is incredibly well regulated and property investors from overseas are even protected in their dealings with estate agents in South Africa as they have to be qualified and registered with the Estate Agents’ Board.

There are currently no significant restrictions applied to non-resident purchasers of real estate in South Africa and this guide details a typical purchase process for overseas investors.

Non-resident purchasers of property in South Africa can either choose to buy real estate directly in their name or through some form of legal holding entity such as a trust or company structure. Some prefer this method of property acquisition for taxation and management purposes as well as asset protection reasons; an individual should discuss their own method of purchasing with the assistance of a South African property specialist or their lawyer.

The methods of property ownership in South Africa are either freehold or leasehold, sectional title and share block. The majority of properties that non-resident purchasers acquire are leasehold as the method of property transfer and the rules relating to the use of that property are far more flexible.

There are specific exchange control rulings in South Africa that detail any restrictions that apply to non-resident purchasers when remitting funds to South Africa or repatriating funds overseas on the resale of real estate. Basically any property investor who remains non-resident can remit and repatriate funds freely; furthermore a non-resident can repatriate any capital gains made after the deduction of any taxation due.

Those foreign buyers who purchase investment property in South Africa and then decide to move to live in South Africa will have their application for residence viewed in light of the fact that they have already invested in property in the country. Once an individual becomes resident in South Africa they may only remit and repatriate funds for five years after which time they fall under the controls of the exchange control restrictions that are imposed on South African residents.

Those who wish to secure finance to purchase investment real estate in South Africa can raise up to 50% of the purchase price locally in South Africa (occasionally lenders will lend up to 75% to non-resident purchasers with whom they have established a working relationship)…naturally enough any mortgage raised in South Africa has to be used to buy real estate in South Africa. Mortgage arrangement fees have to be paid in addition to the purchase price and it is worth securing a provisional mortgage offer before committing to buy any piece of real estate in South Africa as it will make the entire purchase process flow much more quickly.

Once property has been found that matches a property investor’s requirements, and price and condition negotiations have been carried out to the satisfaction of both the investor and the vendor, an official written offer to purchase can be made or a deed of sale signed – either document is legally binding and should be examined carefully by a lawyer before either side signs on the dotted line.

An investor should secure the services of a lawyer to assist with the entire conveyancing and purchase process and they should be on hand to check any contracts and to carry out title and land registry searches and checks. A deposit is usually payable when the preliminary contract is signed and then there is a fixed period written in to the contract until the completion date. During this period it is usual for the lawyer to complete all checks and searches and for the investor to make funds ready for the day of completion.

On the completion date the final monies are payable and the property can effectively be transferred into the property investor’s name. The registration and transfer of the property is handled by the vendor’s conveyancing lawyer, the vendor gives them power of attorney to handle the rather long drawn out and convoluted process of registering the property at the Deeds Office of the Department of Land Affairs in the name of the non-resident investor.

And finally, in terms of extra fees, taxes and charges to be borne by the investor, these include transfer duty which is levied by the government and is a variable rate tax of between 1 and 8% for private ownership or 10% for purchase via a legal entity such as a trust. Transfer costs of between 1 and 2%, mortgage costs, estate agents fees which are normally included in the price and lawyer’s fees which should be negotiated before agreeing their services are also all payable by the property investor

Guide before Investin in South Africa Property

The impressive and substantial annual profits enjoyed by property investors and second homers in South Africa in recent years had a great deal to do with the weakness of the local currency.Yet while the size of recent annual gains may be unsustainable over the long term, the attraction of the South African real estate market remains incredible strong for a number of key reasons.

Firstly, the government of South Africa are well aware that the ongoing strength of their country’s real estate market is critical for South Africa’s economic growth and are open to foreign investment. Secondly, South Africa is a naturally incredibly attractive country for many people for many reasons
creating sustainable overseas interest in property purchase. And thirdly, the long term predictions for the improvement of conditions in South Africa for the local population will slowly lead to domestic demand for property for sale and more quality accommodation to rent.

The political climate in South Africa today is stable and likely to remain so. The economy of the country is considered to be emerging and ‘middle-income’ - at its core is a wealth of natural resources and leading it forward are strong tourism, financial, legal, communications and transport sectors.

For the long term economic success of South Africa, foreign investment is critical. The surge in overseas wealth invested into the country since the property boom began a few years ago alerted the government to the fact that foreign investment into real estate is highly desirable and should be encouraged which makes buying property in South Africa quite a low risk investment decision.

Legally speaking South Africa has a well developed property buyer protection scheme and the best deeds registration system in the world which further reduces an investor’s risk when buying into the market.

In terms of the practical attraction of South Africa - it is a vast land of stunning contrasts offering the home owner, investor, retiree, expatriate or tourist exceptional scenery such as vast wildlife filled land expanses, breathtaking mountains and stunning coastlines as well as vibrant and modern cities, culture, history, fine wine and dining, sporting attractions and activities, unspoilt beaches, great nightlife, peace, quiet and great spring and summer time weather.

