How South African Investors Can Secure Retirement Through UK Property
There’s no denying that one of the major catalysts for investing is retirement. As pensions decrease in value and the cost of living increases, property can often be a more attractive alternative for South African investors looking to the future and planning their later life.
According to a survey by Just SA, a specialist retirement income company, the average South African (SA) has just R1.8 million in savings as a retirement pension with the expectation of receiving R12,000 a month as income. The reality is that their capital is 22% short of the amount they would need to achieve their financial goals at current annuity rates.
“South Africans’ expectations of what their retirement income will be, based on current savings and returns, will not be realised, says Bjorn Ladewig, longevity actuary at Just SA.
“There is a major gap between expectation and reality.”
South African Investing Habits
In current market conditions, the expectation of a monthly retirement income of R12,000 implies an annual income rate of 8% based on their average retirement savings total of R1.8 million. In reality, it’s more likely that the annual annuity income rate will be around 6.5%. This means that SA retirees need 22% more in savings to reach a retirement nest egg of R2.2 million that will give them their guaranteed annuity.
Increasingly, many retirees are also underestimating how long their retirement period will last. Planning for around 20 years will often result in running out of money, especially when the average South African at a retirement age of 65 has a 50% chance of living beyond 83 (men) and 87 (women) respectively.
This is why investments that can supplement a pension are important for securing finances in later life. In markets across the world, investors are realising the power that property can have, delivering rental income that can bolster a pension or even single-handedly create a nest egg for retirement.
So why not invest in South Africa?
Currently, SA investors are experiencing an underwhelming economy and thus, an under-performing investment market. Driven by ‘intense economic stress’, South African investors are realising that looking overseas for investments can help them stretch the value of their money, especially in markets such as the UK where a weakened currency can provide so-called ‘discounts’.
Prior to 2016, 86% of SA investors cited investments in the UK – a figure which only dropped to 82% after the Brexit vote. Despite the uncertainty of such a large-scale political event, SA investors have even seen Brexit as an opportunity to get a foothold in the market, with around seven-in-ten citing Brexit as the catalyst for investing in the UK.
Choosing UK Buy-to-Let Investment
The UK Buy-to-Let sector is a huge market worth over £1 trillion and represents the chance for South African investors to invest in a sector with unprecedented potential. Forecasting a need for 300,000 new homes to meet demand as of Q4 2018, research also estimates that UK renters will outnumber homeowners by 2039 – demonstrating the strength of the BTL market as a whole.
It’s this imbalance in supply and demand that is having the most impact on the market, demonstrating the clear lack of residential property to meet a young and growing demand. These are favourable conditions if you own an investment property, particularly in an emerging market or an established area experiencing regeneration.
Continued growth and redevelopment is creating prime investment locations up and down the country – eschewing the traditional London market for cities such as Birmingham and Manchester. Offering consistent returns and the potential for long-term growth, it’s the income from these investments that can be maximised and reinvested – eventually resulting in passive income that can supplement a pension.
Achieving average rental yields of 4.8%, with the potential for higher in over-performing areas, the UK property market is an appealing prospect for a South African investor looking to secure their retirement. An emergence of ‘ready-made’ investments is making this even more enticing, with pre-let, fully-furnished properties offering the potential for immediate returns and a ‘hassle-free’ investment experience.
Wait to Invest or Invest and Wait?
So what does this mean for South African investors? Should they be looking to capitalise or waiting to see a more concrete outcome on Brexit? Ideally, with the UK market in the state it is – witnessing low-interest rates on borrowing, chronic under-supply and positive forecasts – South African investors should look to get in now as the opportunity will become weaker once market uncertainty subsides.. As with any investment, the earlier it’s made and the longer it has to perform, the higher the potential returns.
Consider the following – data by the Schwab Center for Financial Research shows that between 1926 and 2011, an investment with a 20-year holding pattern never produced a negative result. This highlights the power of a long-term investment strategy – typically much more beneficial as they allow for higher growth and compounding.
Steven Nathan, founder and CEO of 10X Investments in South Africa, believes that a lack of long-term thinking is having a huge effect: “Because we’re in an uncertain, negative environment, ordinary South Africans are blinded by short-termism. From an investment point of view this is concerning, as people aren’t actively creating long-term wealth.”
With the wider UK market in mind, if the overall aim of the investment is to build solid returns over a long period of time, there’s no doubt that now is the time to invest. The bigger regional cores such as the Midlands and the North are benefitting from wide-reaching government plans that are making regional cities much more attractive as an investment location, while the London Commuter Belt continues to take in renters from the capital seeking affordability.
Both of these options currently represent a much more affordable market than London and are only forecast to improve. For South African investors, there’s a golden opportunity to not only beat the competition but get more for their money due to a weaker Sterling.