Real Estate Investor Magazine November 2013

BY JONATHAN SMITH INVESTMENT IN FIXED PROPERTY CAN BE FOR R VARIOUS MOTIVES, INCLUDING: Your Mind Map Personal occupation and use Site assembly Demolition and reconstruction Income return (that is, purely for the income stream that is derived from one Pick the best investment for you CASH month to another from the investment) Capital return (that is, for the dierence between the purchase price and the sale price of a property) Risk diversication (that is, to allow the investor to spread his or her invested The return which investors who place their monies between two or more investment opportunities) money in the bank or the money market receive is termed interest. Interest returns are largely dependent upon PROPERTY START money from the public and the central bank as the rate at which commercial banks borrow HERE well the amount invested. Investment in xed property, whether via direct holdings or indirect That is, as the amount invested increases, so the interest rate earned will increase. holdings, is the fourth investment alternative within an economy. THERE ARE THREE FACTORS THAT So if you invest R50 in the money market at a Direct investment is less tradable than indirect investment, return of 8% per annum, at the end of 12 as will become apparent later. MOTIVATE THE INVESTOR TO MAKE AN Investment should always be understood as the foregoing of an amount of months you will have R54. If you leave that R54 INVESTMENT IN INCOME-PRODUCING FIXED PROPERTY money so as to earn a potential future return thereon from the proposed in the money market account, at the end of a investment. This means that investors within a business opportunity – including further 12 months, you will have R58,32. So property investors – allocate their cash resources (from equity and debt) towards THE AIM OF such investment opportunity in an eort to receive a future benet, which, over a you have gained 32c on your investment from the PROPERTY INVESTMENT period, is anticipated to be higher than the original outlay. interest the previous year, as well as R8 RISK DIVERSIFICATION over the last two years. Thirdly, investors hold commercial NET INCOME property to achieve diversication. 4 TYPES OF INVESTMENT Firstly, there is the net income to be Diversication results in lower risk bonds, including treasury bills made from rent collections after across a portfolio of investments. cash holdings operating costs have been paid. equities (via the stock exchange or privately owned) RENTAL INCOME property. The return that investors in xed property hope to achieve is termed CAPITAL GAIN BONDS rental income. Secondly, there is the capital gain to made from the increase in value which a commercial property achieves in an CAPITAL APPRECIATION inationary environment. Bonds are long-term debt instruments used by business and government to raise The additional value, net of ination, If the credit standing of the ultimate payer large sums of money, generally from a diverse group of lenders. Typically, a which accrues to a property during the of a bond is considered intrinsically sound, bond will have a stated (semi-annual) coupon interest rate and an initial the anticipated payout of the bond is holding period, is termed capital value maturity of from 10 to 30 years at which time the par (or face) value of the FINANCIAL LEVERAGE appreciation. considered to be risk-free. In South Africa, bond must be paid to whoever is holding the If the rate of return on a property one of our risk-free bonds is the RSA 186. bond at the maturity date. exceeds the cost of nancing the The contemporary rate that a risk-free bond property, it is probable that the pays represents the risk free rate used to nancial leverage that can be discount future earnings to a present value obtained through ownership The challenge which investors in the and adjusts periodically in accordance with will be benecial. share market face is that the directors market sentiment as to future INFLATION HEDGE of the company into which they have ination and business risk. Provided one can ensure that the invested their money manage A bond is a long-term loan, which the initial rental income and capital appreciation their funds. bondholder makes to the issuer for which the exceeds the ination rate during the bondholder receives a bond certicate. The bond investment period, investment in certicate is a promise to pay periodic interest at the property can act as a method of coupon rate as well as the loan value (par value) of reducing ination-related the bond to the bondholder at a point in the distant SECURITY value erosion. future. The initial bondholder – as well as several Because the use of property is EXAMPLE bondholders thereafter – will trade their certicates fundamental to modern society, it is An example, if you bought shares in Facebook (often termed “paper”) by selling their right to the regarded as a secure investment, in 2012 and they cost you R10 per share, and you future interest income for a discounted, up-front provided that the risks associated with bought 10% of the shares, you will receive a payment balloon amount. The subsequent bondholder then the ownership of property can be at the end of nancial year based upon how many becomes entitled to the cash benets of the bond successfully mitigated. shares you bought and how well the company until (s)he on-sells the bond to another person for a did nancially. Your shares can also become more further discounted, up-front balloon amount. valuable, so if you decide to sell you can make a prot. EQUITIES(SHARES) If in 2012 your shares were worth R10 and you had 100, and in 2013 those same shares were worth R15, The purchase of shares in a private or public or public listed company then when you sell, you will get R1500, but you means paying one’s money into a company in return for the right to rst invested R1000, so you have receive a dividend, which dividend is normally dependent upon RESOURCES made a R500 prot. the success of the company so invested in. Courtwell Consulting

