This article was first published in the first-quarter 2014 edition of Personal Finance.
If you want to buy a holiday home in the country with the best all-year weather, your choice would be either Malta or Zimbabwe. They are considered to have the best climates in the world, according to International Living magazine’s Quality of Life Index 2012 (see “Using scorecards to choose a country”, below).
The great weather notwithstanding, it is pretty obvious why few people would choose to buy in Zimbabwe. What about Malta? It has one of the highest population densities in the world, with 1 300 people per square kilometre, against 186 people per square kilometre in Seychelles, whose population of 90 000 would fit into London’s Wembley football stadium.
The weather, political stability and population density are some of the issues you need to take into account when you buy a property offshore. Here is what you should think about:
Your reason
Your reason can range from a change in lifestyle to tax advantages. The reason will dictate the countries you compare and the weighting you accord to their respective advantages.
For example, if you are looking for an offshore business base, Mauritius, with its more developed financial sector, wide selection of global banks and a stock market, will rank higher than Seychelles, which has been a late-starter in providing these facilities. But if your priorities are uncrowded beaches, limited resort development and protected natural habitat, Seychelles will beat Mauritius.
Type of property
Properties range from a cost-you-a-fortune, four-bedroom freehold property in central London, to a more affordable, but still expensive, one-bedroom apartment in a marina in Seychelles or Mauritius.
Type of property purchase
In most jurisdictions, you own the property under freehold title. However, if the property is within a development, the freehold title can be qualified by a form of sectional title similar to that in South Africa.
For example, on Eden Island in Seychelles, although you own the property, you have to pay a levy to cover the costs of administration and upkeep, and you belong to a body corporate that draws up and polices the rules of the development.
Cost
Chris Immelman, managing director of Pam Golding Properties International and Projects Division, says that you will get a lot more for your rand in some countries than you will in others. For example, €1 million (R13 590 000) will buy you a very nice three- or four-bedroom villa of about 350 square metres in Mauritius or Seychelles, but the same amount will limit you to an apartment of about 120 square metres in central London.
On the Indian Ocean islands, you can expect prices to start at about R22 000 a square metre for less luxurious accommodation in a lesser-known development, to well over R50 000 a square metre in the top-of-the-range developments.
Apart from the cost of the actual property there will be other costs. These are:
Malta
* A notarial search fee and a registration fee of one to three percent of the purchase price;
* A fee of one percent of the purchase price for a lawyer to scrutinise documents;
* A property registration fee of €233 (R3 167);
* Transfer duty of five percent of the purchase price; and
* A realtor commission of three to five percent, payable by the seller.
Mauritius
* Notary fees:
– Integrated Resort Scheme (IRS): 0.62 percent of the purchase price (including VAT); or
– Real Estate Scheme (RES): 1.15 percent of the purchase price (including VAT).
* Government registration fee:
– IRS: US$70 000 (R703 500) or five percent of the purchase price, whichever is higher; or
– RES: US$25 000 (R251 250).
* For both RES and IRS:
– Approval fee: MUR10 000 (R3 300); and
– Escrow account opening fee: US$300 (R3 015).
* Realtor commissions are generally charged at four percent, of which two percent is paid by the seller and two percent by the purchaser.
Portugal. James Bowling, chief executive of international property investment company Monarch & Co, says the additional costs will be six to eight percent of the cost of the property. The costs are for the purchaser’s account. Commissions to realtors are between four and seven percent, and are normally for the seller’s account.
Seychelles
* Residency fees:
– Attorney’s fee: US$1 000;
– Processing fee: SCR1 000 (about US$100) or about 1.5 percent; and
– Residency permit application fee: SCR150 000 (about US$12 500).
* Legal costs:
– Natural persons: 1.4 percent of the purchase price of US$500 000; one percent of the next US$500 000; and 0.5 percent on amounts over US$1 million.
– Juristic persons (companies and trusts): 1.6 percent on a purchase price of US$500 000; 1.2 percent on the next US$500 000; and 0.7 percent on amounts over US$1 million.
