YOUR GUIDE TO INVESTING IN SOUTHERN AFRICA
A report compiled by investors for investors
 


Investing in South Africa

This report conforms to the plain English campaign.
updated 10 November 2002
 

 

About this report
This report has been compiled for investors, by investors who have had experience investing in South Africa and this report is being released into the public domain.

You may send your comments to this site. The e-mail address is at the end of this document. No names will be published (initials only), but you MUST supply your e-mail address and name in order for us to be able to accept the information as valid. We will still publish information even if it seems contradictory or incorrect, but it will be noted in the document. This is to ensure that the public have a right to know truthful information about making investments in South Africa.

Unconfirmed information is marked as 'NOT CONFIRMED'.

The report aims to deliver information about investment, and is not a political document.
For those who do not understand this: This is an INVESTMENT document. If you want to invest in South Africa, Zimbabwe, Namibia, Nigeria, Russia, Brazil or Iraq, you may to do so in the same way as you invest in Europe, Australia, The United Kingdom, Japan, or the United States.

The South African political history and the current political activities is far too much information and complicated to include in this document and only the relevant information has been included if it has an effect from an investor's point of view (only). If you would like to make direct political statements when it has no direct impact on investments or the future of investments, please do so somewhere else, we are not interested in politics.

However, for an investor's knowledge so that he may make an educated investment, it is recommended that an investor read up on the politics (all of it, not just bits and pieces) and laws before embarking on any investment in a country outside their own, and that this information is not only taken from government or tourism institutions and their web sites (for obvious reasons), but that unbiased views are taken from independent media, investment institutions and their web sites.

Usually, independant financial advisors and advisors that make their money directly through your business, such as commission earners as in the case of property sales agencies (and in some cases stock brockers and investment managers), are not a good source of unbiased information, but their input is a good starting point when it comes to historical information about the investment you are about to make.
Investment , property and tax laws have changed and new laws (such as labour laws) have been introduced which drastically affect your investment. Commision and charge structures are usually excluded or not fully disclosed when an investment product is being sold to you, but is found on the documentation you are given to sign.

So the note to new investors is: Always read the small print and the disclaimers and translate it into plain english that you can understand it. They are there for a reason and it is usually to protect the advisor and the advising company.

Returns well above market rates are not good investments, these are risky and could turn out to be a scam.

South African bank operating charges are high, and these must be taken into account when operating with money through the banks, especially if you are use to working with a reasonable banking system such as in the United Kingdom, these banking charges could come as an unexpected shock to you.

Service in South Africa is not very good, and you could end up becoming very frustrated and losing a lot of time and money as a result of the slow pace of service in South Africa. An example of such a slow service is company registration which takes four weeks to do, if everything runs well, but could take anything up to three months.

Private investors should be aware of new tax laws which affects closed corporations, private or public companies. Seek advice from a reputable accounting firm in South Africa.

Investment institution and sites that may be referenced to:

Media coverage can be viewed at:

Definition of investment
An investment is a sum of money that is placed in an asset or with a company with the view of getting a return on that money, which ideally, is more than putting the money in other instruments such as a bank.

A good investement is achieved when the return on the investment is higher than average (usually checked against a benchmark, such as the FTSE 100 used to benchmark Unit trust performance in the UK), continues to grow and is sustainable over a long period of time. An ideal investment would be tax effecient.

Definition of an investor
An investor is an individual or company that has the money available to invest. The investor will use the money to purchase, sell, build, import or export assets with the vision of making a return on their original investment.

By investing in a country, the investor is creating jobs, they are contributing to the economy and the success of that economy, they are generating income for themselves, the employees, and in turn, for the government as well (by means of tax).

Economy

Currency volatility
The South African currency, the Rand has historically gradually lost value against the world's major currencies by an average of between 7-12% per year. The currency collapsed by over 50% at the end of 2001 due to various factors, even though no single factor has been singled out. The currency has recovered some of it's lost value and has somewhat remained at these new levels throughout the year of 2002, even though it has been volatile.

Financial experts have different views on the short term of the currency value. The majority of views is that the currency is expected to remain at the current levels and may improve over the next year, 2003. However, all the experts agree that this is the short term view and the currency is expected to continue it's slide towards the end 2003 at it's historical devaluation rate, but may be worse at various stages when exchange controls are relaxed further. There are many factors which may cause the currency to devalue at a much higher rate than this, some of which are mentioned throughout this document.

Projected figures given by some institutions and experts are as follows:
The Rand will end 2002 at R10.50 to a dollar and will end at R11.75 in 2003.
The Rand will remain steady and trade between 9.50 to R11 to a dollar throughout 2002 and the beginning of 2003, but will continue it's slide towards the end of 2003.