SMART MOVES BY IAN ANDERSON Despite The Tough Economy Listed still delivers results hare prices in South Africa’s listed property Distribution growth bottomed out in the teams. By doing so, staf overheads can grow sector have declined by about 15% since second quarter of 2013 at approximately 5.3%, at rates substantially below that of the rental SMay. The sharp decline was sparked by but has since accelerated to 6.8%. Te prognosis revenue in an ever-expanding property fears that the US Federal Reserve (Fed) would for 2014 and 2015 suggests further acceleration portfolio, allowing for proft margin expansion ‘taper’ its bond purchase programme. in distribution growth rates towards 8%. Listed and operating leverage. property thus ofers investors a current income The threat of reduced bond purchases sent yield of more than 7% AND growth in that South Africa’s listed property sector has US Treasury yields soaring and placed upward income of between 7% and 8% per year. been able to attract highly-skilled and talented pressure on bond yields throughout the world. Te property managers and asset managers. This Fed’s actions also impacted South Africa’s listed Most listed property companies have has resulted in innovative strategies to retain property sector, as many investors value listed delivered distribution growth in excess of and attract tenants, driving vacancy rates lower. property on a yield-relative basis. market expectations over the past six months, Brand awareness and advertising campaigns are primarily due to lower borrowing costs, cost also helping in this regard. Listed property companies exhibit equity-like containment, proactive property management characteristics as they produce profits (rental and income-enhancing acquisitions. Over the past three years, the sector has revenues less expenses less borrowing costs) raised a significant amount of new capital that grow over time at a rate above inflation. With interest rates having stayed lower to fund acquisitions, developments and However, they also offer a high initial income for longer, the listed property sector has redevelopments. With lower borrowing costs yield, comparable to the yield of a government enjoyed historically low borrowing costs from and most companies able to issue new equity or corporate bond. If bond yields rise, the yield- traditional lenders like banks. Listed property capital at a premium to net asset value, the relative investors start demanding higher yields companies are also accessing the debt capital cost of funding the sector’s expansion has been from listed property. This is achieved through markets through domestic medium-term note lower than the acquisition or development lower share prices, but ignores the fact that, unlike programmes, which makes accessing capital yields achieved. This means each acquisition bonds, listed property companies produce income easier and cheaper. The recent rise in bond or development has increased the income streams that grow over time. yields is likely to place upward pressure on base from day one, driving inflation-beating borrowing costs, but interest rates are likely to distribution growth in the sector. With lower Despite the tough economic backdrop of the remain unchanged for the next year. share prices and higher borrowing costs, this is past five years, listed property companies in likely to be less of a factor going forward, but South Africa have delivered remarkably robust Increasingly, South African listed property should nevertheless contribute to distribution earnings growth. companies are internalising their management growth over the medium term. SA Listed Property Sector Distribution Growth The reasons for the recent sharp sell-off Year - on year % change in listed property have nothing to do with 25% the fundamental driver of long-term capital 20% growth. Distribution growth is expected to accelerate towards 8% in 2014 and 2015 and, 15% coupled with an initial income yield in excess of 7%, listed property continues to look attractive 10% relative to other asset classes. 5% RESOURCES 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Grindrod Asset Management 50 November 2013 SA Real Estate Investor www.reimag.co.za

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SMART MOVES BY NEALE PETERSEN “The Greatest Real Estate Deal – Ever!” Lessons that put Trump on the map onald Trump’s purchase of 40 Wall It was then sold to a member of the Resnick Street in New York City is considered family. Despite their extensive real estate Das one the most successful real estate experience, they also could not make it work. Te deals ever concluded. Tis is mainly because of property was foreclosed again. the ridiculously low price paid, the incredible growth and returns in capital value and the It was then acquired by the Kinson Group high yields it produced. The way the deal was from Hong Kong who planned upgrades structured is not only a valuable lesson for any worth millions of dollars. However, the potential investor, big or small, but also a strategy tenants had to vacate the building during the which can be applied by anyone who has the renovations and the company then failed to desire to be a