Property Investment in South Africa: A Guide on Hedging for Non-Resident Buyers

South Africa’s property market offers attractive investment opportunities for non-residents, combining relatively affordable prices with the potential for significant returns. The process of purchasing property in South Africa, while straightforward, involves several key steps, especially for international buyers. For non-residents, one crucial aspect of this process is the currency exchange, which can significantly influence the overall cost due to fluctuating exchange rates.

The Importance of Hedging in Property Transactions

When non-residents opt to purchase property in South Africa, their financial obligations are essentially denominated in South African Rand (ZAR). Given that their capital is typically held in foreign currencies such as US Dollars (USD) and Euros (EUR) for example, they are required to convert their funds into Rands to facilitate the transaction. The value of the South African Rand (ZAR) can fluctuate significantly against foreign currencies, impacting the overall cost of the property.

Non-resident buyers typically handle two key payments in their property purchase: the deposit (usually 5-20% of the purchase price) and the final payment (covering the balance and fees).

Mitigating Currency Risk with Forward Exchange Contracts

To safeguard against currency fluctuations, non-residents can use a hedging strategy for both their deposit and final payment, particularly Forward Exchange Contracts (FECs). Here is why hedging your currency commitments is important:

• Stability and Predictability: Forward Exchange Contracts allow buyers to lock in an exchange rate for a future date, providing certainty about the cost of the property. This stability enables better financial planning and budgeting.
• Protection from Adverse Movements: Currency markets can be volatile. If the Rand strengthens, the cost in foreign currency terms can increase significantly. By securing an exchange rate in advance, buyers are protected from such adverse movements.
• Flexibility in Payments: An FEC can be tailored to meet specific financial obligations, such as a future deposit or the final purchase price. This flexibility ensures that buyers know exactly how much foreign currency they need to set aside.

How Forward Exchange Contracts Work

When a non-resident anticipates a future payment, they can enter an Forward Exchange Contract (FEC) to fix the exchange rate. For instance, if a buyer needs to make a payment of R8 million in two months, they can secure today’s exchange rate, minimising the risk of unfavourable changes.

In addition to avoiding currency risks, buyers don’t have to pay the full foreign currency amount upfront when booking a forward exchange contract. Instead, they only need to put down a small deposit, usually about 10% of the contract value, to secure the exchange rate for the future. The full payment is required only when they need to fulfill their obligation on the selected future date/s.

For non-residents investing in South African property, utilising Forward Exchange Contracts (FECs) to hedge against currency risk is invaluable. It provides a practical solution to navigate exchange rate volatility, ensuring a smoother and more predictable purchasing process. By securing a predetermined exchange rate, non-resident buyers can confidently manage their financial commitments, enhancing the security of their property investment journey and creating peace of mind.

For more information on Forward Exchange Contracts, please contact our specialist team at enquiries@currencypartners.co.za or call +27 21 203 0081. Our team of experts is ready to assist you.