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Would the Western Cape, South Africa region be good for a US Citizen to relocate to within the next 5 years? Assuming we just get rental property for now, would it also be an option to move there after a few years?
Hello! Thank you for your question about a US citizen relocating to South Africa. In researching this topic, I found the two most useful sources to be this article on an international realtor's website, which talks about the regulations foreigners should be aware of when moving to the RSA, and this article on the top ten places for real estate investments in the Western Cape Area. In short, the property market in South Africa depends on location, with good investments available in Cape Town, particularly certain suburbs, and the Western Cape. For foreigners, there are a number of visa and tax/fee requirements, and it should be noted that non-resident land owners may be subject to changes in politics -- I'll get into the details below.
I have broken my research into three areas: an overview of the South African housing market, rules and regulations for foreigners, and top places to consider in the Western Cape Area. I have also included some pros and cons of living in South Africa as compiled by expatriates. Please see below for the deep dive of my research.
OVERVIEW OF SOUTH AFRICAN HOUSING MARKET
Though the South African economy has shown slow growth since 2008, the housing market has demonstrated a degree of resilience in the past few years. This is due, in part, to the booming real estate market of the Western Cape region, and the high number of first-time home buyers. The national real estate market was valued at "$5.11bn in 2014, and projects this figure to rise to $6.66bn in 2015, $8.07bn in 2016 and $9.31bn in 2017," suggesting continual growth despite the meager outlook for the national economy's success.
For foreign investors, the South African currency, the Rand, is much lower than the US dollar, at 1 USD to 13.3 Rand, making a house purchase "dramatically less expensive." It should be noted that 2016 did see a drop in foreign investment in the country due to the pessimistic economic reports, and the projection that household credit extension by banks will remain subdued in 2017.
Financial numbers for mortgage rates show high interest rates as of 2016 (10.5% for prime and variable), while inflation is projected to fall slightly in 2017 from 6.4% to 5.8%.
These reports are tempered by the growth of the real estate markets in metropolitan areas and the Western Cape region. Also, the affordable housing market (i.e. houses with 450-850 sq. ft) grew by 8.3% in 2015. These varying outlooks on the real estate market in South Africa once again reinforce the old adage of location being king. For the Western Cape Area, the market is strong with high demand for houses.
As far as buying in South Africa with an eye on a return of investment, expatriates continue to consider the Western Cape Area a good investment for owning and for buying to-let properties. However, as one investment advisor cautioned, the value of homes is still recovering from the 2007/2008 crash. Homes over R3 million (USD 225,000) do not have as strong of a return on investment rate when compared to lower priced homes. He suggests that property is not a good investment currently in South Africa "with the exception of in the Western Cape, Sandton, and maybe a small part of the KwaZulu-Natal north coast" areas.
For rental properties, the homes that see the least tenant delinquency are those rated at less than R7,000/month. The range of R3,000 to R7,000 covers 60% of the national rental market. This report suggests that it is the quality of the tenant, not necessarily the locale that has the greatest impact on the landlord's return on investment, and that it is currently a "landlord's market."
RULES AND REGULATIONS FOR FOREIGNERS
The top three regulations to consider when purchasing property in South Africa as a non-resident seem to be maintaining the correct visa, taking into account extra costs when purchasing, and the government's changing ideas on the subject.
A long-term visa is advised over a short-term one if the non-resident is planning on taking multiple trips over the course of several years in and out of South Africa. This cuts down on having to fill out the applications repeatedly. If the non-resident is retired, they can apply for a Permit for Retired Persons (on a temporary or permanent basis) and an Independent Financial Person's Permit (this is only for permanent residency). If the non-resident has no family ties to the country and is not retired, the visa application is less guaranteed, and "their success will depend upon the skills and qualifications they offer, and whether or not there is scarcity of people with their field of expertise in South Africa.”
Once a visa has been secured, the financial terms of purchasing a home in the country come into play. Transfer duties, property rates and taxes, a capital gains tax, and withholding tax of 5% are possible on properties over R2 million and should be taken into account when setting a budget for buying a property as a non-resident. The capital gain tax is an amount calculated from the property purchase cost, up to 16.4%. It also applies to income brought into the country from other nations. If a non-resident sells a property in the RSA, it again comes into play, and this time is "calculated by adding 25% of the capital gain, or profit, to the individual's income for that year and taxing that income at the individual's marginal rate of income tax" (usually 40%). The transfer duty cost is calculated from the purchase price and varies depending upon the residency status and income of the purchaser. Purchasers of property in South Africa are also responsible for the inspection and initiation fees. Deposits are not required, but can be stipulated in contracts with the seller, and are often preferred by the involved banks.
If you do purchase a home, be aware that the property owner must have, by law, two certificates-- one that certifies the electrical systems were installed up to code, and that all "accessible parts of the property are free of infestation by certain defined beetle". Though, for most urban areas, the beetle certificate isn't compulsory as it is in coastal areas.
