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Two sides of offshore property

The pros and cons of listed property and brick-and-mortar real estate

By Mark van Dijk

, |

Two sides of offshore property

The pros and cons of listed property and brick-and-mortar real estate

By Mark van Dijk

, |

3 min read

Investors who’re looking to access the international property market have two main choices: individual, physical properties, or a diversified portfolio with exposure to the real estate market. Which option is best for you?

Property investment in 2021

When the COVID-19 pandemic took the national economy from bad (remember 2019?) to worse (try to forget 2020), South Africans quickly started looking for safe – and preferably offshore – places to invest their money. Global property became an attractive option, even as local housing markets took a nosedive and office blocks around the world emptied out amid the great Work From Home migration.

The property investment conversation soon turned to a choice between investing in upper-case P Property and lower-case p property. On the one hand there are REITs, or real estate investment trusts – companies that own and operate income-producing properties ranging from office blocks to apartment buildings, warehouses, shopping malls, hospitals, hotels, and so on. REITs can be traded on stock exchanges, where (in South Africa at least) they enjoy tax privileges that unlisted property companies don’t.

Then you have actual, physical, brick-and-mortar property investments. These are usually buy-to-let properties like houses or (more commonly) apartments, where the investor is the landlord.

Both options have their attractions.

The benefits of buy-to-let

Speaking about the buy-to-let option, George Radford, MD of property investment company One Global, said in a recent investment webinar: ‘If you invest in international property – and you invest well – over a 10- or 20-year period the returns typically can outperform many other investments.’

One of the benefits of investing in physical property is the hard (foreign) currency rental income you’ll get as a landlord. ‘This is obviously a very attractive proposition for our clients in South Africa and across the Africa region where currencies are extremely volatile,’ Radford said. ‘Having a hard currency income in GBP or euro is very compelling [for those investors].

‘Being able to leverage the property at very low financing costs is a big driver for clients,’ he added. ‘Investing in Germany, we can get 10-year fixed-rate mortgages from as little as 3%, to give you an example, which, compared to local African markets, is obviously incredibly low.’

Then of course there are other advantages, including the fact that you – or your children – have a place to stay if you need to relocate overseas for an extended period.

Diversification through REITs

But, as Yusuf Mowlana, Portfolio Manager at Prudential, pointed out recently, there’s an opportunity cost that comes with sticking all your investment eggs in a single property basket. ‘By forgoing an investment in the listed sector, investors may be missing out on potentially superior opportunities within property sub-asset classes they would not otherwise be able to access on their own,’ he wrote. Properties such as small industrial properties, self-storage, industrial hubs and small retail centres often deliver returns despite the downturn in the local property market.

Add to that the hidden costs of direct offshore property – challenges that any local landlord would easily relate to – and the argument shifts away from buy-to-let properties. Those challenges include ongoing maintenance and repairs, health and safety compliance, fly-by-night tenants, insurance, and so on. When you’re in Joburg and the property is in London or Berlin, much of that hands-on management has to be left to an agent, whom you may never have met.

Still, Mowlana brings balance to the argument by warning of the risks of – to steal a word from investment guru Peter Lynch – ‘diworseification’. ‘It would be better to buy a single, superior-quality property than a portfolio of poor ones, even if they are conveniently packaged in a listed entity,’ he points out.

It’s better to have one great holiday cottage or apartment, or even a bachelor flat close to a good university, than a portfolio of dodgy properties with tenants who may struggle to pay rent.

Call in the experts

Either way, if you’re looking at offshore property – whether it’s a cosy apartment in Portugal or a REIT that manages a portfolio of shopping malls in Poland – all sides agree that you’ll need to consult an expert.

Offshore property comes with a wide range of risks and complexities, and if you don’t speak the language or understand the local laws (or investment environment) you could soon find yourself in trouble.

For the cautious investor, listed property is almost certainly already a part of your investment portfolio; and many South African REITs already have deep interests in overseas properties. But if you’re looking for a little place to retire to, then a brick-and-mortar investment might be the right solution for you.

And, depending on your long-term life plans, the fact that your property is in a European city rather than a South African suburb might only add to the charm.

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