The currency exchange market is currently being monitored and regulated by the South African government, and many restrictions exists on how money may move in and out of the country, especially by residents of South Africa. Once exchange rate restrictions become more relaxed, the currency is expected to flow out of the country at a much faster rate, and so devalue the currency at a much higher rate than at the present levels. The deregulation will also make the currency susceptible to even more unpredictable and highly volatile movements in times of uncertainty.

Some reasons for the devaluation of the currency is the difference between inflation in South Africa as compared to other countries (10.8% inflation as at August 2002), the poor level of productivity in South Africa, and political decisions taken in South Africa and it's neighbouring countries. These will have a negative impact on businesses and the economy as a whole in the medium and long term.

Other reaons for the devaluation of the South African Rand in the future is the current weakness in the US dollar.

On a seeminly positive note, the president of the South Africa is trying to implement a 'plan', NEPAD and the African Union, in Africa that could improve the lives of Africans. Unfortunately, this will do very little to calm the nerves of international investors, since the main object of this exercise is to improve the lives of Africans, not investors.

Inflation
Inflation is a major problem in South Africa. Official inflation hit a low of under 7% in 2001 and has increased dramatically over the past few months hitting under 11% for a few months. Real inflation in South Africa is worse than these figures and may is as high as 20% on food and 50% on imported items. Fuel has increased as the price of crude oil is fixed in US dollar terms. The oil price increases has added to the increase of fuel prices. The cost of fuel is a major contibutor to inflation in South Africa, since the transportation of goods and and commuters are on road vehicles since the public transport infrastructure in the country is very poor, in fact non-existent in most cases.

The public transport that is available can only be classified as high crime zones, with muggings, rapes, murders and other criminal activities occurring quite frequently.

The government is trying to bring inflation under control, between 3% - 6%, by adjusting interest rates, as is the case in most countries.

Some economists and advisors would like to see changes in the way in which inflation is calculated so that the figures can be 'adjusted' to fall within the government target. This type of manipulation is very common in African countries, but thankfully this has not happened in South Africa yet as it will distort the whole machanism of giving accurate inflation figures, since they can be adjusted so that it may seem as if inflation is always on target.

Interest rates
Interest rates are currently at 17% from a low of 13% in 2001. The increases has started to have a negative effect on asset prices in the country. The other effect are of course job losses due to companies trying to cut their costs.

Some economists predict the first rate cut towards the second half of 2003.

Foreign investors should be aware that interest rate cuts usually have a negative effect on exchange rates in South Africa.

Property prices
House prices have increased dramatically over several months in 2001 and the beginning of 2002, due to a variety of reasons.

  1. People moved into 'safer' areas of the country, causing price escalation in the 'hot spots' that have over exaggerated house price inflation in the country as result. Crime is a big problem in South Africa, and is unlikely to be brought under control in the near future. There is more details on this later in the report.
  2. Interest rates starting decreasing and hit it's lowest level of 13% in 2001, and so housing seemed like a good investment at the time.
  3. Inflation is quite high in South Africa and a certain portion of house price rises is a direct result of inflation eating it's way into the economy.
  4. Raw materials have gone up as a result of the currency devaluation and this has been passed onto the home buyers, especially new homes.
  5. The economy was performing reasonably well as a result of the positive growth achieved in the world markets before the end of 2001.

The house price increase trend is reversing as interest rates and inflation starts taking it's toll on companies and the consumers. House bonds (mortgages) have increased by almost 25%. Considering the number of people currently unemployed (running at around 30%), it is unlikely that house prices will remain at current levels for very long.

Other important factors that will affect house prices is the large availiability of land, the rate that new houses are being built, and government incentives to build new affordable housing. It would seem as if the only way for house prices in the long term is down.

When property is priced in a foreign exchange rates, investors are very likely to see their investments shrink year on year, even if their rental agreements with tenants have been successful.

Costs involved in property purchase
Costs and taxes are very high in property trading with estate agent feess and property taxes setting you back by 26% (for a mid range property) as soon as you have purchased the property. Costs and taxes for companies and larger properties are even higher.

