Category Archives: Finance
Doing your part to ensure bond approval.
{Financial institutions are tightening their grip on approval criteria for home loan seekers. What can you do once you’ve used your bond calculator to improve your chances.}
The amount of accepted applications have fallen lately as a result of tighter lending regulations. These oblige providers to make far more stringent checks that you’ll be able to afford to pay your bond, even if interest rates go up or your circumstances change.
While there’s no way of absolutely guaranteeing your bond application will be approved, there’s plenty you can do to make sure your chances are as high as possible.
The following are some helpful suggestions that should assist you in your home loan seeking endeavours. Remember that a good start in this process is to find out where you stand with the aid of a home loan calculator.
In no particular order of importance…
- Grow that nest-egg
Saving a large deposit reduces the lender’s risk if they offer you a bond, as they’ll be providing a loan for a smaller portion of your house’s cost. It also shows that you have the financial discipline required to pay a bond. Remember that when you use your bond repayment calculator, one of the entries is the deposit; you will notice what a difference a large deposit makes to the final monthly repayment. Applying with a higher deposit will improve your chances of being accepted.
- Shrink some debt
Lenders can be negatively swayed if you have many debts on top of your bond, like outstanding credit card bills, overdrafts or loans. The more you can pay off before you apply, the better your chances.
That doesn’t mean you should use most of the deposit you’ve saved to pay off debts. Focus on paying off the expensive ones, preferably using money you’ve saved by cutting down your spending on luxuries.
- Get your credit record in order
Check your credit record through credit bureaus like Transunion, Credit4life or Compuscan. (There are many more.) These can reveal any potential problems like unpaid loans or bills that warn off lenders.
It also gives you the opportunity to check there’s nothing incorrect on your credit report that would harm your bond application – if you find anything wrong, you can ask for it to be removed.
You’ll then be able to work on making yourself look more attractive to lenders. Avoid applying for many financial products just before you take out your bond, although sensible spending like paying off a credit card in full each month can look good.
- Declare all income
When your lender or broker asks about your income, don’t just give your basic salary. Include details of bonuses, commission and any other income like investments, shares, expected inheritances and even potential pension payouts.
Make sure the information you give is accurate, make sure you include all your income. Try to time your application sensibly – you’re far more likely to be accepted if you have a permanent contract than if you’re still in a probation period of a job you’ve just started.
- Reduce your bill load
Having bills you pay out for every month will reduce the total amount of your wages available towards paying your bond.
Divide your monthly expenditure into essentials such as food, travel costs, bills and child maintenance, luxuries such as gym membership, holidays and entertainment. If you can cut down on the latter, you’ll improve your chances of being accepted.
In the event of failure…
When you’re looking for any kind of loan, avoid appearing too desperate. Don’t apply for dozens of bonds in the hope that one might say yes, as every lender will leave a mark on your credit report when they check it.
Instead you should look into why you’ve been turned down. The lenders all have different criteria, so just because one rejects your application doesn’t mean that all of them would. Your calculations with your bond calculator are still valid.
Ask the bond provider if they can offer any feedback. You can also check your own credit report to look for any potential problems or speak to Bond Brokers like Bond Buster, SA Home Loans or IHBB who may have a clearer idea of why the lender rejected your application.
Can bridging finance help you with your home loan
Can Bridging Finance Help you with your Home loan?
So you’ve used your bond repayment calculator to establish what you can afford in terms of a purchase price and the necessary repayments. But for some reason you fall short of what you can afford for one of the following reasons. Consider these scenarios and see whether bridging finance is for you.
Transfer Fees – Bond
If a purchaser has been granted a loan by a bank but is short of the transfer and legal fees it is possible in some circumstances, where the bond granted is higher than the debt due, to get an advance on the bond granted, for these costs.
Estate Agents Commission
If the attorney handling a property sale / purchase transaction is prepared to give a Letter of Undertaking to settle the loan to the estate agent for commission advance and the Principle of the agency is prepared to allow the bridging of estate agents commission to take place, then it is possible to arrange a bridging loan on the sale of land or buildings.
Generally the purchaser should have presented guarantees to the attorney and all documents ought to have been signed by all parties regarding the transaction
Pensioners Finance
People older than 65 who own property and wish to access some of the available equity can access up to 40 % of the equity with no need to pay any monthly payments.
Common conditions: The client should reside in the residential property; both partners must be over 65 years of age and agree that the settlement of the loan can be made from the property owner’s estate.
Sellers Proceeds – Bridging
You have sold a property and made a profit and need some of the money now rather than when registration takes place.
Common conditions: As long as the attorney handling the transfer is prepared to sign a Letter of Undertaking that the purchasers have put up guarantees, that all Common conditions have been met and that he will disperse funds to the bridging company on transfer, then it is possible to arrange an advance of this profit; sale proceeds advance.
Credit Rehabilitation
Similar to Debt Consolidation above, but all the debts you have are settled by the lenders on your behalf and your credit bureau listings removed. Property is the main source of the funds in lieu of the debt settlement. If clients do not own a property then the chances are you won’t be able to get assistance.
Additional Bond
A second bond or further bond is one method where the equity of your property can be unlocked and converted to an access facility or to cash.
Common conditions: Client must be able to prove ability to service the loan granted and the value of the property must be higher than the current bond. You can calculate this with a bond calculator.