successful real estate investor. pay the contractors. As a result, the building was left almost vacant and in bad shape, with Today, 40 Wall Street is the benchmark no services. Furthermore, the contractors fled of how real estate deals should be done. The several mechanic liens amounting to almost a transaction played a part in Trump’s rebound million dollars. (A mechanic’s lien is a security from the brink of bankruptcy to the success he interest in the title to property for the beneft of is today and is also one of the reasons why he is those who have supplied labour or materials to recognised as a modern celebrity in real estate improve the property.) investing. Learning, adopting and applying some of the negotiation principles Trump Te building was totally mismanaged, almost applied when he bought 40 Wall Street will entirely vacant and in a state of total disrepair. give you a powerful advantage on your own As a result of this, and its troubled past, no one investment journey. wanted the building as it seemed no one could make a success of it. The main key to success was the ability to negotiate the deal intelligently after having But Trump saw potential others could not see: done a thorough due diligence. the property ofered more than 1 million square feet (around 100 000m2) of floor space in an Background excellent location. A landmark in downtown Manhattan, New Problems turned into opportunities York, 40 Wall Street was built in the 1920’s and was once the tallest building in the world. Te main problem contributing to failure of the previous owners actually lay in the structure of Unfortunately, numerous previous owners had the ground lease or land agreement with the been unable to manage the property successfully. owner of the land on which the building stood, the wealthy German Hinneberg family. Ferdinand Marcos, the infamous president of the Philippines, owned the building and ran it Te agreement was antiquated and contained into the ground before it went into foreclosure. hostile provisions for potential tenants. This 52 November 2013 SA Real Estate Investor www.reimag.co.za www.reimag.co.za

COMMERCIAL made it difcult to obtain fnance and to invest Abe Wallach, one of Trump’s advisors at the Trump then paid $60 000 of the $1 million in building renovations proftably. time who also played an instrumental role in the mechanic lien on the building and gave the acquisition of 40 Wall Street, believed the only contractors involved the frst option to do the Previous owners, working through a solution was a conversion from an ofce building renovations, provided they gave up the liens. representative of the German landowner, into residential co-operative apartments. In fact, In this way, Trump successfully refurbished could not get the ground lease modified. the city was offering developers incentives to the building. Applying a basic principle of successful sales convert vacant ofce space in the downtown area - getting around the gatekeeper and talking to residential units. However, there was a major Te frst lease was concluded with a major directly to the decision-maker - Trump few to challenge in this regard: before any work in fnancial frm at a rental of $23 per square foot, Germany to meet the Hinneberg family and to respect of a conversion could commence, a deal signifcantly higher than the $17 per square negotiate directly with the owner. had to be made with the law frm that occupied foot projected. the entire seventh foor. Ross, given his extensive Trump and the landowner discussed the legal experience and knowing the principals of When the office market rebounded, the failures of the previous building owners. the law frm, knew that this was going to be a building became extremely popular and Trump offered to renovate the building to time-consuming and expensive process. eventually even the 400 000 square foot lower make it feasible for office and/or residential foor was leased to American Express at $24 per lease, in return for a review of the troublesome So, it was back to the drawing board. With square foot. Given the tenancy rates, Trump land lease and a rent-free period of one year to much out-of-the-box thinking and in-depth could replace the original mortgage with a larger complete the renovations. Tis would make it analysis, Ross came up with a fresh solution: three mortgage at a reasonable rate. possible to fnance the building. ofce buildings, situated on top of each other. Today the building is worth between $350 The biggest deal in numbers The building in rental returns million and 400 million and is, aptly, called the Having renegotiated the land lease, Trump Ross calculated that the top portion of the Trump Building. was ready to acquire the building. Given the building ofered 400 000 square feet of small LESSONS ON BUYING condition of the building and the state of ofce space. Tis, he believed, could be rented 40 WALL STREET the property market at the time, the Kinson at $19 per square foot ($2 over the average rent Group readily agreed to give Trump an option of $17 per square foot), given the prestige of 1 to buy the building for $1 million, and he renting an entire floor with a fantastic view Insist on negotiating directly with also assumed the $1 million liability for the of the New York harbour. At this rental, the the decision-maker, not with a representative or broker. mechanic liens. acquisition and renovation projections would reach breakeven. 