Property law

  1. The Prevention of Illegal Eviction from an Unlawful Occupation of Land Act 19 of 1998 states the landlord cannot move a tenant out of their property, be it a house or undeveloped land, without an eviction order. This could take months while the landlord's expenses increase and his investment diminish to nothing.
  2. The landlord must provide alternative accommodation to the existing defaulting tenant if they cannot afford to stay on the property, or who has illegally occupied the land.
  3. The owner is responsible for all taxes, water, electricity, charges and of course maintenance costs as a result of damages or neglect that the tenant has caused while staying on the property.
  4. The landlord is responsible for the costs to move the illegal occupier. Neither the tenant nor the government are responsible for these costs. The police do not have the power to evict an illegal occupier. The landlord must get an eviction order and then still have to pay a private company, the sheriff of the court, to have the illegal occupiers removed. This could set an investor back from a few thousand Rands (100 of dollars) to well over a million Rand (100,000 US Dollars) to get the sheriff of the court to relocate illegal occupiers.
  5. This law overrides any contract or agreement the landlord has with the tenant, and overrides the Rental Housing Act. This has already been challenged in court.
  6. As a result of this law, tenants are now asked to pay three to four months rent in advance as a deposit. This brings some protection to the investor, but also brings about some serious implications, as many tenants cannot or are not prepared to pay this. The government has now started to step in to prevent 'unaffordable' rental deposits and may bring in a law that will prevent landlords from doing this. This is placing the investor at a serious risk.

Click here to get an example of what South African 'property advisors' will give you, as compared to the returns you are most likely to get on your property investment.

Company and shares
Company law in South Africa is very complex, but the basis that forms the majority of company law are discriminatory and does not make good business sense to international investors to get involved in this highly politicised field of business.

Direct political intervention in business
Notice: This has been placed here because it has a direct impact on foreign businesses operating in South Africa. A recent example: Government has banned Mcdonald's from opening new franchises in certain areas because there are too many American companies in South Africa as far as government is concerned.

  1. Affirmative action. The intentions were good in that it was intended to promote an African person of equal professional qualification, skill level and experience above someone of another race. The practical reality is that there are skilled, professional people with high qualifications, such as doctorates, who are doing shift work at supermarkets because of this law, while people of lower skill and professional levels have obtained high paying positions in companies because of their skin colour.
  2. Black empowerment. This can only be classified as a form of discrimination against companies and businesses who are not willing to give away more than half of their companies to 'government approved' individuals and companies. This law has left many qualified professionals, with decades of experience unemployed. This law does not only discriminate against people that are not of African origin, but has also opened up a gate for fraud, bribary and corruption when dealing with government departments.
  3. Government departments have offered 'packages' to those that government refer to as 'whites', and some of those who have not been offered a package have had been subjected to some form or other of discrimination to encourage them to leave 'voluntarily'.
  4. Government introduced 'fines' for campanies who do not comply with their demands.

Company law

  1. Investing in a company is still an employer's nightmare since the employee has many rights over his job and over the employer. An employer will find it very difficult to let an employee go, no matter how bad an investment that employee is to the company.
  2. Redundancy is very difficult to do, and the employer must usually bear the cost of all losses, even if it means that the company will go bankrupt.

A list of discriminating companies will be posted soon, and some of these include Metro rail, the post office, Telcom (the only telcom company in South Africa at this time), the SARS, licensing offices, manucipality including emergency services such as the paramedic services, a field which requires skilled people and experience is a definite advantage.
These will be listed to help prospective investors avoid burning their fingers in badly informed decisions.

Crime
The high level of crime affects businesses and returns on any investment in South Africa.
A large number of private investors who have bought property, have been forced to sell again as a result of constant burglaries, violent crime on the property and defaulting tenants. This type of information is not disclosed by estate agencies and the investor should try to obtain this information by various methods such as:

  • Ask the estate agent about the any crime that have occured on the property in the past year. Inform them that you will be checking at the local police station about the information as this will encourage them to be more forthcoming, but this will not guarantee a truthfull answer. If you are told that "the owner has not told the agency of any crimes", take this as an indication that something has occured on the property recently, since it has been shown that over 95% of sellers inform the agency about the crime or lack thereof.
  • Determine the level of crime in the area by asking the local police station.
  • Neighbours and the caretakers are an excellent source of information.
  • Call insurance companies and ask them how much it will cost to insure your property on the premises, and compare the quote to the average rates in the area.
  • Ask for a car insurance quote for the area and the property you want to purchase and compare this to the average rates in the area.

Most crimes in South Africa are very violent in nature, with shootings and murders being part of any normal burglary. Sadly, the justice system is seen as flawed, with a murder rate of 60 a day, and an extremely low number of sucessfull convictions.

This situation is unlikely to improve within the medium term and the crime problem will exist for some time. The government's official line is that they are trying to bring crime under control and that various things have been done to achieve this, but considering that crime has been at these levels for almost a decade with no change, it is a clear indication that these steps are not working, and unless something drastic is done, it will continue to be like this.

Aids
This is a strongly debated topic in South Africa, but the situation is quite severe in the country, with one in three people being HIV positive. Cultural practices has made the disease far more widespread in African than in the other races. With 'official' figures like this, the ratio of race in South Africa will change from a population of 75% African, 16% European and 9% other race, to balance at 63% African, 24% European and 13% other races within a few years.