Debt Consolidation for property owners
This is a 4 month bond – if you have equity in a property a short term loan can often be arranged to settle your debts (from the equity in your property) and then arrange for you to apply for a normal 20 year or 30year bond (don’t forget you can use your bond calculator for this.). This is a debt restructuring program
20 year bond – if you have at least 40 % equity in your property but you are blacklisted at the credit bureau, a 20 year bond could possibly be arranged for you
Bridging for developers
Bridging for developers can be obtained where a property developer has almost completed, or has completed, a property development project and needs to get access to some of the funds due to him from the sale of units built.
There are various ways this can be done and so it is best to speak to a consultant to advise you.
For a rudimentary list of property bridging finance service providers a simple entry into a search engine will do. Shop around the net to see who’s out there and meet with your banks to compare notes.
For those looking for bridging finance in addition to your home loan, remember to use your bond affordability calculator to work out your preliminary repayments and then factor in bond registration costs et cetera. From there you will be able to tell where you stand with regards to your bridging finance requirements. Any challenges you may have encountered with bridging finance in the past consider approaching the FAIS Ombudsman.
Written by Matthew Campaigne-Scott
A Glossary of Terms for the Homebuyer
When considering a mortgage bond from a bank to buy your dream house you may find yourself bogged down in a swamp of legal terms and bureaucratic mumbo jumbo. Not everything is as straight forward as your bond calculator.
Affordability Score
The Bank’s assessment of a Buyer’s ability to afford monthly instalments based on their income.
Agent’s Commission
The amount payable by the Seller to the agent for work done on marketing and selling a property. This is a percentage of the selling price.
Asking Price
The price at which the Seller is offering their property for sale.
Beetle Certificate
A certificate issued confirming that a structure is free of wood borer or termite infestation. This is a legal requirement when selling.
Bond
A lending agreement between a Buyer and the Bank. The legal bond document states that the Bank will lend an amount of money in the form of a bond.
Bond Calculator
Online software used to calculate estimated repayments on a bond. Input data is required, for example the desired monthly price. The sales price is then automatically adjusted enabling the user to appraise his/her position in the market place.
Bond Cancellation Cost
Costs accrued during the cancellation of a bond. These include an Attorney’s registration fee and a Deeds Office fee.
Cancellation Attorney
The Attorney who attends to the cancellation of the Seller’s bond and is appointed by the Bank with whom the current mortgage bond is held.
Conveyance Tax
A tax charged for the transfer of property from the Seller to the Buyer.
Conveyancer
A Conveyancing Attorney will attend to Deed Office transactions such as the transfer of a property from a Seller to a Buyer.
Cooling Off Period
The 5-day period after the Offer to Purchase has been signed during which the Buyer of a property has the right to cancel this agreement.
Credit Report
A detailed score card of an individual’s credit history prepared by an official credit bureau. This report will determine your risk as a borrower.
Debt-to-Income Ratio
A ratio which shows a Buyer’s monthly payment obligation to debts and which is divided by gross monthly income to ensure affordability.
Estate Agent
The Estate Agent is a person who is authorised to act as an agent for the sale of land or the valuation, management, or lease of property.
FICA
The Financial Intelligence Centre Act, 2001 was formed to regulate money laundering and requires valid information to be presented to the Bank.
Home Loan
An agreement between the Buyer and a Bank, where the Bank lends the Buyer money in order to purchase property.
Home owners Insurance
An insurance policy that covers your house (structure and property) in the event of damage or loss.
Instalment Amount
The monthly amount paid to the lender as part of the total home loan amount. Instalments run for the entire duration of the agreed term.
Interest Rate
A percentage interest is added onto the amount of money borrowed from a Bank. This amount is fixed for a period and is based on the amount of money borrowed.
Mortgage Broker
Someone who acts as an intermediary between the Buyer and a Bank, for the purposes of arranging a home loan.
Municipal Rates
Taxes paid to the municipality by property owners.
Net Income
This is your yearly income after taxes.
Occupational Rent
A charge applied to the Seller for occupying the property after registration has taken place or to the Buyer for occupying the property before the registration has taken place.
Offer to Purchase
A legally binding document signed by the Buyer and Seller stating the agreement of the sale and its conditions.
Payslip
A document issued on a monthly basis by your employer as proof of your monthly income.
Property Transfer
When ownership of a property legally changes hands from Seller to Buyer, through registration of the property at the Deeds Office.
Purchase Price
The amount paid for the purchase of a property as set out in the Offer to Purchase agreement. This can be worked out retroactively by using a bond calculator.
Qualified Buyer
Someone who meets a Bank’s requirements of affordability and has qualified for a home loan.
Registering Attorney
The Attorney who attends to the registration of the new bond into the name of the Buyer.
Repayment Term
The number of months allocated to pay off a home loan. The maximum repayment term is 30 years. This can be easily calculated with a bond calculator.
Sectional Title
An entire property of flats or townhouses. The property is divided into individual units and sold separately and runs under a Body Corporate.
Subject to Sale
When a sale of a house becomes binding and unconditional then certain conditions are met, such as bond approval.
Title Deed
The legal document which states ownership of a property. The Title Deed is filed at the Deeds Office and contains details of the property.
Utilities
Services provided by the government for your use at home. Utilities include: water, electricity, telephone service and other essentials.
Voetstoots
Refers to a property sold “as is”. After a sale of property, a Seller is not liable for defects following a reasonable inspection of the property.
Print this list out and keep it handy when those terms start flying around that you’re not too familiar with. Remember to refer to your bond calculator as the figures start coming at you. With both your bond calculator and your glossary of terms you’re all set to go house hunting.
Bond Affordabilty and the Hoops Banks make us jump through
Your Bond Affordability ‘Score’
Is there such a thing? With research it seems that between the banks the variables are many and the absolutes are few. After working out what you can afford with your bond calculator one will have to take your chances depending very much on the bank.