2 Long-term investment is based on At one million square feet, the price tag of strong personal relationships with key $1 million dollars meant that Trump bought On the next level down, the foors are larger people. the building for a dollar a square foot - a and consist of 300 000 square feet without the ridiculously low price. views, which Ross believed would achieve rentals 3 Establish an aura of exclusivity to create a desire for ownership, as Trump of $17 a square foot. Tis would ensure a proft. did by splitting the building into three Key lessons sections. Trump then exercised his option to buy 40 Given these projections, the lower 400 000 4 Wall Street. He now owned a building with square feet of space would not even have to be Don’t be misled by apparent legitimacy fantastic potential in a great location, with rented out. - every document is negotiable under appropriate circumstances. wonderful views of the New York harbour. Renovations 5 Every negotiation requires maximum But the real work had just begun. To achieve these rentals, the building required pre-planning time. a complete makeover, including a luxurious At the time, there was a glut of office space lobby in true Trump style on the ground foor; 6 Take time to prepare and negotiate - quick deals may lead to omitting in the area and, as a result, no demand from modern infrastructure including elevators, important aspects. tenants for ofce space downtown. Even George air-conditioning, and electrical and plumbing 7 Ross, Trump’s right-hand man, believed that systems; and state-of-the-art telecommunication According to the invested-time the building had little chance of success, even and data systems. principle, the more time spent on a transaction, the more likely the parties if the office market recovered. Furthermore, will want to complete it. numerous brokers had analysed the building To fund the renovations, Trump borrowed and confrmed that the higher foors were too $35 million from Union Labor Life Insurance small for commercial office use and that the Company - the only loan he could obtain at RESOURCES lower foors, which contained huge columns that the time. Te company bought into the idea of Trump Strategies for Real Estate, Trump interfered with efcient ofce space usage, were renovating the building, because it would put Organisation, George Ross equally unsuitable for commercial ofce use. many of their union members back to work. www.reimag.co.za www.reimag.co.za November 2013 SA Real Estate Investor 53

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REI Offshore Valuable Input Affordable Housing Pays Off The vision to invest in the development of afordable housing in Africa is starting to pay of handsomely for pioneer private equity investors. Strong returns achieved with the first South Africa Workforce Housing Fund prove the success of afordable housing as a solid asset and Pierre Van Tonder, Ian Hawksworth, augers well for ongoing investment in the sector. CE, CEO, Spur Corporation Capital & Counties Properties “Countries in the rest Record Rentals In The UK of Africa ofer a good “While the national UK opportunity to enter real estate outlook is still higher growth markets fairly weak, the prospect Near record rental values in the UK coupled with although each market for the London market the rise in house prices will generate average brings its own particular is positive across all returns of 13% in the next twelve months, more challenges.” property sectors.” than £22,000 per property, a report found. It also revealed rents are within £1 of their all- time high at £743 a month in England and Wales. www.reimag.co.za November 2013 SA Real Estate Investor 55

GETTING STARTED BY MIKE SMUTS Important Questions You Need To Ask Before you buy a property overseas herever in the world you decide to purchase an investment property, Wchances are you’ll use the services of an estate agent, buyer’s agent or property fnder. But the level of commitment and services you receive from an overseas agent can vary hugely. With this in mind we look at the important questions you need to ask your agent when investing ofshore. Who do you represent, the seller or me? It’s important to understand where your agent’s loyalties lie and what their obligations are to you. Te ofshore property market, like the SA market, is primarily a service for the vendor, which means most agents represent the seller and not the buyer. Many frms who sell ofshore property under the guise of being “investment specialists” are unfortunately nothing more than glorified estate agents and make more money from their commission from the developer than the information they are giving out is not Pay attention to what you are told, take notes they do on fees from their clients. As a buyer with from personal experience, but rather what and then be sure to do your own research to little or no local market knowledge it’s important they have learned on a quick inspection tour, ensure the agent’s being upfront and honest. that you have someone in your corner whose sole what they have read in a book or what they At the time of writing, the best online property responsibility is to you. When you spend the have been told by others. portal is Rightmove.co.uk. This is not only greatest amount of money on the biggest deal a great resource for finding out what similar of your life you don’t want to go into it with the I’m not saying that the agent must have properties are worth, but you can also use it to odds stacked against you. personally visited each and every property check what such a property may fetch in rent. they are involved with, but first-hand Be sure to compare apples with apples but you How familiar are you with the country experience and a detailed understanding of have reason for concern if the price