The new gold rush

Ten years after democracy formally arrived in South Africa, opinion is still divided on how far the country has moved on. Detractors cite the huge gulf between rich minority (white) and the poor majority (black), the Aids epidemic, a sky-high crime rate and President Thabo Mbeki's relationship with neighbour Robert Mugabe.

Ten years after democracy formally arrived in South Africa, opinion is still divided on how far the country has moved on. Detractors cite the huge gulf between rich minority (white) and the poor majority (black), the Aids epidemic, a sky-high crime rate and President Thabo Mbeki's relationship with neighbour Robert Mugabe.

South Africans who fled abroad in the last decade to avoid what they thought would be the downfall of their country are now returning home, however. Interest rates have almost halved in the past three years, the stock market is up 30 per cent in a year and inflation is falling. The government is working hard to provide health, housing and job opportunities for previously disadvantaged South Africans.

And to adventurous property investors, South Africa is a land of opportunity. Since 2000 the average house price has climbed 46 per cent, but Cape Town has done much better, with some estimates putting the figure at 70 per cent. The lettings market is buoyant, too, which has led some UK buyers to look at the buy-to-let market there. "We have quite a number of British clients," says Dexter Leite, who heads the rentals department of Pam Golding Estates' Cape Town operation. "Yields of between 6 per cent and 11 per cent are being achieved."

David Higginson moved to Cape Town from Nottingham four years ago. "I came for the climate and the quality of life. But then I saw what great property investment opportunities there were here." He now owns four homes in the city: two guest houses in the fashionable seafront district of Camps Bay and two houses in the centre of the city. "Yields on properties here are good, but capital growth has been excellent," he says. "There has been no shortage of quality tenants, either."

Direct flights from London have helped, but Cape Town's status as one of the world's most exciting cities has also lured investors. Alex and Helen Sharpe, from Shropshire, have spent much of the past year looking for investment opportunities. "The market in the UK is saturated," says Alex, a technical author. "And we have dismissed Spain and Florida. South Africa looks a very good proposition to us."

But the couple, who have yet to visit the country, are not rushing in. They have hired a property search specialist, Thabalanga, to study the market for them. "They will look at a range of options and narrow them down before we go out there. Two of our options are buy-to-let and buying off-plan," says Alex.

Thabalanga was set up last year to help Europeans buy South African property. "While most of my clients are looking for a home they can spend time in, a growing number are looking at it primarily from an investment angle," says Dominic Johnson-Allen, a Londoner who moved to Cape Town last year. "Interest rates are still high - about 10 per cent - which means a lot of locals can't afford to buy, so they rent. But rates have fallen from almost 20 per cent and that has pushed house prices higher."

So what can investors buy? Leite says cheaper properties in the city centre will generate a higher income than larger properties in the suburbs, but capital growth will be less. In the suburb of Kenilworth, a one-bedroom flat is selling for about £29,000 through Brooks and Michaels. It is in excellent condition and demand for similar properties is high.

"We would expect to get about £220 a month," says the agency's Cathy Campbell. "Rentals have been going up a lot recently, driven by demand from South Africans who have been abroad coming back into the country. There are also a lot of first-time letters leaving home."

At the other end of the scale, a family home with a pool in the upmarket suburb of Constantia will cost a little over £200,000, but will generate £1,500 a month in rent.

The laws governing rental property in South Africa are similar to those in Britain. Non-residents are exempt from South African income tax, but must declare overseas earnings on their UK tax return. The Pretoria government has just introduced capital-gains tax, which applies to anyone with a second home. Owners must pay tax on 25 per cent of all profits over 10,000 rand.

The market for holiday lets is also buoyant. As well as overseas visitors arriving in droves almost all year round, the Western Cape is the destination of choice for wealthy Johannesburg families. In Hermanus, a town 90 minutes from Cape Town famed for the whales that give birth in its bay from September to March, a three-bedroom £40,000 house with a pool will command a weekly rent in season of at least £300.

Although the figures look mouth-watering, managing agents can charge anything up to 30 per cent for finding tenants and looking after the property. Ross Elder of holidaylettings.co.uk, says: "Buyers must ask local letting agents what type of properties attract the best rental returns for the purchase price."

Maintenance and security are key factors for landlords living thousands of miles away. "Investors are primarily looking at golf estates, beachfront apartments, marinas or small private estates where security is paramount," says Johnson-Allen, but prices are rising with demand.

"In Strand, 30 minutes from the city centre, they are building 300 new apartments. One block, Atlantica, has 16 floors and will be shaped like an ocean liner, according to the developers. A two-bedroom 120m² apartment would cost about £200,000, and this is not the most upmarket area."

One of the biggest risks facing investors in South Africa is also one of its biggest attractions: the currency. The rand has see-sawed dramatically between 10 and 19 to the pound since 1999. It is currently about 12, and while any weakness is good news for buyers, it is bad for investors bringing cash out of the country.

Brooks & Michaels, 00 27 21 762 6492

www.thabalanga.com

www.pamgoldingestates.co.za

www.holidaylettings.co.uk

Compare the best mortgages at Independent Compare