ABSA Home loans singled out ‘Affordability’ as having become a key factor in the South African housing market recently. You may know what you can afford having used a bond calculator to work out what asking price you can afford but the banks have varying, between banks, criteria on which to base its decision to grant you a bond.
Affordability is a key factor in the South African housing market and banks’ lending criteria has tightened up, but in some instances applicants are reportedly still able to qualify for 100 per cent loans.
ABSA has been quoted in a previous review that the focus of demand for supply of housing is set to be on smaller-sized and higher density housing because affordability is set to remain a key factor into the future.
ABSA also said it still lends up to 100 per cent home loans to would-be home buyers even in this buyers’ market but only if they qualify.
In line with the National Credit Act, the bank’s lending criterion is informed by the customer’s affordability and credit worthiness and taking into consideration some factors as discussed below.
Bond Assessment Criteria
When a local property website asked the four major banks what the criteria are for assessing a home loan application the summarised replies were:
Standard Bank: a loan–to-value criterion plays a major role in what the customer can qualify for; documents required depend on whether the applicant is employed or self-employed, has a Standard Bank transactional relationship or not and if they earn a fixed or variable income.
Generally, document requirements are less onerous for customers that have a transaction account i.e. Employed SBSA applicant with fixed income would need to provide the latest payslip and an offer to purchase.
A non Standard Bank customer with fixed income would need to provide the latest payslip together with the latest three months consecutive bank statement reflecting three months’ salary deposits.
Nedbank: minimum income (single or joint gross monthly income) + R2500- minimum loan amount R100 000. A maximum repayment term of 25 years. An acceptable credit record. Payment by debit order. The property must be in good condition and acceptable to the bank
FNB: latest copy of applicant’s payslip. A bank statement. Self-employed applicants will need to supply a signed personal statement of assets and liabilities as well as a balance sheet and financial statement for the business from which income is derived. A commission earner will be required to submit the last six months commission earnings statement.
ABSA: Current debt repayment behaviour; credit history; affordability; net disposable income; household finances; residential property cycle and prospects; prevailing economic cycle; consumer risk profile.
Preapproval of Bonds
When asked if the bank would give pre-approval of a bond with no upfront fees: this could be worked out and adjusted using a bond calculator.
Standard Bank: A customer can apply for a pledge via the internet or through the Standard Bank Call Centre. No fees are charged for pre-approvals.
Nedbank: Does not grant pre-approvals. Customers can read through the information on the bank’s website to determine what they can afford through various calculations and thereafter use a bond calculator.
FNB: It is called a “Passport to Purchase” where no upfront fees are levied and this pre-qualification is valid for 90 days.
ABSA: According to the National Credit Act, financial services providers are prohibited from granting pre-approved finance to customers.
Sceptics may reflect that this is hardly a scientific process but at the end of the day banks are conservative for a reason. What’s best, is to ensure you have jumped through all the necessary bureaucratic hoops with the bank of your choice and ensure you are taking advantage of a bond calculator to keep the correct figures at hand.
Pre-Approved Bonds
So what is a pre-approved bond when it’s at home in front of the fire warming itself? One web definition says that a “pre approved bond gives both the buyer and seller the assurance that the buyer can afford offers made within a certain price brand, and that they will qualify for the bond required to make the offer.” So let’s unpack that some more.
How It Works
When you use a bond calculator it’s reassuring to know what to compare figures to, what to feel comfortable about investing into the selling price field. Getting yourself a pre-approved bond is the very first thing you should do before you put in an Offer to Purchase.
The National Credit Act stipulates that monthly deductions, like monthly living expenses, income tax and debt need to be considered. It is recommended that you provide your bank or home finance professional with a precise summary of your monthly expenditure and your level of debt so your pre-approved figure can be established. Your bank or home finance professional will formulate your pre-approval figure and issue you with a certificate. This enables you to provide an estate agent with a pre-approval certificate that has been calculated according to the National Credit Act requirements.
The pre-approval is valid for 90 days after which your bank or home finance professional should contact you to check whether your expenses have changed over this period. (It’s better not to wait to be contacted but rather contact them a few days in advance.) If there has been a quantifiable change, the pre- approval will be revalidated and recalculated. If there is no quantifiable change to either income or expenditure, your bank or home finance professional will reissue a revalidated certificate. This ensures that your input data for the bond calculator is always accurate.
After the banks have assessed your home loan application, and if the application is successful, the bank will issue a Quotation which will include interest rate, cost of credit, any special conditions that may apply, etc. Your bank or home finance professional will discuss this and other bank quotations with you. Once you settle on a Quotation, your bank or home finance professional will proceed to instruct the attorney appointed to register the mortgage bond.
Advantages of having a pre-approved bond
It can be so frustrating for a seller to accept an offer only to find out weeks down the line that the deal has fallen through due to the buyers inability to get a home loan. It can also be very disappointing for the buyer. With a preapproved bond this can be avoided. Using a bond calculator you can determine what you aspire your preapproved bond to be.
Bear in mind when dealing with sellers and Estate agents that they want to sell to you! You are holding the cards when it comes to buying and you will seek out the very best deal available to you. This attitude will make the seller think twice before counter offering and will have the Estate agent working twice as hard to close the sale.
One should be encouraged to be assertive when making an offer, apply for bond pre-approval before you go out on a show day.
The posture of the Estate agents, like anyone who is dependent on financial institutions giving credit to customers in order for them to earn an income, is very different towards a pre-approved buyer, especially one who has clearly gone to the trouble of doing the necessary homework with a bond calculator.