The first sale of any parcel of land on Eden Island by the developer to a purchaser is exempt from stamp duty and fees for the approval of the sale. For any on-sales, the purchaser pays a maximum duty of 6.5 percent (five percent stamp duty and a sanction-processing fee of 1.5 percent).
Levies, rates and utilities
Annual levies can be high in property developments. The cost of utilities, such as water and electricity, can also be high, particularly in countries where natural resources are limited. Most island destinations have to import most of their energy. Malta has virtually no water and has to desalinate seawater, which pushes up the cost of utilities.
Craig Heeger, chief executive of the Eden Island marina, says the basic levy is usually based on the internal dimensions of a unit. On Eden Island, the average basic levy is about US$3.25 (R33) a square metre a year. Garden homes pay additional amounts.
The levies may depend on the stage of a development. In the early stages, when there are few owners, you can expect the levies to be higher than when a development matures and has many owners.
Heeger says it is important that you check on the levy reserves. He says that at Eden Island the reserves are currently healthy.
There are no property rates and taxes in Malta. The levies average US$9 (R91) a square metre a year. However, Bowling says that you will incur additional costs if you buy a new unit in Malta, because air-conditioning and bathroom and kitchen fittings are not included.
In Portugal, you can expect to pay levies from ¤60 to ¤85 a month on a two-bedroom apartment, and rates of about 0.4 percent on the value of your property, Bowling says.
Residency/citizenship
Most countries will grant you residency rights if you buy a property of a certain minimum value. However, citizenship is often not on the cards no matter how long you stay. In most cases, your residency rights expire when you sell the property.
Investment returns
Even South Africans who bought for lifestyle reasons on the Indian Ocean islands have earned a sound return on their capital, Immelman says. For example, at Tamarina Golf and Beach Estate in Mauritius, villas purchased in 2006 for US$1 million (R10 050 000) are now selling for about US$2.5 million (R25 125 000), depending on the condition, size and finishes. On top of the capital growth, there can be rental income, which has been growing at a rate of six percent a year.
In Seychelles, a two-bedroom apartment at Eden Island bought for US$300 000 (R3 015 000) in 2006 is now selling for US$615 000 (R6 180 750), while a four-bedroom villa, which cost US$1.525 million (R15.33 million) in 2006, is now selling for US$2.8 million (R28.14 million).
Bowling says that a property bought in a sought-after area in Malta 10 years ago will have appreciated by between 80 percent and 120 percent; if the property had been bought five years ago, the appreciation would be between five and 20 percent.
On the other hand, if you had bought in most European countries in 2007, and therefore suffered the price knock-back in 2008, you would not have seen much of a capital return, although prices have started to climb again in the United Kingdom.
The potential for growth off the low base of 2008 in places such as the UK is likely to be sound over the medium term, but it is expected that Portugal and, in particular, Spain will take longer to recover.
Bowling says that, traditionally, Portugal has seen capital growth of about five percent a year on property, and the fall-out from the 2008 subprime crisis and uncertainty have created a buyer’s market.
Immelman points out that a property investment in foreign climes may be a sound currency hedge, with your returns multiplied by the depreciation in the value of the rand.
Heeger says the time that it takes to resell a property will depend on the maturity of a development. Resales can be expected to take longer when the developer is still selling new units. For example, a resale on Eden Island can be expected to take six to 12 months.
Resales often need to go through a sales structure set up by the developer, Heeger says.
Rental
In most cases, it is unlikely that you will use a holiday-in-the-sun property throughout the year; therefore, you may want to rent it out.
A few developments have rental administration facilities, for which you may be charged up to 25 percent of the rental.
However, rental pools are rarely available. Where they are, Heeger says that they are normally structured in two ways:
* Your property is placed in the pool and your share of the total rental is in proportion to the size and/or value of your property, less costs; or
* You place your property in the pool and it is then rented out on a fair-distribution rotational basis. You receive the full rental earned by your unit, less costs. This is the structure used at Eden Island.
