Buyers beware of bargain overseas properties

The strong Rand, low interest rate and relaxed exchange controls have led to more South Africans considering buying property overseas, particularly in the UK and USA. So, is this a good time to buy property offshore?

At first glance the rationale seems sound; an apparent once-in-a-generation opportunity to snap up super-cheap, distressed overseas property, depressed by the global financial crisis. This is supported by a favourable exchange rate and the recently announced annual overseas allowance of R4 million per individual.

I foresee a number of companies starting to market this appealing offer to South African investors. The principal selling point being that American, British and Spanish property is so cheap you would be wise to invest in an undervalued market, now that we can invest quite easily offshore, and hedge against a historically volatile Rand.

However, my view is that based on the fundamentals and being exposed to distressed offshore markets, buyer beware! In the short term there’s a terrible danger of buying in an unfamiliar property market and doing so sight unseen. South Africans have been exposed to local dodgy investor schemes, and if you are contemplating buying real estate offshore, you should not do so through investment structures but rather purchase title yourselves.

That said many of theses properties for sale are highly questionable assets. In some cases they may have been vandalised by their foreclosed owners and need substantial investment to restore them to a tenantable state.

The troubled North Atlantic property markets are far from out of trouble economically. Even if you believe that things will get better in the US sooner rather than later, and you really want to get into that property market, it’s a false economy to buy something because its “cheap” or a “bargain”. It doesn’t usually translate into high quality performance.

It’s the higher priced properties in more affluent US cities that are likely to bounce back quicker and higher than fire sale dwellings in rustbelt regions. The US market certainly presents many bargain opportunities but some US cities are in serious decline and may take years to recover; global house prices are also at risk of dropping even further in 2011.

Investors contemplating buying overseas should undertake some serious research; including visiting the area they want to buy into. I thus advise extreme caution, as investing in an overseas property market (often sight unseen) is a high risk strategy.

How will an investor know which suburb is a good investment without knowing the intricacies of the market?

How will they research the market?

What will they do if something goes wrong and they are thousands of kilometres away? So if you have some speculative money set aside that you’re prepared to put away for a long term investment, you might consider investing in the US. I prefer the UK, which is in a similar time zone to South Africa and more accessible but my feeling is that if you’re looking to invest you’re better off investing in proven markets right here in South Africa.