you are and in particular, the local area in which the property is located? the factors that govern the market you are paying and the rental figure you have been buying in is essential. quoted is at the high end of the market. The principle of letting out a property to How do the properties you market What due diligence do you do on the paying tenants does not change, wherever compare to others in the local area, properties you sell? you buy in the world. But the details do. It’s based on price, size and potential therefore important that the agent assisting Agents are often quick to hand you a glossy rental return? you has frst-hand knowledge of the country brochure full of lovely pictures but are less and the area he/she is selling in. And by frst- What you are looking for here is detailed facts, forthcoming with a due diligence report hand I mean someone who has lived and not just sales hype or a list of features. It’s often detailing what checks have been done. It’s invested in the UK for some time. I often true that new developments come with all the important that this contains a valuation meet agents at trade shows and networking latest bells and whistles but don’t accept this report and structural survey, if appropriate, events who passionately brief me on the as justification for overinflated prices. After from an independent surveyor who is a wonderful aspects of Florida, Spain or some all, a high specification kitchen with marble member of Te Royal Institution of Chartered other exotic location. Yet after some detailed worktops is irrelevant when you are paying £35k Surveyors (RICS). If the property is new, ask questioning it quickly becomes apparent that more than the ceiling price in the local area. whether the developer has NHBC insurance 56 November 2013 SA Real Estate Investor www.reimag.co.za www.reimag.co.za

OFFSHORE or similar in place. This will mean that the the client to explain the whole process to you Just as you would when you buy property development was inspected during building in their own words and also if they would use in South Africa, you have a responsibility to and that you are covered by a warranty should the agent again. inform yourself and protect yourself when the developer / builder become insolvent buying property overseas. Be diligent in your Do you own any ofshore property before the development is complete and a 10 research, and utilise the questions above to yourself? year warranty against major defects after the align yourself with a knowledgeable and property is built. Does the agent actually walk his or her effective agent. With the right support you talk? It’s easy to have a detailed knowledge will certainly be able to develop a proftable Also look at the due diligence done on the of how things work and what makes a good ofshore portfolio. local area, if any. Are you buying in an area with ofshore investment. However, things change JENNY ELLINAS OF CYPRIOT a high unemployment or crime rate? Are major dramatically when you practically apply such REALTY GIVES YOU 5 TIPS FOR businesses moving into the area or closing up theory and put your own money on the table. OFFSHORE INVESTING shop? Look for a balanced, informed report It’s important that you work with someone and not just a thinly disguised sales brochure who has experienced this frst-hand and who 1 Chose your property type carefully, talking up the value of their own properties. can guide you through it confdently. choosing which type of property to buy depends on lifestyle Could you explain how the buying Can I choose to use my own requirements, budget and long-term process works? independent UK solicitor and/or mortgage broker? plans. It’s important to look for a Te biggest challenge you face as a South African home that suits you best. investor is the fact that the buying process in Most agents will have strict timelines to 2 other countries differs dramatically from the adhere to and are likely to recommend that Chose your developer/agent process used in South Africa. Tose who invest you use a solicitor and mortgage broker they carefully. Ensure you deal with a in a foreign country for the frst time often fnd have worked with before and found to be registered agent, as you will not have the process frustrating and confusing, mainly competent and responsive. There’s nothing any recourse if someone is trading because they try and apply the same principals wrong with this as long as you are confdent illegally and runs of with your and structures they have learned from investing that the solicitor and mortgage broker will money. in South Africa. It’s important that the agent work exclusively for you and act in your best 3 you are working with is fully aware of the buying interest. Do independent checks on these Buy to rent with a medium-term process and is able to describe it openly and service providers as you would with the agent. view; in this recovering global crisis honestly with you. Even if you are already aware There are many horror stories however of there are currently no guarantees on of the ins and outs of the process, getting the dodgy solicitors and brokers who gets paid rental returns. agent to explain it should reassure you of their by the developer or agent to ensure things go knowledge and experience. their way so beware. If the agent insists you 4 Take advantage of the attractive use only their people, alarm bells should ring. foreign exchange allowances, And how you will help me many countries are ofering foreign throughout? What happens to my fees when exchange rates and citizenship to things go wrong? You also need to be clear on