The agent knows that you are looking for a home and that you essentially have the money available. This is a huge bonus for the agent who will go out of his way to help you spend your money.
The other thing the agent will be very aware of is that you don’t have to spend your money with him/her but there will be other agents out there trying to help you spend it. The result is that once you have made an offer he will do everything in his power to get the seller to accept your offer.
Currently we are living in a buyers market with some areas selling homes for as much as 30% below their asking price. Both the agent and the seller know this, the pressure is on the seller to accept what he knows is an approved buyer when you walk in..
Good luck with pursuing your preapproved bond
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Ten practices of picky property purchasers
So you want to buy a house. House hunting is all about the viewing. Here’s how to make sure a property is really worth your money.
Upon determining your bond repayments with your bond calculator it’s time to start looking around. Looking around a property that could become your new home is exciting, but you can’t afford to get swept up in fantasy, sales pitch and the pressure to purchase…
Failure to use the viewing time effectively and you could miss something that ends up costing you dearly.
Here are ten tips that will help you see what’s really up for sale behind the agent’s sales talk.
1 View during the day
Make sure to view the property at least once in daylight so that you can see it with clarity. If your first viewing was unavoidably at night, push for another viewing in daylight before making an offer. Similarly if you have viewed the property during the day and want a better idea of what the area is like in the evening, you could arrange a second viewing later in the day.
This will give you an idea of how light the property is at different times of the day, how loud the neighbours are and what the neighbourhood is like once evening sets in.
2 View with company
The more pairs of eyes you have looking around a property the better.
If you attend a viewing alone then it’s likely you will be lead around by an agent who do their best to highlight the positive features of the property, not giving you the chance to look closely.
So even if you will be living alone, take a friend or relative to view the property with you as they may spot something you miss.
3 Examine the exterior.
It is easy to get caught up examining the inside of a property and forget to take a thorough look at the outside.
Checking the exterior and the roof as well as the pipes and drainage is essential; if there are any problems they could be expensive to fix.
If any work needs doing you may either want to arrange a professional survey if you are looking to buy, or look for a rental property elsewhere.
4 Take your time
The last thing you want is to have to rush around the property because you have another appointment or viewing booked.
You should leave at least 20-30 minutes to view the inside of a property and a further 20-30 minutes to check the outside and the local neighbourhood.
If you are being shown around by an agent or the owner, try and view the property at your own pace and avoid being rushed through.
5 Consider room and space
An empty flat or house will always look bigger than a fully furnished property, so you need to check that there really is enough room.
Check what the property offers in terms of storage space. For instance, are there built in wardrobes in the bedrooms, or would you need to have space for a wardrobe in each room?
Would your bed, couch, dining table and drawers all fit comfortably or would you be blocking plugs and windows and so on?
In the kitchen, are the white goods built in or would you need to use vital space for a fridge, washing machine or dishwasher? What about the cupboard space, is it expansive enough to fit all of your pots, pans and crockery?
6 Arrange many viewings
Making sure you go back to view a property after the first look can help make sure that you don’t miss any potential issues and ensures that your know exactly what you’re getting for your money.
It also gives you the chance to ask the agent or owner any specific questions that you have after looking around the first time and to negotiate on price if needs be.
7 Take pictures
Taking lots of photos, or even a video, is a great way of ensuring that should you miss something you then have a personal record of the viewing to look back at.
It also means that you can look back at the property and compare it to others you’ve seen in your own time without the pressure of going around with a letting or estate agent.
However, make sure to ask permission before you start snapping away. Although letting agents and estate agents will not usually have an issue with you taking photos, if the owner still lives in the property it is only polite to check.
8 Watch out for damp
Damp can be serious concern regardless of whether you are looking to buy or rent a property, simply because it may illustrate more fundamental problems.
Signs of damp include a musty smell, peeling wallpaper or bubbling paint and mould or dark residue on the walls and ceiling.
If you suspect that the property suffers from damp it need not be a deal breaker but should definitely be an issue you raise with the agent and investigate further.
Any cracks or signs of subsidence may indicate a much more serious problem with the property so make sure you look out for these too.
9 Examine everything
When you are looking around a flat or house, don’t be afraid to test the fittings and fixtures.
Check that the windows open easily and that there is suitable water pressure throughout the property by testing the showers and taps. You are also within your rights to check things like the level of loft insulation, the wiring and electrics during a viewing and it’s a good idea to do so.
Although you may feel awkward testing things in this way, any issues you spot at viewing can either be fixed before you move in or be used to negotiate a reduction in price.
10 Ask the hard questions
Don’t be afraid to ask questions, whether you are looking to rent or buy, you will be parting with a significant sum of money and you are well within your rights to have any of your questions answered. For example ask about rates, previous renovations, traffic, neighbours, burglaries, state of roof, proximity of schools, state of geyser, the reason why the property is on the market, were there tenants before and so on.
BOND PROTECTION INSURANCE
So you’ve decided to work out the details of your bond repayments with our bond calculator. But now you need to start thinking about, what they call in the industry, Bond Protection Insurance.
Bond Protection Insurance is a bond insurance plan that has been specifically designed to provide flexible risk benefits in respect of home loan protection.
The plan pays the original bond in the event of Death, Dread Disease or Permanent Disability, and pays the monthly bond instalments in the event of illness, injury, temporary disability and retrenchment. Under most plans the bond holder has the flexibility to select any combination of the benefits, in addition to the death benefit.
Most insurers these days offer choices, making the cover more accessible, highlighting the convenience and expertise they offer. Getting insured should be a straight forward process ensuring that your particular financial needs are adequately met and that your most important asset is protected for Life.
