FEATURE: SA property attracts high net worth individuals

Insurance company gives advice on insuring luxury homes in South Africa as wealth grows.

CAPE TOWN, June 2 (ANA) – South Africa will be a sought-after destination for prime properties as Africa expects a surge in the number of high net worth individuals (HNWIs), a leading insurance company says.

The 2021 Wealth Report published by global real estate firm Knight Frank foresees a 139% growth in African households earning more than R1.3 million (about US$100,000) a year between 2020 and 2025, by when there will be more than 63,400 HNWIs living in South Africa alone.

South Africa is perfectly positioned to benefit from the rise in Africa-domiciled HNWIs thanks to the stable economic and financial environment as well as magnificent residential properties on offer, said Christelle Colman, managing director and founder of Elite Risk Acceptances (Pty) Ltd, a subsidiary of Old Mutual Insure.

Colman said many HNWIs are seeking to buy luxury properties, and many buyers are choosing to invest in South Africa.

She said this comes after another global survey was conducted by Luxury Portfolio International, which revealed that as many as half of HNWIs are planning to buy one at least one extra luxury property in the coming 12 months, compared with just one in five at the start of 2020.

The rise in the demand for prime properties is already evident in the latest property data.

Seeff Property group recorded its highest-ever South African sales in March 2021, with one in three high-value properties being snatched by foreign buyers.

The property group recorded a 36% increase in sales to such buyers across the Atlantic Seaboard and City Bowl areas in Cape Town in the first quarter of 2021.

However, while buying prime property may be anyone’s dream, Colman urges buyers to not underestimate the importance of insurance once sealing the deal on properties.

“Assets with high price tags present unique risks to their owners.

“There are a number of insurance missteps that the wealthy make, which can cause huge problems at the claims stage,” she said.

Being wary of pitfalls would include getting insurance from a specialist insurance broker and underwriter with extensive local knowledge and strong financial backing, Colman said.

She said selecting an experienced risk partner is seen as the first step that HNWIs should take to avoid many insurance pitfalls.

“The most important aspect of buildings insurance is to value the asset at its correct replacement cost, because failure to do so can result in the asset being severely underinsured and the insurer applying ‘average’ at claims stage,” Colman said.

She said a 20% underinsurance on a R20-million (US$1.4-million) luxury home could leave the property owner R4 million (about US$290,000) out of pocket in the event of a total loss.

Colman said properties insured at too high a value also has consequences as the property owner will end up paying higher insurance premiums but only be paid the correct actual replacement value in the event of a loss.

“Luxury homes must be insured at their replacement cost, not the market value.

“The insured value must include the cost of rebuilding the primary building and outbuildings; restoring any landscaping features; and to provide for costs such as professional fees and site clearing, to name a few.

“A common error made by international investors when insuring local property is to assume that rebuilding and replacement costs will be similar to those experienced in their home countries,” Colman said.

She said foreign buyers may also be unaware of the challenges that their properties present insofar as rebuilding due to location.

Colman said expert local knowledge, such as the ability to source and cost specialist construction contractors and high-end materials, is essential when placing luxury homes on cover.

She said she has observed that a large portion of the purchase price of luxury homes is linked to location and that it is not uncommon for prime properties to change hands for amounts far in excess of their replacement costs.

“Approaching an ill-equipped insurer to place a luxury home on cover can be as devastating as making errors on the sum insured,” Colman said.

She said a specialist insurer who understands the luxury property segment is best placed to assess the asset values and offer a competitive, risk appropriate premium with no surprises when it comes to the claims stage.

– African News Agency (ANA); Editing by Yaron Blecher