Do the benefits outweigh the risks?
OFFSHORE REAL estate investment—the practice of investing in properties outside of the country—is becoming increasingly popular amongst the uber wealthy in South Africa, with buyers looking to cash-in on foreign markets that offer higher returns. This can be done in a number of ways, from buying an entire home overseas, to purchasing shares in an offshore Real Estate Investment Trust (REIT), to investing in a foreign property development.
While many have already cashed in on the semigration trend, they’re now looking to diversify and reduce risk by investing in foreign real estate. Investing in foreign real estate is a great way to build your offshore wealth portfolio, that also offers diversification and protection from the volatility of the local property market.
Unpacking the upper end of the homebuyers in the residential property market, buyers purchasing properties of over R3-million are generally classed as weal-thy in South Africa. However, this particular pocket of investors has far more disposable income, and are relatively immune to the economic pressures facing most South Africans.
South Africa is also a relatively small market. Allan Gray’s recent findings indicate that South Africa comprises about 0.3% of the world’s market capitalisation, and that investors who ignore the other 99.7% and fail to diversify do so to their detriment.
Accordingly, many asset managers recommend 45% offshore exposure—a percentage that diversifies your portfolio, while still mitigating the risk that comes with offshore exposure. For those thinking of getting their foot on the foreign investor ladder, an outline of the top three benefits of offshore real estate investment is as follows:
- Currency hedging: Buying property in a country with a strong currency offers some protection from rand depreciation, especially if it is purchased as a buy-to-let. A steady stream of rental income in a stronger foreign currency is an effective way to build wealth, and is an asset that can be passed down to future generations.
- A diversified portfolio: South Africa’s residential property market is limited in scope, and highly influenced by interest rate fluctuations. Investing offshore can allow you to take advantage of emerging markets that offer the potential for strong capital growth.
- A path to citizenship: Some countries offer programmes that enable foreign investors to claim citizenship or residency rights by making a significant investment in the country’s economy, which can include real estate investments.
Offshore real estate hotspots
While the rand remains a relatively weak currency in comparison to the euro, British pound, or US dollar, there are still several foreign real estate markets where market conditions are conducive for South African investors to achieve significant returns on their investments.
Countries like Malta, Greece, Portugal, Spain, and Mauritius offer tax incentives for foreign property investments, as well as a path to permanent residency for investors with that goal in mind.
It’s worth noting that following Only Realty Property Group’s expansion into Mauritius and Portugal, most of our clientele in these countries have been South African buyers, illustrating the high local demand for offshore real estate investment opportunities.
Mauritius has become increasingly popular with South African investors due to its relative proximity, lifestyle benefits, and the numerous tax advantages avai-lable to residents.
A permanent residency permit can be obtained by buying into an approved Mauritian property development scheme, as governed by the country’s Economic Development Board—and, unlike in South Africa, residents of Mauritius are not required to pay dividend tax, withholding tax on interest and dividends, Capital Gains Tax, nor rates and taxes on a property.
For those interested in pursuing offshore real estate investment as a path to obtaining European residency, Portugal, Spain, Greece, and Malta all offer ‘Gol-den Visa Programs’ as an incentive for investment in the local real estate market.
The buy-in costs for the program range from €150 000 to €500 000, with Malta’s Golden Visa program coming in as the most affordable at €150 000 (just under R3 million). For the cost of a luxury home in South Africa, local offshore property investors can fast-track their path to obtaining European permanent residency, which brings a host of economic and social benefits.
Tips for offshore property investing
However, while offshore real estate investing can be hugely advantageous from both a wealth and lifestyle perspective, this practice comes with its own set of risks and challenges.
It’s crucial to do your due diligence before embarking on an offshore real estate investment journey—including researching market conditions, local laws and regulations and taxation implications. Understanding the dynamics that govern the country you plan to invest in is crucial for making informed decisions.
To maximise the success of this investment strategy, here are some top tips for would-be offshore investors:
- Conduct a risk assessment: This should include strategies to protect against currency fluctuations, legal and regulatory uncertainties, geopolitical instability, and market volatility.
- Draw up a comprehensive financial plan: Start with your long-term investment objectives, and factor in your budget and options for obtaining funding. Be sure to take property taxes, legal fees, maintenance costs, and currency conversion fees into consideration to see if this strategy will be financially viable.
- Understand the tax issues: Don’t forget to consider the tax implications of an offshore property investment for both the foreign country, and in South Africa.
- Ensure legal compliance: Research the local laws governing property ownership, leasing, and investment trans-actions in the host country to ensure that all activities are above board.
Above all, the importance of consulting with professionals throughout this process cannot be sufficiently stressed, due to its complexity and significant legal and financial implications.
Don’t try and go at this alone, at the risk of making a costly mistake. Talk to your asset manager, lawyer, and a real estate professional in the country you plan to invest in to ensure that this exciting and profitable opportunity is set up for success.
Grant Smee, managing director of Only Realty Property Group.