From an investors point of view, government is trying to make companies responsible for treatment of their employees. This will have a negative impact on businesses, considering the high rate of infection and the costs invloved for treatment.

Support for countries the West see as a threat to democracy and peace.

Quotes taken from the media:
'When leaders like Nujoma and Mugabe defend the utterly indefensible, behind the pretext of colonialism, it is a minority view, but it doesn't encourage those who are trying to help Africa'... Tony Balir at the world summit

'We condemn it in the strongest terms. No country can decide whether another sovereign country is doing the right thing or not'... Nelson Mandela telling US president not to attack Iraq.

The South African stance on countries like Zimbabwe, Iraq, Communist Cuba and the recent Teleban Afganistan with the unbelievable human right abuses is truly shocking. The South African governments' point of view is not in line with the majority of South African citizens, however, the government has made the stance against the Western countries many times.

The government will not fully condemn what has happened in these country.

This may have a direct impact on investment at some point.

Education levels
Over the past few years, the quality of education at schools in South Africa has been pretty high and has been on par, and sometime superior, to other countries. The education system has recently gone through some drastic changes, with the new level of education being questioned by many. The quality of educated people in the future is about to come into question. The lack of well educated employees will have an impact on future productivity. The majority of these concerns have been expressed by teachers of schools.

Have your say:

E-mail us your experiences about South Africa.

What people have said

'Rent ruling a shocker... This judgement could have a very negative impact not only on the property market as a whole, but on the availability of accommodation. Owners may now have to charge deposits of three to four months rent to ensure that tenant are in fact able to pay... It is crazy and a major disincentive to invest in the property market'... Pretoria News 7 September 2002

'While I have much sympathy for this latest victim of municipal incompetence I can't help seeing the funny side of it.'... With regards to a woman who had to receive treatment for shock after receiving an erroneous account from the city council...Home Loan magazine, Issue 15/Apr 2002

'South Africa's economy has been buffeted again after two years of considerable progress... caution remains ... Zimbabwe and the Rand's spiral remains a grave threat on our economy'... Home loan magazine, Issue 15/APR 2002

'I fully agree... I have a doctorate ... I studied for eight years and yet I work for someone else at a seven eleven because I am white...' J.K. Pretoria

'I was almost hijacked on a busy highway one Friday afternoon during peak hour traffic, the first police officers was incompetent and didn't even take a statement, he was a sergeant who had gone through the affirmative action process, and he couldn't understand me when I told him that I was nearly hijacked on the highway, he tried to direct me to the highway thinking that I needed directions. Eventually I spoke to a lesser ranking officer who informed me that they knew who the hijackers where but yet the police did nothing about it'... H.D. Sunnyside Pretoria

'I have an IT company in Northern Pretoria and have been a victim of a South African crime syndicate. They showed up at our door and paid for a computer with a bank cheque. The cheque was a fake. We proceeded to sell computers at a different venue with another employee and the same people called again. We knew it was the same people since the exact same story as the first was given to us. We immediately called the police who went undercover at our premises. The culprits were caught and a court date was set. Believe it or not, the court made an 'error' when we were suppose to attend the court hearing and the three men were never convicted. The case has been closed. We have never recovered our money.The courts are useless. This is not the country to run any business.'... T.D. Villieria Pretoria

'I will never again invest in residential property in South Africa... I have had my fingers burnt too often... ' S.F. Pretoria, investment company advisor

'We were robbed twice in a month, we have now got protection by a well known protection company since we were threatened with our lives at gun point, beaten and sworn at. The police didn't even come to our shop. We were told to go to the hospital to get our wounds looked at and then return to the station to give a statement. Nothing has happened since then'... A.A. Shop owner, Sunnyside Pretoria

'Disgusted... Owner shot dead at Steers in this area'...T.K. Queenswood Pretoria

'I have already been mugged three times after leaving the clubs in Sunnyside. I am so use to having my car's window brocken that I knew exactly how much it is going to cost me to replace'... F.J. Pretoria West

'Our neighbours were recently brocken into while they were asleep, and this is the safest area of Centurion. It is lucky for our neighbout that our dog started barking like mad. This woke up half the complex.'... W.V.R. Centurion

'It has been two years that I have been trying to recover my money from Nedbank Investment center in South Africa. The money got 'lost', and I call every month, and yet I still havn't got my money.My investment was for 3500 US Dollars. Just **** service as usual'... H.D.A. Pretoria

'Do not travel South African Airways. It is the worst flight in the world... the rudest people. ..'... F.P. Johannesbourg

 
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