Because of the short time difference and reverse seasons between Europe and South Africa it has become a very popular destination for Northern and Western Europeans. Furthermore the year round demand for accommodation to rent from tourists is massive, the demand for second homes is growing and the expatriate retirement population in South Africa has already surged because the cost of living is lower in South Africa than in Europe, property prices are lower, standards of living are high and the country has something to offer everyone.

From a real estate investor’s point of view the timeless attraction of the country for so many people on so many levels means that there will always be demand for rental or resale property. Over the much longer term for those who like to speculate, South Africa is trying to shore up its economy, tackle unemployment and poverty and generate intrinsic wealth for its citizens. This will gradually lead to an increase in purchasing power for the majority which in time will create more domestic demand countrywide for property to rent and buy and broaden the market that an investor can target making South Africa a great bet for property investment on so many fundamental levels

South Africa Property Investment Potential

The property investment potential in South Africa is substantial with government investment incentives existing for real estate developers in the country’s major cities, taxation breaks available for investors and demand for property to rent and buy in South Africa increasing from overseas and domestic citizens. Property investors already in the market have benefited from an impressive period of growth boosted in part by the disparity between the South African Rand and major first world currencies but also because now that South Africa is economically and politically stable it is an incredibly popular country to visit, retire to and purchase property in

This demand for property for sale in South Africa from overseas purchasers underpins the real estate market currently and property investors seeking the best potential gains in South Africa may like to consider catering to this audience. Demand for gated, private communities including retirement communities is strong in South Africa with mainly British and German buyers and the most popular developments are around Cape Town and along the Western Cape.

Investors could consider buying such properties off plan and reselling upon completion to waiting buyers or even purchasing parcels of well appointed land for later division and re-sale to private buyers or for sale complete to developers. Such land resells for greater profits in the short term when planning permission has been granted and a number of investors buy land without permission and their investment consists of making successful application for planning permission and then reselling at a premium. Such speculative land purchase is not prohibited in South Africa.

Property developers looking at the potential in South Africa are afforded various government investment incentives for the creation of retail, commercial and residential properties in South Africa’s 16 major cities. These include a 20% taxation reduction on income derived from a completed development for five years as well as a good rate of depreciation to further reduce the effective taxation rate payable.

Property investors in South Africa who purchase renovation properties in the country’s 16 major cities also receive welcome taxation breaks and an investor could purchase run down residential units, renovate them and then get a 20% tax break on rental income earned from the renovated property for five years, enjoy five year’s capital appreciation and then resell for profit when the taxation breaks come to an end.

For smaller investors seeking a single property for sale in South Africa there is the chance to target European holiday makers seeking properties to let during the South African spring and summer period. Properties most popular with overseas tourists are villas with private pools in secure compounds or communities. These properties rent well and attract the highest yields...they are also the easiest type of property in South Africa to resell and attract the strongest rates of capital appreciation making them a great investment vehicle.

In terms of the most favoured location in South Africa for property investment these depend entirely on what the real estate investor is hoping to achieve from his investment. For example, commercial properties in the country’s main cities are massively in demand, cheap residential housing in and around major towns and cities are in demand from the domestic market and foreign investors, holiday makers, retirees, expatriates and holiday home hunters favour properties in Cape Town, the Western Cape and the Garden Route, and finally the Eastern Cape offers far excellent value for money and is being heralded the next strong real estate market to emerge in South Africa. Therefore in South Africa property investment potential is massive and diverse.

South Africa Mortgage Market

General Home Loan Information

The normal term of a home loan is 20 years, you can opt for a 25 to 30 year home loan, but it is not advisable as you will pay a lot more in interest charges. The only real advantage is that, it does reduce your monthly installments considerably, making it easier for you to get into the property market.

As a single person, the bank will grant you a home loan at a monthly installment of 25% of your gross income, and 30% of your joint income.

Example : Single - Gross Income - R 10000.00 - your monthly installment must not exceed R 2500.00 month.

Joint - you and your spouse -Gross Income - R 15000.00 - your monthly installment shouldn't exceed R 4500.00 a month.

Almost all the major banks in South Africa offer calculators where you can calculate your mortgage payment and some even offer calculators to see how much you can afford. We suggest you use them to work out what you can afford, before submitting your online application.

ABSA Home Loan Calculators

Estimated Building Replacement Cost Calculator
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Increasing your Installments
Making a Lump Sum Deposit
Take Up a New Home Loan with Absa
Transfering my Home Loan to Absa
Maximum Home Loan Calculator

Nedbank Home Loan Calculator

Bond Repayment Calculator
Nedbank Accelerated Payments

First National Bank Calculators

HomeLoan Affordability Indicator

Standard Bank Calculators

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