South Africa can offer good hope to property investors

The rainbow nation has warm weather, an outdoor lifestyle and the chance to turn a healthy profit on property investments. Julian Knight reports

This could be the year of South Africa. The rainbow nation has managed to steer a steady course through the economic turmoil of the past two years and its economy is growing again.

Meanwhile, on a wave of massive infrastructure investment Africa's richest and most successful country is gearing up to host the football World Cup this summer. The streets of Cape Town, Johannesburg, Durban and Port Elizabeth are festooned with flags and banners welcoming the world to South Africa.

The World Cup will showcase the country not just as a tourist destination but also to property buyers, whether they want to settle in its warm climate or invest for rental income or long-term capital growth.

And like most of the globe, the South African property market has had a tough couple of years but is now showing signs of life again. "A couple of years ago [at the onset of the global credit crunch], things flattened out," says Jacques Ellis, the manager of Cluttons, an estate agent in Cape Town's exclusive waterfront development. "Lots of estate agents went bust and the market ground to a halt. But in the past few months we have seen life return; sales and enquiries are up and we expect, with the global focus on South Africa in 2010, that this will continue with international buyers returning in force."

Many buyers from the UK and overseas focus on Cape Town and the Western Cape with its beaches, outdoor lifestyle and vineyards. Despite the credit crunch, which has seen property developments in many parts of the world mothballed, new-build apartments and villas are still coming on stream in the Cape and seem to be selling. "We have just seen a development of 60m2 apartments in the Green Point (a stone's throw from the new World Cup stadium) area of Cape Town come to market at 600,000 rand (£50,700), and half the properties have been snapped up by international investors," Mr Ellis says.

In Cape Town's coastal suburbs, such as Hout Bay, Simon's Town and False Bay, villas with several bedrooms and pools are available at prices ranging from four million rand to more than 10 million. The whale-watching centre of Hermanus, a 90-minute drive from Cape Town, is also seeing major new villa developments, says Seeff, South Africa's biggest estate agency with 170 offices. For those trying to save and willing to take on the hard work, a popular choice is to buy a plot of land with planning permission to build a luxury home. Vacant land with permission starts at 400,000 rand, although this can rise considerably depending on whether or not the land has sea views.

Buyers looking for more bang for their bucks may be best advised to venture away from the Cape. "They may not be as widely known, but I would advise looking towards Umhlanga Rocks and Ballito in KwaZulu Natal, and Kruger National Park in Limpopo, South Africa's most northerly province. These are the current bargain locations," said Tracy French from Seeff.

Those who want something a bit more adventurous and closer to South Africa's wild nature can buy a luxurious lodge in Dinkweng safari park in malaria-free Waterberg in Limpopo from 4.9 million rand for three bedrooms and a pool (www.zorgvlietprop.co.za). Purchasers can view South Africa's famous "big five" wild animals – lion, elephant, buffalo, rhino and leopard – at the nearby Ka'Ingo Private Game Reserve.

Buying in South Africa is fairly hassle free. Seeff says sales take three months, while taxes and fees, although higher than in the UK, still generally equate to only about 5 per cent of the purchase price. However, foreign nationals will have to pay tax on any gain they make when selling. What's more, gazumping is illegal: once an offer is accepted in writing, it is legally binding on both parties.

But such legal sanctions make it imperative to have your finance sorted before making an offer, and in South Africa loans are not easy to come by.

"There are fewer lenders, mortgage types available and loans are more expensive and criteria are much tighter than in the UK, even post credit crunch," said Sean Adams, the international mortgages manager at Savills.

For example, whereas in the UK people can expect to be able to borrow three or four times their income, in South Africa lenders look purely at affordability. "If your mortgage outgoings – in the UK and potentially South Africa – equate to more than a third of your income, then you will find it difficult to get a loan," said Mr Adams.

As for mortgage rates, historically they are higher in South Africa, currently standing at an average of close to 11 per cent. "All in all, if you haven't got the cash to buy outright,it's a difficult market to work in. You have to accept higher rates and can expect to have to find a substantial deposit. Fifty per cent is common," Mr Adams said.

Those lucky enough to have the money to buy without a mortgage have another issue to consider: currency. "Historically, the rand has moved between 20 to the pound down to just eight. In the past year, it has appreciated enormously against the pound and currently stands at about 11," said Duncan Higgins, a currency analyst at Caxton FX.

High interest rates in South Africa partly account for the rand's current strength but the volatility does present problems for UK buyers. In the long term, if the rand falls in value any profit made from property bought now in South Africa could be reduced.

During the purchase itself, Mr Higgins says, buyers can take some precautions. "A move of 5 or 10 per cent in the exchange rate during the period between offer and exchange could be costly. One way to offset this is to buy a forward contract. In effect, you can book the exchange rate as it stands today for a few months ahead. When you go ahead with the purchase, you can use this contract if the pound has fallen in value," he said.

For those edgy about a big outlay but looking for a taste of the South African lifestyle, a popular option is fractional ownership. Instead of buying a property outright, you purchase a fraction. Unlike timeshare, where you simply buy the right to stay in a property, with fractional ownership you own a portion of the equity of the property, which can be sold at a later date. One of the most attractive fractional ownership arrangements – in terms of location – are offered by Zorgvliet Residence Club. For 72,000 rand (around £6,000) purchasers receive a week each year (144,000 rand for two weeks) in a five-star room at the Zorgvliet lodge nestled in a picturesque vineyard near the university town of Stellenbosch. Use of the on-site pool, luxury room, free case of the vineyard's wine and discount spa treatment and restaurant dining are also included. Purchasers who can't use their week can swap it through the Interval vacation exchange network, which offers access to hundreds of properties around the globe.