This is all very well but what about the details. Once you’ve used your bond calculator and you have some idea of the kind of house you’re in the market for and what the repayments you’ll be faced with, bond protection insurance is like another hill before the end of the marathon. So let’s look at what insurers are offering.
What are the benefits?
Firstly there is the direct payment of benefits into your home loan. Next there is the death benefit (which typically pays a lump sum directly to the home loan within 48 hours of receiving all the documentation on a valid claim). There is also an instalment protection benefit which covers the bond instalment in the event of illness, injury, temporary and permanent disability.
There is usually a permanent disability benefit which pays a lump sum directly to the home loan in the event of a valid disability claim as well as a dread disease benefit which pays a lump sum directly to the home loan in the event of a valid dread disease claim allowing you to focus on getting better. A retrenchment benefit is offered which covers the bond instalment for up to 6 months while you focus on finding new employment.
Very rarely are there medicals or HIV test. Two lives may be insured under one policy, thereby providing a more affordable premium. The policy can be ceded to any financial institution. The policy will pay the full death benefit on death even if the instalment protector benefit has been claimed. While a valid Instalment protection benefit is being claimed, all the policy premiums due during that period do not have to be paid. You should be able to increase or decrease your cover to suit your home loan requirements.
Free death cover is offered, usually around three months, while the bond registration is pending. Cover is provided for the term of your home loan.
Typical Features of the Products
Instalment Protector Benefit
If you as a homeowner are prevented, as a result of illness or bodily injury, from earning an income for a period of usually 90 days or more, your bond protection plan Insurance will pay the monthly home loan instalments while you are unable to work. These would be the same instalments you that can be worked out with a bond calculator.
Dread Disease benefit
Most Bond protection policies include what’s called a Dread Disease Benefit. A list of diseases would be included with the policy. If you are diagnosed with any disease on that list you will be paid the sum assured, usually after a period of 90 days, allowing you to concentrate on recovery. If the sum assured is greater than the outstanding home loan balance, the difference will also be paid into the home loan account.
The following 12 Dread Diseases are more often than not covered by most insurance companies:
Blindness, Cancer, Coma, Coronary Artery Bypass Graft, Heart Attack, Heart Valve Surgery, Loss of Limb, Major Burns, Major Organ Transplant, Paralysis, Renal Failure, Stroke.
Retrenchment Benefit
If a homeowner is retrenched for a period longer than 30 days, Bond Protection Insurance will, if this benefit is included, pay the home loan instalments for up to 6 months, allowing the homeowner the peace of mind to find alternative employment.
Lump Sum Disability Benefit
Almost all bond protection insurance covers homeowners who are totally and or permanently disabled rendering them incapable of earning income for a period of 90 days or more. Bond Protection Insurance will pay the home loan instalments for the first 24 months, before paying the lump sum benefit equal to the sum assured into the home loan account. If the Sum Assured is greater than the outstanding home loan balance, the difference will be paid into the home loan account.
Death Benefit
In the event of death all Bond Protection Insurance schemes pay a benefit equal to the sum assured. Again, if the Sum Assured is greater than the outstanding home loan balance, the difference will also be paid into the home loan account.
Now that you’ve seen all the benefits of Bond Protection Insurance you can soberly consider the value in pursuing this next stage in your journey to purchase your own home.
Investing in Africa, Good News, Bad News and Faux Pas
As people around the globe eye Africa for potential investment and South Africans head north there is some encouraging news to feed those ambitions, worrying reports to temper our enthusiasm and some mistakes to learn from.
Ghana’s capital Accra is awash with educated, well-dressed young up-and-coming people, driving top-of-the-range cars living in stylish houses. It’s indicative of Ghana’s economic growth, 4% last year. According to the World Bank many African economies are among the world’s fastest growing in 2015. African countries in the top 20 last year with the highest projected compounded annual growth rate (CAGR) from 2013 through 2015, based on the World Bank’s estimates are: Zambia 7.2%, Tanzania 7.4%, Uganda 3.4%, Sierra Leone 9.5%, DRC 7.9%, Ghana 8.1%, Mozambique 8.7%, Angola 8%, Rwanda 7.8%, Gambia 7.8% and Ethiopia 7.9%.
US-based business consulting company Ernst & Young reports: “There is a story emerging out of Africa: a story of growth, progress, potential and profitability.” Back in 2013 US secretary of state for African affairs, Johnnie Carson is quoted as saying that Africa represents the next global economic growth since 2000, U.S. trade relations with Africa have been dictated by the Africa Growth and Opportunity Act (AGOA). As a unilateral preference scheme of the U.S. to promote trade and investment in Africa, AGOA was meant to boost U.S. trade with Africa and the development of the continent. However, 14 years in, U.S. trade in goods with Africa has demonstrated a perplexing downward trend since 2011. U.S.-Africa trade dwindled from $125 billion in 2011 to $99 billion in 2012 and $85 billion in 2013. For the first five months of 2014, U.S.-Africa trade in goods totalled about $31 billion. At this rate, the total trade volume in 2014 could be well below $80 billion in a continuation of the declining trend. This is largely blamed on an decline in demand for oil from Africa and the fall-out from the 2008 financial crisis
In comparison, Beijing has been quite low-key in disseminating its Africa trade promotion efforts, although its trade with Africa has been growing exponentially. China surpassed the U.S. as Africa’s largest trading partner in 2009. China-Africa trade reached $166 billion in 2011, an 83 percent rise from 2009. The bilateral trade further increased another 19.3 percent to $198 billion in 2012, and passed the $200 billion threshold to $210 billion in 2013. In terms of trade volume, Chinese trade with Africa not only dwarfs U.S. trade with Africa, but the gap is as large as 2.5 times the magnitude of last year. But there’s some dissonance between the rhetoric and action. {THE HILL}
London based magazine The Economist reported: “Since The Economist regrettably labelled Africa ‘the hopeless continent’ a decade ago, a profound change has taken hold.” Today “the sun shines bright … the continent’s impressive growth looks likely to continue.”