Heeger says that costs will depend on whether you, as the owner, find the tenant, and whether the tenant comes through an agency or through the development itself.
Short-term rentals generate a higher income than long-term letting arrangements, but a long-term rental assures you of a steadier income stream.
Heeger says that, depending on the size of the unit, you will have to rent it out for two to three months of the year to cover the annual levies.
Some people use websites such as www.gumtree.com to advertise holiday accommodation, particularly where rental arrangements are not available. Another option is a property swap using a website such as www.homeexhange.com
Weather
William Shakespeare obviously had not been to a tropical island paradise when he wrote of England as that “other Eden, demi paradise … this blessed isle …” If he had, good Will would have been far more likely to have chosen Seychelles, which has a good all-year-round climate and is outside of the cyclone belt.
You need to take account of the weather in all seasons. Overly hot summers can be just as uncomfortable as a wintry and wet London. Surprisingly, Malta’s average maximum summer temperature of 34°C is higher than that of Seychelles – 32°C – even though the latter is within the tropics.
Seychelles comes off better than Mauritius, which falls within the cyclone belt, particularly if you have a boat to moor at a marina.
Lifestyle
There is an oft-stated view that after 10 days many tourists start to suffer from what is called island fever. In other words, they become tired of doing the same thing day after day.
If you want to lie on the beach, hike in tropical forests, fish or dive on coral reefs, seldom seeing another soul, the Indian Ocean islands should be high on your list of destinations. But if you want night-time action, the Mediterranean countries are more likely to appeal to you.
Population density
The number of people, including the number of tourists, can affect everything from standing in queues to getting around. Population densities can range from an uncrowded, low-population country such as Seychelles to a very crowded Malta, which has one of the highest numbers of people per square kilometre in the world.
Natural and historical interest
Some countries have set aside extensive areas where flora and fauna are protected.
Although a very small country, Seychelles has set aside a sizeable percentage of its land surface for nature reserves. For example, 20 percent of the main island of Mahé is in the Morne Seychellois National Park. The protected areas include a World Heritage Site, the Vallée de Mai, on Praslin island, where the famed Coco de Mer palm is found, and the island of La Digue, where giant tortoises roam free and vehicular traffic is restricted to ox-carts.
Seychelles has established six marine reserves, which have remarkable coral reefs teeming with colourful fish.
Seychelles Finance Minister Pierre Laporte says that large hotel developments – currently 31 – will be limited to another three or four to protect the island’s ecology.
The government’s policy is to concentrate on the upper-income tourism market, which restricts the total number of visitors to the island.
Exchange controls
What you take in to buy property, you need to be able to take out again. None of the major holiday property-purchase destinations have exchange controls.
Financing
Immelman says that financing is available in most countries. The level of financing is typically up to 70 percent of the purchase price, but, depending on the financial strength of the investor, this can be increased. The loans usually have a term of 10 to 15 years.
Bowling says that in Malta you can finance a property purchase with a loan of up to 80 percent; interest rates are around five percent and the term is up to 30 years. However, Maltese banks will be more cautious about lending you money if you are over the age of 65, he says.
Liability for tax
In most of the countries where you can invest in a residential property, you pay tax only on income generated in that country, and not on income you derive from offshore. This is likely to include taxation on any rental of property, depending on how and where the rental is paid. Some countries, such as Seychelles, insist on taxing rental income even where a foreign tenant pays the rental in a foreign currency to a foreign owner through a bank in a foreign country.
You need to take a close look at the finances of countries that have economic problems since the experience of Cyprus, where the government overnight slapped a tax of 10 percent on money held in bank accounts, to meet a European Central Bank demand that the country balances its books.
If you are subject to tax in both South Africa and another country of residence, you need to check if any double taxation agreements are in place. Double taxation agreements ensure that you are not taxed twice on the same income, by giving you credit for the tax that has been paid in another country.
Taxation agreements may also be designed to stop tax avoidance. South Africa recently concluded a new tax agreement with Mauritius that aims to stop South Africans using the island as a tax haven.
