Mansion shopping? Be wary of these insurance pitfalls

Camps Bay, Cape Town.
Camps Bay, Cape Town.

A surge in high-net worth individuals living in Africa is set to inflate demand for prime properties in sought-after locations in South Africa.

According to Christelle Colman, MD at Elite Risk Acceptances, a subsidiary of Old Mutual Insure, South Africa is perfectly positioned to benefit from the rise in Africa-domiciled high-net worth individuals thanks to the relatively stable economic and financial environments as well as the calibre of residential property on the market.

The Wealth Report 2021, published by global real estate firm Knight Frank, forecasts a 139% growth in African households earning more than US$100 000 per year between 2020 and 2025, by which time there will be more than 63 400 high-net worth individuals residing in South Africa alone.

Another global survey by Luxury Portfolio International reveals that as many as half of high-net worth individuals are planning to buy at least one extra luxury property in the coming twelve months, compared to just one-in-five at the start of 2020 and many of these buyers are choosing South Africa to invest in.

But the rise in demand for prime properties is already being seen in the latest property data.

Seeff Property Group recorded its highest-ever South African sales in March 2021, and it has reported that one-in-three high value properties are being purchased by foreign buyers. It further recorded a 36% jump in sales to such buyers across Cape Town’s Atlantic Seaboard and City Bowl areas in early 2021.

These transactions included a R45 million penthouse at the V&A Waterfront, a R36 million property in Fresnaye and a R20 million house in Upper Constantia. Similarly, Frankie Bells real estate also says luxury homes are back in demand in South Africa with the property group seeing an increased demand in the northern suburbs of Gauteng, southern suburbs of Cape Town and eastern and southern coastal regions.

Furthermore, New World Wealth estimates that over 45% of South Africa’s high-net worth individuals live or have homes on estates. An additional 30% have homes in luxury apartment blocks which have been the fastest growing residential segment in South Africa over the past twenty years in terms of price growth.

Colman says that as the demand for ultra-luxury South African homes skyrockets, buyers who are in the market for high value properties should not underestimate the importance of insurance when signing on the dotted line.

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 claims stage.”

She adds that properties with expensive price tags should be insured by specialist insurance brokers and underwriters with extensive local knowledge and strong financial backing. Selecting an experienced risk partner is seen as the first step that high-net worth individuals should take to avoid the many insurance pitfalls in the ultra-luxury home segment.

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,” says Colman.

A 20% underinsurance on a R20 million home could leave the insured R4 million out-of-pocket in the event of a total loss. Insuring the property at too high a value has consequences too, as the insured 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 like those experienced in their home countries.”

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

Expert local knowledge such as the ability to source and cost specialist construction contractors and high-end materials are essential when placing luxury homes on cover,” says Colman.

She observes 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 more than their replacement cost.

Approaching an ill-equipped insurer to place a luxury home on cover can be as devastating as making errors on the sum insured. A specialist insurer who understands the luxury property segment is best-placed to assess your asset values and offer you a competitive, risk-appropriate premium, with no unfortunate surprises at claims stage” Colman concludes.