Africa’s trade with the rest of the globe has skyrocketed by more than 200% and annual inflation has averaged only 8%. Foreign debt has dropped by 25% and foreign direct investment (FDI) grew by 27% in 2011 alone and 13% in 2013. Although according to E&Y FDI projects (as opposed to cash) declined by 3% in 2013
Despite projections for growth in 2015 being revised downward due to the so called Arab Spring, lack of demand for oil and a sluggish world economy , Africa’s economy is expected to expand by 4.2%, according to a UN report earlier in the year. The International Monetary Fund (IMF) is expecting Sub-Saharan African economies to increase at above 4.5%. Added to that, there are currently more than half a billion mobile phone users in Africa, while improving skills and increasing literacy are attributed to a 3% growth in productivity.
According to a UN report the think tank, McKinsey Global Institute writes, “The rate of return on foreign investment is higher in Africa than in any other developing region.”
An end to numerous military conflicts, the availability of abundant natural resources and economic reforms have promoted a better business climate and helped propel Africa’s economic growth. Greater political stability is greasing the continent’s economic engine. The UN Economic Commission for Africa (ECA) in 2005 linked democracy to economic growth. Having said this attacks by Boko Haram in Nigeria and Al Shabab in Somalia and Kenya go against this trend and have worrying consequences if not contained. Also in this category would be the so-called Xenophobic violence in South Africa.
All this growth and urbanisation is putting a strain on social services in cities, it has also led to an increase in urban consumers. More than 40% of Africa’s population now lives in cities, and by 2030 Africa’s top 18 cities will have a combined spending power of $1.3 trillion. The Wall Street Journal reports that Africa’s middle class, currently estimated at 60 million, will reach 100 million by the end of 2015.
Some other sobering news: “A sustained slowdown in advanced countries will dampen demand for Africa’s exports,” writes Christine Lagarde, managing director of the IMF. Europe accounts for more than half of Africa’s external trade. Tourism has been and may continue to suffer as fewer Europeans come to Africa, affecting tourist dependent economies like Kenya, Tanzania and Egypt.
The South African Reserve bank warned in May that the financial crisis in Europe, which consumes 25% of South Africa’s exports, poses large risks. Adverse effects on South Africa could have severe consequences for neighbouring economies.
Another worry is the resurgence of political crises. Due to the so called Arab Spring, economic growth in North Africa plummeted to just 0.5% in 2011 and hasn’t recovered much since. Recent coups in Mali and Guinea-Bissau could have wider economic repercussions. “Mali was scoring very well, now we are back to square one,” says Mthuli Ncube, the AfDB’s chief economist. Ethiopia, Kenya, Uganda and other countries have militarily engaged in Somalia, which may slow their economies.
A cause for concern what many are referring to as Africa’s “jobless recovery.” Investors are concentrating on the extractive sector, specifically gold and diamonds, as well as oil, which generates fewer employment opportunities. 60% of Africa’s unemployed are aged 15 to 24 and about half are women. In May, UNDP raised an alarm over food insecurity in sub-Saharan Africa, a quarter of whose 860 million people are undernourished.
But none of this is deterring South African business interest north of the border. One may ask why? South Africa’s domestic market is not providing local companies with enough growth opportunities, prompting many of them to look at the rest of the continent. This according to Ernst & Young’s Africa Business Centre’s leader, Michael Lalor in an online press conference recently: “While South Africa was still growing well compared to the advanced economies, it’s certainly hasn’t kept up with some of the other rapid-growth markets.” Says Lalor. Now it’s battling to grow at all.
Analysts are pointing out that many of the other emerging markets, such as China and South America, are difficult to enter, making the rest of Africa the obvious choice. Asia is seen as almost excessively competitive. Latin America ventures mean dealing with a very strong and ever present Brazil. Therefore Africa, given its sustainable growth story and its potential, is an obvious region for South African companies to grow into.
Quoted by howemadeitinafica.com Lalor says that most Johannesburg Stock Exchange-listed companies are currently developing strategies for the rest of the continent. Ernst & Young is experiencing strong interest from foreign companies to invest in the continent. “The response from our clients and from potential investors is overwhelmingly positive, to the extent that we simply cannot keep up. So there’s no doubt that we are seeing significant interest, both spoken, interest in spirit, but also people putting their money where their mouths are,” he said.
These sentiments are confirmed by a survey done last year by Price Waterhouse Coopers. A CEO survey published by PwC found that 94% of South African company heads expect their business in Africa to grow in the next 12 months. PwC interviewed 32 South African CEOs in the ICT, financial services, and consumer and industrial products and services industries.
With this in mind it’s worth turning to Raymond Booyse, founder of consultancy firm Expand into Africa, who identified four mistakes often made by South African companies venturing into the rest of the continent.
The first was: Not doing your homework. South African firms are frequently not prepared to spend money on market research. “Go and look if there is a market for your products or services. After you’ve established that there is indeed a market, find out who your competitors will be,” says Booyse.
Booyse points out that South African companies underestimate transport costs and ignore how local laws and regulations influence doing business.