Johan Hatting, PricewaterhouseCooper’s senior international tax manager, says the most significant change in the new treaty concerns companies that are dual-resident in both Mauritius and South Africa. In terms of the old treaty, a dual-resident company was taxed in the country where its “place of effective management” was situated. Under the new treaty, the “effective management” criterion has been replaced with administrative discretion, which means that the South African Revenue Service (SARS) and the Mauritian authorities must agree on whether a dual-resident company should be taxed only in Mauritius, or only in South Africa. If SARS does not reach an agreement with its Mauritian counterpart, the company will pay tax in South Africa and Mauritius, Hatting says.
Tax treaties vary as do tax regimes, and you may need expert advice, taking account of where you are resident for tax purposes.
If you want to move to a foreign country to avoid South African taxes, but you want to visit this country from time to time, you need to be careful about how much time you spend in South Africa.
If you are a South African resident, you pay tax on all income and capital gains earned worldwide, except for foreign pensions.
Paula Bagraim, a partner at Maitland, says that SARS regards you as a tax resident if in any tax year:
* You are ordinarily resident in South Africa in that year;
* You are physically present in South Africa for more than 91 days in aggregate for that year and in each of the preceding five years of assessment; and
* You are physically present in South Africa for a total of more than 915 days in the five preceding years of assessment (in other words, more than 183 days on average for each year).
All three requirements must be met before a person will be regarded as tax resident. If you do not meet one or more of the requirements, you will be regarded as a non-resident for tax purposes.
Bagraim says the test is applied over a six-year period (current tax year and the five previous tax years). If all the requirements are met, you are deemed a resident from the first day of the current year of assessment (thus the sixth year).
Accessibility
You should consider the regularity of flights, the number of hours you will spend in the air, and whether or not international airlines fly directly to a country. The number of airlines that fly to a country may affect transport costs.
Communications
This includes telephone access and internet broadband. In some countries, the broadband may be slow and the cellphone coverage limited. A cottage on an island in Seychelles is not the right place if you want to conduct business over the internet every day.
Most developments provide wi-fi access.
Cost of living
The cost of living can be high in countries that rely on imported goods, particularly luxuries. For example, the cost of wine on the Indian Ocean islands is notoriously high, whereas in Spain you can buy a good bottle of plonk for very little. In Seychelles, the cost of living is accentuated by what could be regarded as an overvalued currency.
But there are contradictions. In Seychelles, a fairly ordinary meal out for two people will cost you a minimum of R1 200 – far more than in the finest restaurants in South Africa. But the price of local produce is very reasonable. At the daily market in Victoria or at roadside stalls, you can buy a medium-sized fish, which will feed four people, for SCR50 (R42) and enough vegetables and salads for about SCR100 (R83).
In Mauritius, restaurants are cheaper and of better quality, but fresh supplies are not as freely available or as cheap.
In Malta, which produces very little of anything, food is expensive whether you self-cater or eat out.
Political and economic stability
Until recently, countries in the Mediterranean had an edge over countries such as Mauritius and Seychelles, as well as those in the Caribbean, because it was assumed that they were more stable economically and politically.
But then along came the 2008 subprime meltdown, which not only exposed irresponsible lending by banks but also bad fiscal policies in the developed countries. Property prices in countries such as Spain and Portugal took a beating.
The overhaul of residency rights and property ownership in many of the Mediterranean countries has been driven by the need to sell off properties in a moribund market with falling prices.
Spanish Prime Minister Mariano Rayo was recently quoted as saying that Spain needs to attract foreign investors to help digest the glut of some 700 000 new homes languishing on the market in search of a buyer. “Someone’s got to buy those homes,” Rayo said.
Property prices in Spain and most other Mediterranean countries look favourable now, compared with what they were before the 2008 financial crisis. But the glut of properties and the political instability of many of the countries are unlikely to result in any real after-inflation capital growth for years to come.
In Europe, austerity programmes that limit social entitlements, from free education to over-generous pension schemes, have resulted in often-violent street protests; while the need to create jobs is putting fiscal restraint under pressure as borrowing becomes increasingly expensive.