just how far your investors, so make sure you are agent is prepared to support you. Different It’s quite common for agents to ask that you getting the most out of your ofshore agents ofer diferent levels of service. Some sign a reservation contract with them once deal. can’t do enough to help you and will assist you have decided on a property and pay over 5 with every detail such as setting up your either part or all of the finder’s fees. There Deal with local people with a bank account, setting up your tax structure, is a substantial amount of work that goes solid reputation, there are many securing lending and even help you find a on behind the scenes to ensure that each fy-by-night individuals that enter tenant. Others though are simply there to investment completes successfully and the the market with many seemingly market and sell a property and are likely to bid agent needs to be sure that they are working attractive ofshore deals and ofers. you farewell once contracts has exchanged. As with a serious buyer so that they can take the Buyers beware! It makes sense to long as you know from the start what level of plot of the market. research with whom you are dealing, service to expect, there should be no problem. get referrals and recommendations Things do not always go according to plan from existing clients and if possible Do you sell to many South Africans however and in some cases, through no meet the local representatives in their and could I speak to a couple of particular fault of the agent the sale will fall place of business – that way you are previous clients? through. It is important to check in which assured that you are dealing with a As with any business transaction, asking for instances your fees are refundable, or indeed if reputable company. testimonials is always useful. Have an informal they are refundable at all. Once again, as long as RESOURCES chat to the client and establish if the agent you know from the start where you stand on this actually delivered the service as promised. Ask issue there should be no nasty surprises later on. Smuts & Taylor, Cypriot Realty www.reimag.co.za www.reimag.co.za November 2013 SA Real Estate Investor 57

STRATEGIES BY SCOTT PICKEN The Successful Four Dimensional Investment Model Make the right decisions hat distinguished us in our success from Tat is what defnes us and points the way to were to watch. Ten, once I understood them, our competitors is how we eliminate as our and your success. and based on my motto, I thought I had better Wmuch as possible the uncertainty of any build a model to take his research and turn it investment through Clem Sunter’s scenario system, A motto I live by is “Your destiny is determined into something tangible that could help me take my own probability calculations, which further by the decisions you make and the actions you the right decisions and the right actions. You see refne the chances of success for any investment, take.” As I have mentioned, for years I have been most people listen, understand at a level what and our four-dimensional investment model: our attending Clem Sunter’s presentations. I will Clem is teaching, and then continue on with Global Property System (GPS), which is a proven be honest, I actually had to watch them many their lives as normal. Tis does nothing and is scientifc way to help you make the right decision times until I properly understood the diferent certainly not allowing them to create options no for you and your family. scenarios globally and locally and what the fags matter what happens. 58 November 2013 SA Real Estate Investor www.reimag.co.za

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STRATEGIES I basically had to build a 4-dimensional model, I built two models to make the right decisions: ability to adapt the variables and ultimately get as there are four variables which are all changing 1. Probability Calculator the answers as to the safest investments with the and which infuence each other directly. a. Tis gives the answers to the frst 3 variables best returns. See Figure 1 for the results for 2013, 2. Global Property System (GPS) based on the facts as they are today. Te four variables are: a. Tis takes the information from the 1. Te four scenarios for the global economy Probability Calculator and integrates it with Tis allows us to plot the fgures onto a graph, so from Clem. the property fundamentals and shows us that it makes logical sense. See Figure 2. a. Basically where to invest, based on the where the best places are to invest globally. scenarios and the probabilities. It leaves us with four quadrants. High return, Probability calculator – where is the 2. What asset class to invest in globally, based low risk, which is obviously the best investment best place to invest? on Clem? quadrant. Te only country, which falls into this a. Basically what to invest in, based on the we have explained why we only like to look quadrant at the moment, is the USA. Australia scenarios and the probabilities. at first-world countries to invest, if we are is sitting at low risk, low return along with the 3. Te three scenarios for South Africa from investing outside of South Africa. I personally UK which is on the border of risk. South Africa Clem? am investing or have invested in South Africa, is showing higher return (still in the bottom a. Whether to invest locally or ofshore based the UK, Australia and the USA. For this reason quadrant), but also higher risk. Te worst quadrant on the South African scenarios and the we built the calculator around these countries. is low return, high risk and many countries probabilities. currently