JESSICA HUBBARD: Welcome to this Moneyweb feature on investing in UK education for your children. Our guest today is Arran Kerkvliet, investment director at the award-winning One Touch Student Property Brokerage based in London. Arran, since the Fees Must Fall campaign and the conflicts at South African universities, more parents are considering sending their children overseas to study, so in today’s podcast we want to explore the cost of studying in the UK and to make financial plans to budget for those costs, as it can seem intimidating and a little bit unreachable for many. So let’s kick off with if you could talk us through the appeal of UK universities and what the benefits are for parents in South Africa.
ARRAN KERKVLIET: The UK is a popular destination not just for South African students but a lot of other overseas students come to study here and the appeal is that 18 of the top 100 universities in the world are in the UK, so they are highly regarded learning centres with world class research. So they attract over 430 000 non-UK students per annum. The appeal is not only for an education but also for the opportunity to immerse yourself in a new culture, for some people it’s an opportunity to make new friends with the potential of having a new life abroad. For South African parents it’s rather appealing certainly, as you mention, with the Fees Must Fall campaign and the disruptions that it leads to.
JESSICA HUBBARD: There is obviously a very strong connection between the UK and South Africa as it is, so it can be quite a natural step for families here, so how much does it actually cost to study in the UK, can you break it down for us on a general level?
ARRAN KERKVLIET: The typical cost to study in the UK is £27 000 and that’s about R500 000, the bulk of the cost is tuition fees and accommodation costs. An international student will pay slightly higher tuition fees of around £10 000 and accommodation costs are between £6 500 and £8 000, and the rest is obviously on living expenses.
JESSICA HUBBARD: This obviously can be quite intimidating because these are large sums of money, especially given the volatility of the rand and the insecurities here. So how can South African parents start planning on a practical level and work towards this goal?
ARRAN KERKVLIET: Pension companies have for a long time advised investors to match incomes and liabilities, it’s therefore a good idea to have the income in pounds to match the future expenses incurred in pounds. The rand is actually at a relatively strong level compared to the pound, especially considering the credit downgrade, so it’s a good time to invest. There are various ways to invest in UK property, one way to invest would be in real estate investment trusts such as Empiric or DIGS, you could purchase shares in one of the largest student property companies called Unite or you can purchase a studio in a fully managed block. The income generally from either of those options will match the future accommodation costs of the children studying abroad, both in terms of the currency and the asset class.
Benefits of investing in UK property
JESSICA HUBBARD: So some of these options sound a bit technical, can you take us through the benefits and the actual differences between each of the options you mentioned?
ARRAN KERKVLIET: Sure, a REIT is a real estate investment trust and Unite is a company, so you can own shares in that company that owns the blocks and the REITs are the same as that. These blocks are purpose-built for students, they are located within a short walk of the universities and they have all the mod cons, high speed internet and communal spaces. So the students can choose to rent an en suite room, which is part of a five-bedroom flat or a studio within the facility and they will pay between £125 and £200 per week. The other option, which we recommend, is to purchase the actual studio within the specific block. A lot of overseas investors like the fact that these types of investments are fully managed and they generate an income stream which is paid quarterly. So the difference there between the real estate investment trust and the listed company is that they are shares that would only pay an annualised dividend.
JESSICA HUBBARD: You also mentioned to me earlier that they offer a really great option to diversify in that you can own various student blocks across the region, is that correct?
ARRAN KERKVLIET: Yes, I think in terms of the real estate investment trusts it’s one trust that would own various blocks across the country. What that means is that you get diversification in that there’s geographical spread. However, there are fund managers’ salaries and the expensive offices to pay for so that’s why a lot of investors prefer owning a single unit within a development because they receive a higher yield, typically 8% net, whereas the REIT and the company when you deduct the expenses for the fund manager it actually only comes to around 5.5% income.
JESSICA HUBBARD: So for South African investors there are obviously some limits to how much you can invest and how exactly these investments work, so how can South Africans immediately get into this market and start planning and how much can they invest at one time?
ARRAN KERKVLIET: South Africans can send R1 million overseas per person per annum without any special clearance from Sars. So investing abroad is relatively easy. Most people don’t realise that you don’t need to travel overseas to make the purchase, you would go through the process with a qualified solicitor who would act on your behalf for the purchase. A lot of our investors have actually never seen the property they purchase, it’s just like a box that makes money for them. All the due diligence information is available in our student investment guide and the solicitor will answer any questions that you have before proceeding. From a share point of view, such as the REITs, one can open a brokerage account on one of the platforms, which is fairly simple, one of those is YOUinvest.co.uk and you would just normally send through your FICA information and then be able to transfer funds across. So either way it’s quite accessible for South Africans.
How One Touch can assist South Africans in off-plan properties
JESSICA HUBBARD: So how does One Touch Property come in here, what is your role, how do you make this process easier for investors sitting in South Africa?