Suddenly, the Indian Ocean islands are looking like a much better deal. For example, Seychelles has a track record of political stability, a move towards a free market economy, responsible fiscal management with a budget surplus for the past three years and an average 4.5 percent economic growth over the same period. Property prices have climbed steadily, increasing by between five and eight percent a year compounded on Eden Island since the project was launched in 2006.
In 2008, Seychelles was the subject of an International Monetary Fund (IMF) austerity programme after a number of years of a highly socialist economic system that saw its economy collapse, with ships anchored offshore refusing to offload their cargoes unless they were paid in cash.
Laporte told Personal Finance that the island state took a lot of pain in 2008 and 2009 as it opened up its economy and lifted trade barriers: the economy shrunk by 1.09 percent in 2008 and a further 0.2 percent in 2009, with inflation soaring to 60 percent.
“We are now committed to a free-market economy. Even if the IMF and World Bank withdrew their guidance that we would not change,” he says.
It is not that Seychelles and Mauritius are immune to upsets that may have serious consequences for their economies. For example, Laporte says that Seychelles, which is almost completely dependent on imported oil for most of its energy needs, is particularly vulnerable to oil price shocks.
But this may soon be a problem of the past. While not holding out any promise of success, he says that two oil companies are about to start test drilling in parts of Seychelles’ 1.3 million-square-kilometre economic zone. If there are significant oil and gas finds, Seychelles – one of the smallest countries in the world by population and land surface – will become the place to have a property toe-hold.
In comparing economic stability it is important to look at factors such as current and past inflation rates, employment rates and economic growth.
Security
Security includes personal safety and security of ownership and tenure. The level of crime in a particular country is likely to be dictated by economic factors, such as unemployment.
You may even have to take account of piracy if you’re considering an island hide-away. For example, there have been three acts of piracy in the Seychelles’s economic zone. But, according to the country’s foreign minister, Jean Paul Adam, the problem has been mostly solved by the co-ordinated efforts of the world’s major navies, improved radar surveillance and prosecuting and imprisoning pirates, rather than the catch-and-release policy that applied before.
Seychelles has a very low crime rate. Crime that involves tourists is opportunistic in nature, rather than violent, as has been the case in Mauritius, where a tourist was murdered at an upmarket beach resort two years ago.
USING SCORECARDS TO CHOOSE A COUNTRY
You can assess different countries by using international scorecards that compare things such as competitiveness, corruption and quality of life.
When investigating the merits of a country as a permanent holiday destination, probably the two most important scorecards are:
* The Travel and Tourism Competitiveness Report by the World Economic Forum (WEF), which assesses how 140 countries compete in the tourism market; and
* International Living magazine’s Quality of Life Index 2012, which uses nine factors to measure the extent to which you would enjoy living in each of 193 countries.
The scorecards, as well as the methodologies behind them, can be found at www.weforum.org/issues/travel-and-tourism-competiveness/index.html and www1.internationalliving.com/qofl2011
The Travel and Tourism Competitiveness Report and the Quality of Life Index do not agree in their assessments. For example, Switzerland, where the WEF happens to be based, is ranked number one in the Travel and Tourism Competitiveness Report, whereas International Living says that the United States is the best place to live.
Malta comes third in the International Living rankings but is placed 24th on the WEF list. Seychelles, which International Living ranks at only 103, jumps to 38 by the WEF’s reckoning. The WEF puts Mauritius 58th, whereas International Living scores it 62nd. Portugal comes 20th on the WEF list but drops to 14th on International Living’s Quality of Life index.
RATES OF EXCHANGE
In most cases, South Africans will buy property priced in euros or United States dollars. This article provides the relevant purchase prices with the following conversion rates on November 25, 2013. The rand amounts quoted will change in line with the exchange rate.
1 US dollar = R10.05
1 euro = R13.59
1 Mauritius rupee (MUR) = R0.33
1 Seychelles rupee (SCR) = R0.83