Cape Town - Factors like the poor state of the SA economy, the risk of a downgrade by international ratings agencies and the weakening of the rand mean many high net-worth South Africans are considering other ways of investing.
Some are looking at purchasing an offshore property, especially when it comes with citizenship rights from a country with a stronger passport than SA's.
Fin24 asked Sandra Woest, senior manager at Henley & Partners SA, a few related questions on the matter:
Please put the impact of the weakening rand on SA’s investment portfolios in perspective:
For South Africans whose investments are heavily weighted towards South African stocks, the weakening rand, within the context of the damage to the South African economy in recent months, is not a good thing. Significant value was wiped off South African counters and so the value of investments has declined considerably.
For exporters, of course, the decline in value of our currency augurs well for an increase in sales. For this reason, the local investor may want to consider putting some of their funds into the shares of companies with foreign clients. Since South Africa’s manufacturing base is not large, this may be particularly relevant in the services industry – things such as tourism may well benefit.
As for investors looking for offshore investment opportunities, economists predict further declines in the currency, so investors should begin their offshore investing now.
As painful as it may seem to have to buy into foreign assets with a weak rand, there is every chance that your investment will reap returns both from the point of view of normal growth in the markets or in property prices in an environment with greater economic stability, as well as in terms of the likely foreign currency wins as the currencies strengthen against the rand.
We are seeing significant interest in the acquisition of property in countries such as Malta and Cyprus, with the accompanying benefit of an EU passport. Not only does this allow for your children to attend world renowned schools in the EU and not have to apply for work visas, but it also assists with visa-free travel for those needing to expand their business interests into offshore markets, or business acquisitions.
Last year saw some significant acquisitions in commercial property in Cyprus by South African companies, specifically in the retail sector (shopping malls).
What are high net-worth South African investors doing to prevent their portfolios from being eroded?
Investing in stocks in other countries, such as the UK, the USA, and parts of Europe, is a good move because the economies are more stable and the currencies are not hit by such dramatic drops in value as is the case with the rand. An investment in fixed property in a location with a more stable economy is one way of securing your investment – property generally gains in value over time, and you can earn income out of it through renting the property out.
If you are using rands for the purchase of a property, you may take a knock in the conversion of the currency for the purchase, but you will then be able to earn income and sell the property at a later date in the foreign currency and thus make up any perceived loss suffered at the time of purchase.
This will allow you to avoid further knocks from a declining rand. This sort of solution is also attractive for South Africans because, with a purchase such as this, they will be taking funds offshore and they can establish a base of family wealth outside South Africa that could potentially be added to at a later stage.
In some instances, a property purchase may also give one residence or citizenship in another country, as is the case with the purchase of fixed property in Malta, for example. This can be beneficial for ease of mind, mobility and security especially to someone who travels extensively or has business interests offshore or who has children who may wish to be educated and work outside South Africa.
What are some of the alternative ways of investing this group of high net-worth investors are looking at?
Property has always been known to be a stable and secure investment and most of the programmes include the option to invest in real estate. Europe in general is a good place to purchase property and we have seen an increase of 8% in real estate investment in Cyprus in the last year alone.
Malta, being one of the financial hubs of the world, has seen an increase in demand for property. We know that the UK, specifically London as the world business capital, has always been a good real estate investment sphere and Malta is seen, these days, as the newest business capital. A potential rental income is allowed in some countries and in some cases an average of 6% capital growth.
With the weakening rand, this can allow for a better and more secure investment. The citizenship by investment programs require a client to hold the property for three to five years and for the residence programs the property may be sold in some countries as soon as permanent residence has been granted.
Investing in a Caribbean island property, such as Antigua and Barbuda, for as little as $400 000 (about R6.3m) can get a client and his family citizenship in four months and allow them to travel visa-free to 133 countries including the EU and Canada. The property may be sold after five years. The invested amount is much lower compared to the Mauritius programme that gives one residence in Mauritius as long as the property is owned with no real route to citizenship or EU visa-free travel.
Government bonds are also a popular, and in some cases, a required investment. The growth percentage on these bonds isn’t significant though, once again, compared to the weakening Rand still a better investment than in South Africa.
Have you seen an increase in South Africans looking at alternative citizenship options?
Yes, we have seen more than twice the number of queries coming through our offices in 2015 compared to 2014, and the trend looks set to continue with already more than double last year.
Our clients are looking to increase their mobility, not only for travel and business purposes, but for peace of mind and security such as the option to relocate or possibly educate their children overseas. Ninety percent of our clients have no intention of leaving South Africa, although by having a second passport with right of establishment in 28 EU countries, visa-free access to a larger number of destinations that can even include the USA offers our clients the best peace of mind and in most cases their children the best opportunities in the world.
Many of our clients use their annual allowance to invest offshore and acquire a second passport and most of the programs fall within the SA allowed amount.
South Africans are allowed to have dual citizenship, and it has no influence on your tax residence unless you spend more than half your time in another country.
Please put offshore investment in the current South African climate in perspective.
While there have been opportunities for growth in investments in the South African stock exchange in the past, it is becoming increasingly risky to invest locally without also investing offshore. Our economy has experienced volatility and the falling value of the Rand means that investments need to grow both to counter the fall in the currency’s value but also for normal growth – which means that we need a high total growth rate.
This is why South Africans should be looking to invest in other locations – where currencies are less volatile and where the stock markets reflect growth. Property is a class of asset that generally retains its value – or in fact increases over time. Malta, for instance, is one of the eurozone’s better-performing economies, with a growth expectation of over 3% for 2015, and a record of rising property prices in recent years.
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