New Exchange Controls a Boost to Offshore Property

FINANCE Minister Trevor Manuel's budget announcement that exchange controls on institutional investors would be removed could prove to be a boost for institutional property players with offshore property funds.

Manuel said last week that exchange controls on institutional investors would be removed and replaced with a system of prudential regulation, involving quarterly reporting and monitoring of foreign exposures by the Reserve Bank.

The budget review said further work would be done this year on the final prudential foreign exposure limits. In the meantime, the limit for pension funds and underwritten policies of long-term insurers would be increased from 15% to 20% of total retail assets.

Colin Young, head of institutional asset management at Old Mutual Investment Group Property Investments (OMIGPI), says he believes the increase to 20% in the offshore allocation is "very positive" for institutions. But he says it is also a double-edged sword because in terms of asset allocations, some local investments could lose out as money moves offshore.

The first time the allocation was increased, to 15% in the mid-1990s, South African property was a big loser with institutions selling down their direct property allocations from above 10% to 5%.

Young says this "was very negative for the property industry" at the time, because interest rates were moving up. But this time around the property cycle is different and "still very positive" and it is unlikely that property will be the asset class to suffer if any money moves offshore.

"Those asset managers who have value propositions offshore are likely to benefit. For example, our new Triangle India Real Estate Fund, which is the first international property fund we are launching and which will build 20 'super-regional' malls in India, should benefit."

Young says local institutions will now have the flexibility to move money offshore into investments such as OMIGPI's Triangle India Real Estate Fund, which is a $500m development fund domiciled and listed in Mauritius.

Property economist Francois Viruly, of Viruly Consulting, says the removal of exchange controls on institutional investors is "positive" and that institutional investors are already looking at investment overseas.

He says this could further encourage the trend, especially if South African investors continue to find investment stock shortages in SA.

"At this point in time, we are sitting with very low commercial property vacancies and it is a very tight stock environment," says Viruly.

He says the exposure of local institutions to direct property is about 3,5%, compared with international institutional benchmarks that are closer to 10%. If South African institutional investors are to increase their exposures in line with international standards, the local market would never be able to meet the demand for property stock.

"The question for South African investors is, do they invest in the north, such as America or Europe, or do they start investing in the south, such as in India?

"We probably understand the market in the developing world better than investors in Europe.

"I think South African investors have a better advantage to invest in emerging countries than in more established countries," says Viruly.

Unless it can be ensured that conditions remain attractive in SA "whether from an policy or economic perspective", South African investors are likely to be faced with "either remaining in SA or investing elsewhere. Increasingly our property market will have to be benchmarked against opportunities that exist outside of our borders."

Article by: Nick Wilson - www.businessday.co.za