Secondly: Ignorance. Many South African business people are ignorant of local cultures and attitudes according to Booyse. By way of example, ignorance doesn’t realise that just because they’re both former Portuguese colonies, what works in Angola’s capital Luanda, doesn’t necessarily mean it will work in the northern Mozambique. In a recent report, research firm Nielsen noted that African consumers’ attitudes towards technology, fashion and how to spend leisure time vary greatly. No prizes for that one.
Thirdly: Arrogance. Booyse says that South Africans sometimes think they know what people in the rest of the continent need. “In the rest of Africa, South Africans are often regarded as arrogant.”
Finally: Not being prepared for the high costs of doing business in Africa. Many South African companies are not aware of the high costs involved in doing business in the rest of the continent. “If you want to spend two weeks in Angola it will cost you R40,000 (US$4,700),” notes Booyse. “It is not cheap and easy.” Flights for example, from South Africa to either Kinshasa or Lubumbashi can be costly, and hotel rates are also very high.
It’s clear that Africa is a fertile place to plant seed. But Africa is not for the faint-hearted as business is done in a very different way to elsewhere in the world, with all manner of social and political hoops to jump through. South African companies have a potentially bright future and definite advantages if they are prepared to take risks, stay humble and do their homework.
Offshore Property Investment – Not for the Faint-hearted.
Timing is everything, and if it isn’t then learning from history is. Continuing to make the same offshore property investment bungles could be the result of a combination of emotional frustration, Afro-pessimism and a Moby Dick like obsession with the Rand.
In 1997 the South African government allowed its citizens to take R200 000 per capita per annum to invest offshore. One may argue that investors practically ran to the offshore hills from an outperformed JSE and evaporating Rand. South African investors stood clutching their modest handful of Rands and looked up in wonder at a booming Wall Street. By 2001 the rand had fallen to R13.50 to the Dollar.
Who would believe that ten years later many countries would be on the verge of bankruptcy and that people would be grumbling about the “Strong Rand” and that the South African Equity market had outperformed most other markets over the same period?
But those in this game for the long haul will remind us that when all seems lost, it’s time to role up the sleeves and capitalise. Back in 2001 when fear gripped investors it was actually the right time to buy into SA equities. When the rand collapsed and afropessimism crept in, investors bought Dollars and Euros expensively and sold out of arguably undervalued markets and bought into markets trading at large premiums.
Looking back over ten years, comparisons have been made to a R100 investment in the JSE all-share index at the end of 2001 that would have been worth about R400 by the end of June this year, versus only around R94 if invested in the MSCI world index over the same period. The main US equity index, the S&P500, is today still roughly 10% below its peak in 2000 in rand terms. Emotions have been the main driver of the investments.
Says Investec Asset Management director Jeremy Gardiner to the Financial Mail August 2011, Many SA investors, having watched with horror over the past 10 years as the rand doubled in value and the JSE delivered enormous returns, are again considering switching at the wrong time — this time out of developed markets and into SA equities and the rand. “Yet again, this decision is made on the basis of emotional frustration rather than recognising that both SA equities and the rand are now relatively overvalued.”
But a steady hand is required here since the strong performance of the SA equity market seems set to continue. Offshore investment in general equities may well have dried up recently, it seems the JSE’s R125bn listed property sector is becoming a hot commodity among overseas investors. Big institutions putting down their names include Principle Global Investors, Black Rock and State Street.
On the receiving end GrowthPoint properties, has seen its overseas shareholding jump from 3% to 11% a while back. Redefine – SA’s second-biggest listed property counter, with a market cap of R20.3bn – doubled its offshore shareholding from 4% to 8% in the same period. “Global investors are now taking note of the fact South African-listed property offers far more attractive returns – total returns of close to 30% last year – than other global real estate markets.” Says Growthpoint executive director Estienne de Klerk.
There is expectation of more overseas funds showing up locally over the next 12 months. Names bandied about include Hyprop Investments, as well as what we’ve see materialise from the merger between Capital Property Fund and Pangbourne Properties, also whatever surfaces from the potential merger between Acucap Properties and Sycom Property Fund and then there’s the listing of Old Mutual’s R12bn property portfolio.
Macquarie First South Securities property analyst Leon Allison spoke to Finance Week recently and said that although returns over the next decade will be more subdued than has been the case over the past 10 years, current positive structural changes will make the sector more investor-friendly.
Bringing us back to offshore options. The rand’s ‘strength’ favours taking money offshore. But the logic for offshore investment goes beyond any potential weakening of the rand. There is much to be said for the need for South Africans to diversify their assets. But there are more South Africans who have in the past got their offshore investment timing wrong. 2001 was the prime example, when a historic devaluing of the rand alarmed investors into the arms of foreign markets. At the peak of the rush, the second quarter 2001, 88% of net unit trust inflows went into offshore funds.
Now according to Marius Fenwick, head of the financial services arm of accountants Mazars: “Now is the opportune time to invest offshore as the strength of the rand makes offshore investment attractive. Instead, offshore diversification should be used to hedge future rand depreciation and diversify through access to large global companies.” So here we go again…
But we know already this isn’t all about the rand. The great Bismark said: “Some people learn from their mistakes, that’s good. But isn’t it better to learn from other people’s mistakes?” Aren’t the underperforming overseas markets just waiting for South African investors? Rand or no Rand variance?
What are the options? Who are the players in offshore property investment?
First of all there’s Growthpoint that bought up a Sydney listed subsidiary applying its winning formula in Australia. Then there’s Emira, which has just put R117m into Growthpoint Australia, in their case they claim the rand had zero to do with their investment move. Emira has a 6.4% stake in Growthpoint’s Australian presence.