ARRAN KERKVLIET: Our business, One Touch Property, sources high yield investments, including UK student property investments and care homes. We’ve helped hundreds of overseas investors to purchase off-plan property within the UK. So we work closely with student property developers and the management companies to provide hands-off, full managed properties which deliver net yields between 8% and 9% per annum.
JESSICA HUBBARD: As I understand, you are from South Africa, so you understand the South African mindset and you understand what the fears are around such an investment.
ARRAN KERKVLIET: Definitely, most South Africans want to own something and the idea of owning a studio appeals to them. These properties are in major university towns like Liverpool, Birmingham, Sheffield and they provide the option for the investor’s child to use the property when they come to study in the UK. Typically South Africans have been more nervous than investors from other countries because they like to meet people and they are not as accustomed to purchasing over the internet. But we’ve certainly seen an increase in investors from South Africa and it’s got a lot to do with the current economic climate and the worry that children won’t be able to receive a first class education in South Africa.
JESSICA HUBBARD: So just to clarify again for our listeners, we are not talking about a fund, we are talking about investing in an actual off-plan property in the UK and then making it available for your child if they want to study or work in the UK. But obviously every type of investment comes with risk, so can you go through the risks for us.
ARRAN KERKVLIET: Yes, a lot of investors feel nervous about investing overseas and they want to come to the UK to see the property. However, what they found was that it was unnecessary because of the legal process of how the funds are released, they’re only released on presentation of actual works completed by the building contractors. So the developer’s objectives are aligned with yours in that they make money at completion. The property purchase is done through stage payments, which is typically 50% upfront and that money is released for building works as they progress and then 25% at roof height and then the final 25% at completion. How people are protected is that a building surveyor would go through and inspect the property at roof height and ensure that it’s built to the specification as per the contract and then again upon completion before the final 25% is released, which is really the developer’s profit. The surveyor would sign it off and it comes with a new build warranty, which is just like you would have in South Africa.
JESSICA HUBBARD: As with any income-producing investment how secure is the income and how does it actually work?
ARRAN KERKVLIET: The UK student sector has been one of the best performing asset classes since 2011. Just last year £3.5 billion was invested by pension funds and institutional investors because student property has one of the lowest vacancy rates, it’s a low risk investment because the parents sign as guarantors and most student property developers provide a rental assurance to secure their income. So even if the student drops out the investor is paid the income on a quarterly basis, which is 8% net after all expenses, based on the purchase price of £70 000 that’s £5 600 of income, which is almost R100 000.
JESSICA HUBBARD: So is that net after taxes?
ARRAN KERKVLIET: We have special experts who would help with the tax planning, so there can end up in a net no tax position but the tax would normally need to be deducted. However, in the UK for each individual who invests in the UK the first £11 000 of income is tax-free. If a person were to buy two properties it would still be around the threshold of the £11 000 income. So if we considered the example above of £70 000 you’d receive £11 200 worth of income for the two units, which means that you’d only pay 20% on £200, which is just £40, so it’s a very low income tax rate.
Now is the time to take advantage of the weak pound
JESSICA HUBBARD: Sure, and obviously the whole idea is it’s not a bad income and it could go some way to paying towards your child’s university fees and living costs and giving that amazing opportunity of studying abroad.
ARRAN KERKVLIET: Yes that’s the general idea, we are encouraging South Africans who are trying to plan for their children’s future to takes steps to bring some rands across while the pound is relatively weak and it makes sense to fix your income with expenses in the same currency. Considering an ever-changing political climate in South Africa it’s the very least, I think, parents can do to ensure that at least options are available for their children in the future.
JESSICA HUBBARD: There is obviously a lot of political change and political turmoil happening in the UK as well, there’s a lot of talk about Brexit and how that’s going to impact everyone in Europe and particularly in the UK. So what are your views on Brexit and how does that relate to South African investors and their plans?
ARRAN KERKVLIET: Sure, South African investors are being cautious in wondering about the impact of Brexit and the reality is the UK is Europe’s biggest customer and why wouldn’t they want to do business with the UK. It really is a process of renegotiating the terms and one has to bear in mind that international tariffs have plummeted to below 2% and the EU obviously can’t charge much higher than that because the UK trade will simply go elsewhere. So for sure some currency fluctuations might happen in the medium term but the outcome for the UK I would say over five years does look more promising than South Africa and I’m surprised that the rand is so strong considering the challenges of the state capture, corruption scandals and the recent credit downgrade. So projections for the rand to devalue on average 5% per annum relative to the pound is quite probable So it’s a good time to start investing abroad, especially if you are considering sending your children overseas.
JESSICA HUBBARD: Before we end off, how can South African investors get in touch with you to access your services at One Touch Property?
ARRAN KERKVLIET: We have banners on the Moneyweb website and if you click on those it will lead you through to an enquiry page. We’re coming to South Africa, as we do each quarter, and they could book a meeting with us, we’re going to be there from June 8 to 16. Alternatively, they can go onto our website, which is www.onetouchinvestment.co.uk
JESSICA HUBBARD: That was Arran Kerkvliet, investment director at One Touch Student Property Brokerage.
Brought to you by One Touch Investment UK.