fall into this quadrant including India, Global property system results 4. Based on the fundamentals of property, China, France, Japan and Cyprus. where to invest? taking everything into account, one has the RESOURCES IPS Invest Global Property System Results Figure 1 Risk vs Value / Discount Return Property Fundamentals Country Economic Value of property Population Supply and Rule of Law GPS Risk Yield Capital GPS Return Risk discount Growth demand Index Growth Index Rating % % 60% 40% % 70% 30% South Africa 60% 10% 70% 100% 30% 59,50 8% 6% 7,40% Australia 40% 0% 100% 90% 100% 36,00 5% 3% 4,40% UK 65% 5% 100% 90% 80% 46,00 5% 2% 4,10% USA 50% 50% 90% 60% 90% 33,00 12% 10% 11,40% France 75% 0% 0% 10% 50% 80,25 2% 0% 1,40% Cyprus 80% 30% 0% 0% 30% 80,00 5% 0% 3,50% India 20% 0% 100% 100% 0% 55,00 0% 10% 3,00% China 40% 0% 70% 0% 0% 74,50 2% 0% 1,40% Japan 60% 20% 0% 0% 100% 60,00 2% 0% 1,40% Global Property System High Return - Low Risk High Return - High Risk Figure 2 Yield & Return with capital growth Low Return - Low RiskL Australia ow Return - High Risk High Return USA South Africa India France Low Return Low Risk Risk vs Value / Discount Japan China Cyprus High Risk 60 November 2013 SA Real Estate Investor www.reimag.co.za

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AFRICA BY ANGIE REDMOND Annual Europe 1% growth in labor 1.5% productivity, U.S 2000 to 2008 Africa 2.8% Africa’s Economies of $1.6 number sub-Saharan $1.4 of telecom Africa ranked trillion subscribers amongst the exceeded lowest in the trillion Africa’s collective GDP 450 million World Bank’s 2010 in 2008, roughly equal in 2009, up from Ease of Doing Africa’s consumer to Brazil’s or Russia’s 52 million in 2003 Business report spending in 2020 Compounded annual real GDP growth, 2000-2013 20 Number of African Developed 2.0% 4.0% companies with at Latin America least $3 billion in Africa revenue last year Emerging Asia 4.9% 8.3% The Race To 40% Invest In Africa 1900s 8% 22% 2000s Ready, set, go Percentage of world’s reserves in Africa ore and more companies are choosing of Africa, which to invest in countries in Africa, from include JHI, Pam Mproperty companies to JSE listed Golding, Actis, OilG oldC hromiumP latinum funds and retail giants. Investment into Africa RMB Westport, has taken off and the pace doesn’t seem set Stanlib, Resilient 10% 40% 84% 88% to slow any time soon, so what is driving this Property Income expansion into Africa? Fund, Standard Number of cities with Bank, Atterbury, population over 1 million “While it was a relatively untapped region Hyprop and many up Africa. Last year, Latin America 63 over a decade ago, with economies too badly more. One large South Africa was the managed for there to be any real opportunity factor that is driving Europe 52 single largest investor in for companies with integrity, there has been this expansion into Africa 52 foreign direct investment a massive shift towards encouraging foreign Africa is the retail sector; in Africa, outside the country. North America 48 investment in Africa and the continent is on the many retailers are forging move. Today many large businesses are seeing ahead and looking to markets Retail giant Massmart recently the potential that the continent is currently in Africa to expand and announced its aim to expand its yielding and are eager to expand into the region diversify and for good reason. footprint in Kenya, with ambitions in food and take full advantage of the opportunities that Retailers are responding to increased retail in West and East Africa. It reported are presenting themselves,” says Adrian Goslett, demand from consumers in Africa, and in that in West Africa the group is trying out CEO of RE/MAX of Southern Africa. particular expanding operations on the continent several food stores in diferent formats. In East from South Africa, reports Malcolm Horne, Africa it has held discussions with supermarkets There are a whole host of south African CEO of Broll Property Group. Horne notes including Kenyan chain Naivas, but no deal has developers and investors focused on the rest South African retail is driving development materialised yet. In total the group plans to open 62 November 2013 SA Real Estate Investor www.reimag.co.za

OFFSHORE 15 new stores outside South Africa in the next for more than half the total revenue increase market. As more people become of working age three years. Towards the end of the period Grant that all businesses are expected to generate in and move out of their parents’ homes, there will Pattison, CEO of Massmart, expects the ratio of Africa by the end of the decade according to a be a greater need for infrastructure, transport and new openings to shift away from South Africa report by McKinsey & Company on the rise of housing,” says Goslett. and towards the rest of the continent. the African consumer. He says that the opportunities and potential Tax treaties Its focus on African expansion joins the likes are there, but what Africa lacks is the fnancial of Shoprite Holdings, which already trades from South Africa currently holds tax treaties with the resources, which has largely opened up the 192 stores in 16 countries outside South Africa. following African countries, making investment continent to foreign investors seeking a far better It opened 19 new supermarkets outside South into that country all the more attractive and is return than what they can achieve in their home Africa in its 2013 fnancial year and has a further certainly one factor at play when it comes to countries. “As the country with the continent’s 20 confrmed for 2014. Similarly, Te Foschini