International Property Solutions markets UK and Australian residential property to South African investors. CEO Scott Picken was quoted as saying that South Africans wait until the rand is collapsing, panic and throw their money into offshore apartments as it hits bottom, he says. “Most investors have lost money offshore in this decade.”
Financial correspondent Scott Picken writes that comparative data shows that South Africans would have made much more money over 10 years measured in sterling by buying an average house in Johannesburg in 1997 than buying one in London at the same time. Only time will tell if the shoe is now on the other foot.
Other off shore institutional investors include Capital Shopping Centres. British Capital, run through Barnard Jacobs Mellet and Stanlib which has offshore unit trusts. Investec Property Investments has unlisted funds buying property in Europe and the US. There is also Catalyst which has an unlisted fund of global listed property funds. Redefine is working through its London-listed Redefine International. Resilient has New Europe Property Investments (Nepi), which mainly owns shopping centres in Romania. All top performers.
Other choices in property include these very few funds which have actually lost money. Nedgroup Global Cautious (down 8,5%); Sanlam Investment Management Global Best Ideas (down 2,3%) a long term performer though; the Absa International fund of funds (down 15,8%)
Whether it’s a strong Rand or the need to diversify one’s portfolio, these may be the times that offshore property funds offer the South African investor a long term strategy again, last made available ten years ago. Whatever the case this isn’t the time to think with the knee-jerk of emotion or a political bias.
Airport Offices, Conference and Meeting Places – what to expect
With the advent of the aerotropolis many business people are expressing an interest in office and conference accommodation at airports. Terms bandied about include serviced offices, turnkey premises and virtual office. But how close to the airport can you get?
As it turns out pretty close, but often with no cigar. When searching across the globe for serviced office accommodation at airports the directories, internet or otherwise are all smoke and mirrors. A cursory scan of office space at airports on Google or Yahoo gives you blatant statements like “Serviced Office at Heathrow” or “Turnkey facilities at O R Tambo.” With further investigation you discover that there is a helpful little map with direction on how to get to the said facilities from the airport – not in the airport!
So don’t be deceived you may not be able to pick up your luggage and push it to your office at the airport. What you can do is take a short taxi or shuttle ride to one of numerous facilities offered close to airports. Of course this isn’t new by any means but the prevalence of ‘designer’ type offices specialising in accommodating ‘on-the-hop’ business people who want to slip in and out to have a meeting with clients in meeting facilities or a conference room, is on the increase.
Having said that there are many airports that do offer virtual offices in the actual airport. Schiphol Airport, Europe’s 4th busiest, is located in Amsterdam. For $130 a month you can have the key to a very basic but functioning office with electricity, shared ablutions, Wi-Fi and a desk. These seem to be typical.
So why are serviced office facilities necessary? Minimal capital outlay: In the serviced office, you have the choice of bringing your own furniture and office equipment or renting these items from your landlord. According to serviced office providers, the cost of using a serviced office, with or without conference facilities, is approximately 40 to 50 per cent of the cost of setting up and staffing a comparable conventional office. In a Virtual office you bring nothing at all, just your key and WiFi is mandatory.
So what is a Turnkey or Virtual operation? When you rent a serviced office, you don’t have to waste your time designing an office, installing electric and phone lines, recruiting staff, and taking care of all those other details. With a turnkey you make one call today and have a fully functioning office tomorrow.
The difference with these facilities at an aerotropolis is that your facilities are designed for ease of use from the airport and the airport is seen as the centre of the universe with all its tentacles slipping seamlessly out from it into the world around it. Again there is nothing new in this as hotels and conference facilities have been sidling up to airports for years. But the relationship has now become somewhat symbiotic.
Looking more at the conference facilities in particular most hotels either point you to facilities adjacent to or within close proximity to the airport. Like offices most advertised facilities for airport conference rooms are actually not at the airport itself, in fact the advertisements on the internet are particularly misleading in this regard.
Where there are conference facilities and meeting rooms at airports, the model, if there is one, is one of outsourcing. Looking at South Africa as an example: The O R Tambo International Airport has the Intercontinental Sun running upmarket and fully serviced conference and meeting facilities. Boasting seven boardrooms and two conference rooms, facilities cater for between 10 and 100 delegates and can accommodate up to 140 guests for cocktail functions in the private Savuti Restaurant.
Looking abroad, Munich Airport has the Kempinski Airport Hotel located at the centre of the airport beside the terminals. The Munich Airport Academy and training centre specialises in conference facilities and meeting places for business people right beside the airport.
The two above examples seem typical of many airports that seem to have handed over the conference model to the professionals
Airport Meeting Places is big business. There are organisations like Alliance Virtual offices. This international network offers both turnkey facilities and meeting rooms for across the globe. Many of these in airports. Typically these networks’ facilities offer:
- Wi-Fi Internet: Most locations will offer wireless internet access for free, or for a minimal charge.
- They promise “Friendly welcome”: All venues are staffed by a professional team who will be ready and waiting to receive you and your guests. Many venues will also offer additional receptionist support such as administrative services.
- Presentation facilities: Most meeting room venues will have presentation facilities on offer such as screens, projectors, wide-screen monitors and whiteboards.
- Video conferencing: Many venues now have video or audio conferencing capabilities, perfect for long-distance meetings with remote teams or board members.
Airports and aerotropolis business culture is more than ever focused on the world of networking and connecting people using facilities that are both hospitable and convenient. The important thing is if you really want to meet at an airport make sure the facilities you require are actually at the airport.