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For the brave: Servicing Rand debt with foreign assets

by Andrew Rissik | May 23, 2016
  • As a South African investor, it is becoming more difficult to find pockets of value locally. In these volatile and difficult times, investors often turn to property investment. But where should you invest? And will you be able to service your mortgage in the face of rising interest rates and currency volatility? Well, there may be a way…
    Joburg sunset skyline

    The current situation

    The consensus is that most investors are currently risk averse. Things in the US are looking good one moment and then somewhat glum the next. The UK and Eurozone are dealing with their own economic malaise, with a possible “Brexit” being only one of many problems. As a result, markets are extremely volatile. Investors and traders alike are keeping liquid positions while flipping currencies and waiting for some firm ground to materialise.

    These conditions, together with political ineptitude, the worst drought in over 20 years and a commodity cycle that refuses to pick up, have dealt some serious blows to the South African Rand. The incredible Rand slump, precipitated - but by no means solely caused by - Nene-gate, has made many question whether they should hold any ZAR.

    The collapse of the Rand over the last five months has led to a lot of South Africans sending their money offshore. Many of these investors, particularly in the small-to-medium range, were convinced to pull as much as they could offshore, as quickly as possible.

    When panic strikes, going offshore may seem like the correct thing to do, but it should be remembered that there are huge costs in investing offshore for South Africans right now. There are also several tax implications that need to be considered and if investors are careless they could end up getting their fingers burned.

    Think local, think property

    Something we’ve noticed over the last few decades is that even north of South Africa’s border, there is solid demand for property within a country’s economic hubs. We see this in throughout Southern Africa in cities like Harare, Lusaka, Luanda, Windhoek as well as Johannesburg and Cape Town. While the five countries in which these cities are located all struggle with various economic and political difficulties, their metropolitan property markets have remained strong.

    In South Africa, Cape Town and Johannesburg have both enjoyed years of decent growth after the real estate boom died down in the late 2000s. It’s simply a case of supply and demand. There is a huge demand in both cities for real estate, as more and more people from around the country migrate, looking to live in the nation’s financial hubs. Thus, despite all the economic turmoil in the country, these two markets should remain resilient in the medium- and long-term.

    Local property may just prove to be a better investment than sending your money offshore at great cost and risk.

    A less than ordinary plan

    If you have some extra liquidity but not enough to safely invest into a large offshore portfolio, you may want to look at putting a large deposit down on a local property. You can then convert the remainder of your funds into foreign currency and send them overseas. 

    Once you have this money overseas, you may find it a lot easier to start servicing your Rand denominated mortgage. This could turn headwinds like a falling Rand and strengthening Euro/USD/AUD into good things for your investment. As the Rand continues to devalue, slowly but surely, you’ll find it easier to service your Rand debt using your foreign assets.

    Final thoughts

    The allure of holding non-Rand denominated assets offshore needs to be carefully weighed against the costs of doing so. You must also factor the current turbulence of global markets into this. If you don’t have a lot of capital, you could quite easily find yourself in a sticky situation should your offshore portfolio underperform.

    The situation here in South Africa is not ideal, but with some creative thinking and bold decisions, it is possible to extract value from local investment opportunities.

    Andy Rissik is a Director at Sable International. If you have any queries about structuring offshore investments or transferring funds overseas send him an email.


    Disclaimer:
    The information in this article is intended as a guide only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.

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