investing in Africa. biggest economy, South Africa has always been Group plans to double its 104 stores outside seen as the gateway into the rest of Africa. But, Countries in Africa with tax treaties South Africa in the next three years. the current rate of growth locally is also a lot Algeria, Lesotho, Nigeria, Tunisia, Botswana, slower than some of our neighbours, which has “In sub-Saharan Africa, growing customer Malawi, Rwanda, Uganda, Egypt, Mauritius, led to many South African companies expanding demand is coupled with an increasingly well Seychelles, Zambia, Ethiopia, Mozambique, into the rest of the continent,” says Goslett. informed customer base, making it easier Swaziland, Zimbabwe, Ghana, Namibia, Tanzania to position retailer brands, especially as far Chief executive of Buna Group, Caswell as fashion, supermarkets and electronics According to Goslett another draw card for Rampheri says there’s never been a better time are concerned,” says Horne. This move into investment is the fact that a large portion of the to enter certain African markets but cautions Africa marks an important shift in property African population is below the age of 20, which investors to do their homework. “Te starting investment, opening the borders to more back means that within the next thirty years, Africa point is identifying countries with sustainable and forth investment opportunities and will see will have a larger working-age population than stable democracies and the absence of war.” mutually inclusive growth. Africa’s consumer- China. “A growing work force will in turn result in RESOURCES facing industries are expected to grow by more more money being spent and more opportunities Broll, RE/MAX, Buna Group than $400 billion by 2020. Tat would account for investors wanting to break into the African CAPE TOWN Ground floor, Liesbeek House, River Lane, Mowbray PO Box 23644, Claremont, 7735 Tel: +27 21 680 5272 | Fax: +27 86 670 6490 Official South African marketing agent for LEPTOS ESTATES | www.LeptosEstates.com Contact: Jenny Ellinas | +27 83 448 8734 | [email protected] | www.cypriotrealty.com www.reimag.co.za

LESSONS BY ANGIE REDMOND Be A Billionaire Learn to invest like one ho wouldn’t want to be a billioniare? While most people think this is just a dream, the following examples of people just like you and me, who became billionaires, will show you that it can be done. Not one of these people were rich or geniuses, they just didn’t let failure or adversity stop them. So look at the lessons their lives ofer you and the next time you think you can’t do something ask yourself if any of the people on this list would have given up? Te answer is no, so Wyou shouldn’t either. If you want to be a billionaire, start thinking and investing like you want to be one. 1. David H Murdock David Murdock only got a Std 9 education, and after serving in the army he returned to Detroit homeless. A loan from a good samaritan changed all of that and he moved to Los Angeles and got involved in real estate. After seeing some success in sales and acquiring some properties of his own, Murdock began to acquire businesses. One would prove to be a standout investment. Castle & Cooke was a bankrupt real estate company, which is how it caught Murdock’s eye. He developed their real estate portfolio and the rest is history, today at 90 his net worth is $2.4 billion. Te lesson here: you can go from homeless to billionaire in a few years with the right investment strategy. 2. Mark Zuckerberg If you have a Facebook profle, then you know who Mark Zuckerberg is. He launched the social networking site from his dorm room in Harvard, and dropped out in his sophmore year. At the age of 23, he became the youngest billionaire. His net worth is $16.8 billion. Te lesson here: sometimes you just need the right idea and a little bit of innovation to change the world and your life. 3. Steve Jobs If you haven’t already seen the Steve Jobs movie, then it’s defnitely worth watching. Steve dropped out of college and continued to go to classes, just to gain knowledge. At 21 he and Steve Wozniak started Apple Computers out of his father’s garage. He didn’t play it safe, he threw in all his cards on his projects, and he wasn’t afraid to say what he thought, which is why Apple is as successful as it is today. Despite being voted of his own board, he turned Apple around and made it the brand it currently is. Steve’s net worth at his death was $10.2 billion. Te lesson here: don’t be afraid to take risks, if you don’t take risks, you will never see rewards. 4. Tommy Hilfger Tommy Hilfger began his fashion career while he was still in high school and when he was 18 he opened a store, which soon spawned a chain of stores, but the economic downturn saw him fling for bankruptcy in 1977. In 1979 he moved to New York and pursued his fashion career, despite his failed attempts in his hometown. Today Tommy has a net worth of $250 million. Te lesson here: perseverance pays of, don’t let failure stop you. 5. Sir Richard Branson Richard Branson was not a good student, he struggled with dyslexia and nearly failed out of the schools he attended. At 16 he left school and started a youth culture magazine called Student, he then began a mail-order record company called Virgin to fund the magazine eforts. He was able to expand and add a record shop to his business and from there add a recording studio. Today Richard Branson is worth $4.6 billion. Te lesson here: it all start with a single step and it never hurts to diversify. 64 November 2013 SA Real Estate Investor www.reimag.co.za

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