As far as securing financing is concerned, most foreigners finance outside of South Africa due to the country's high interest rates. As you have found already, non-residents can apply to South African institutions for a home loan, but "they may only obtain a loan for 50% of the purchase price, and the sale will then be subject to a suspension condition, which will render the contract null and void if the loan application is unsuccessful." The loan amount as well as profit from the resale can be repatriated.
On the tax front, it is the non-resident's obligation to register with the government as a tax payer. Any income earned in the country is subject to taxation, though anyone under 65 that makes R27,000 annually, or if you're 65 and older and make R42,640 annually, is exempt from all but a marginal non-resident tax rate. It is highly advised that first time foreign buyers contact a consultant on these issues and for information about income tax laws and these purchasing regulations.
One political note for foreigners looking to invest in this housing market is that the president, Jacob Zuma, has announced that his government is interested in changing the rules for land acquisition by foreigners. The Regulation of Land Holdings Bill has since stalled in Parliament, but is worth noting that foreigners would be prohibited from owning land in "freehold." They would instead be "permitted to acquire land under long-term leases of 30 to 50 years." This bill mainly seeks to control the acquisition of large land tracts, but has a gray area concerning residential property. The Minister for Rural Development and Land Reform has said it will not impact residential property ownership, but it has made foreign investors wary. It should be noted, however, that any foreigners already owning land in the country at the time of the bill, should it pass, would be exempt from these prohibitions. As of the end of 2016, this bill has not been passed.
TOP AREAS FOR REAL ESTATE
Currently, the best areas for foreign investment and for nationals are the Atlantic Seaboard, parts of Cape Town, and Stellenbosch.
On the Seaboard, Bantry Bay, Camps Bay, Clifton, and Fresnaye saw the greatest influx of foreign residential buyers, who accounted for 17% of all sales in the area. These four areas are suburbs of Cape Town, all affluent and close to the water. Clifton and Bantry Bay, in particular, have spectacular ocean views.
Other areas in Cape Town that are not as expensive but are seeing great real estate booms are Goodwood, Richwood, Bothasig, Edgemead, and Montevista. These areas are close to the major highways, public transport, and community centers such as sports clubs, pools, libraries, and top schools. Theses neighborhoods are also close to the Panorama and N1 City hospitals.
Western coastal towns along the Garden Route and the Wineland areas have also seen an increase in their real estate market. Somerset West and Paarl, along with Stellenbosch, are three such towns along the coast from Cape Town that are known for their food and wine, as well as outdoor activities. Stellenbosch has been billed as the Napa Valley of South Africa though locals claim it is its own unique treasure.
When considering rental properties, this article has the top areas for tenants paying on time. The data comes from a 2014 report, and shows that Stellenbosch is highly rated, as is Brackenfell, a suburb of Cape Town. Camps Bay, in Cape Town, however is not. These areas are also included in the top safest places to live in South Africa. The Garden Route, West Coast, and Cape Town are three out of those five. As Somerset West and Paarl are along the Garden Route, and close to Stellenbosch, they generally fall under the safe and quality tenant umbrella as well.
PROS AND CONS
From two well-known expatriate sites, these seem to be the major pros and cons of moving to this region of South Africa.
Pros:
1. Ethnic diversity in Cape Town- popular with many European and African expats and people from across South Africa.
2. Long summers and mild winters.
3. Excellent public transportation and infrastructure.
4. Cape Town and the Western Cape have lower crime rates than elsewhere in the country.
5. Beautiful beaches and mountains.
6. Good, local wine.
7. Low cost of labor means affordable domestic help.
8. High USD to Rand conversion rate means ex-pats have high quality of living.
9. Friendly locals.
10. Good schools and healthcare.
Cons:
1. The country overall has a higher crime rate than most European cities.
2. If you are looking to work in the country, their Affirmative Action laws and relatively high unemployment rates can make it difficult for expats to be hired.
3. Ineffective/corrupt government can tie up business deals and money transfers.
4. Healthcare can be expensive: "If you are treated in a state hospital while living in South Africa you will be required to pay." The amount charged depends on your salary and number of dependents.
5. Parts of Cape Town can be very expensive.
6. Summers can be windy.
7. If you're a big surfer or swimmer, the water remains cold year round, and they do have great white sharks off the coast.
8. Public transportation is often limited to within a city .
9. Onerous bureaucracy rules and regulations.
10. High capital gains taxes for non-residents.
CONCLUSIONS
The property market in South Africa is varied, and is considered only to be a good investment if the property is located in Cape Town or the Western Cape. Foreigners should be aware of visa requirements, property tax and fee laws, and the government's possible changing views on non-resident land owners. The top real estate markets are in suburbs of Cape Town, and coastal cities such as Stellenbosch. The top benefits for an expatriate in this area are the high quality of living, the beautiful landscapes, and temperate climate, while the top disadvantages are an elevated crime rate, ineffective government, and high tax/property fees.
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