Numerous converging factors make South Africa a particularly challenging environment for investors at present. Whether it's equities or property, returns from local markets have been hard to come by in recent years.
“In terms of property, the sector is struggling under the impact of low economic growth, an upward interest rate cycle and a lack of certainty. These market dynamics aren't conducive to long-term tenant tenures and the resultant income stability this provides,” explains Darryl Mayers, Joint-CEO of the Investec Property Fund.
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Investors have increasingly looked offshore for growth and inflation-beating returns, with property delivering strong performances.
While investors must consider the liquidity loss when investing in property over 10- or 20-year terms, Mayers believes this asset class is a solid foundation on which to build a diversified offshore investment portfolio. “Property investors who take a long-term view generally beat the market over time,” he says.
It seems investors are adopting the 'wait and see' approach, but in this case, it may be worth considering Winston Churchill's view to 'never let a good crisis go to waste.
“Never let a good crisis go to waste”
It is also worth noting that global markets are also experiencing volatility and challenges at present, but there are significant opportunities, even in troubled markets like the United Kingdom.
“Brexit's impact on markets has been interesting. While property stocks and funds are trading at up to a 50% discounts to NAV, UK properties are holding their value and are still selling at book value,” explains Joint-CEO of the Investec Property Fund, Andrew Wooler.
Wooler explains that this disconnect exists because equity markets respond much quicker to political risk, sentiment and interventions than physical assets. “Shifts in underlying property prices move more slowly, which has generally insulated this segment of property investors from the Brexit fallout. This means buying property is often a sensible investment amid market volatility.”
However, there seems to be a lack of activity in the UK market, says Mayers. “It seems investors are adopting the 'wait and see' approach, but in this case, it may be worth considering Winston Churchill’s view to ‘never let a good crisis go to waste’.”
Local knowledge is key
The key to success in a market such as the UK is making the right offshore property investment decision, which is predicated on a number of factors. “The prevailing macro-economic factors are enough to scare even the most astute investor, but making the right decisions comes down to having feet on the ground,” adds Wooler.
He believes that investors can still extract real value and deliver fantastic returns if the local investment management team knows what they are doing and knows where to put investors' money to work.
“The prevailing macro-economic factors are enough to scare even the most astute investor, but making the right decisions comes down to having feet on the ground."
“Moving into international markets where you don't know what's going on can be dangerous because no one seems to speak English when things go wrong. In this regard, while we are opportunistic, we remain conservative in our approach. That's why we carefully vet the teams with whom we choose to partner.”
The prevailing macro-economic factors are enough to scare even the most astute investor, but making the right decisions comes down to having feet on the ground.
Where are the opportunities?
With this approach, Investec Property believes there are opportunities across both Europe and the US. “Despite Brexit, signs of economic cracks in the US and Germany, and concerns around contagion across Europe, individual countries and specific sectors within various economies present attractive investment options,” continues Wooler.
In Germany, for instance, returns from commercial, office and residential properties around transport hubs in major centres continue to outstrip those from other property types. “Access to mobility is a prolific driver of value in European markets,” explains Wooler. Student accommodation is another standout performer, he adds.
“Painting entire regions with the same macro-outlook brush will result in missed opportunities.”
More broadly, the growth of e-commerce across the continent has also driven the demand for decentralised light industrial warehousing and logistics facilities as Europe catches up with the US market.
And in the US, where the Fed's interest rate cycle has normalised and the potential for future rate cuts now exists, Wooler sees additional opportunities. “In this environment, investors need revenue growth to come through the property system to offset cap rate yields. However, we're always hesitant to take long-term positions based on short-term movements in interest rates.”
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To offset any drop in property valuation in terms of cap rates, Mayers believes that multi-factor property investments, where the asset value is complemented by unique operational competencies, offers great potential.
“Extended stay accommodation that can compete with disruptive platform services like AirBnB, and assisted-living facilities all offer robust income streams and a quality offering, which should make these investments more resilient in the dynamic global market environment,” adds Mayers.
From location to new local property trends, taking into consideration the individual circumstances of offshore properties is important, says Wooler. “Painting entire regions with the same macro-outlook brush will result in missed opportunities.”