Geo Arbitrage: Why South Africa?

This post is based on a readers question, which was simply:

"What drove you to choose South Africa as a place to live?"

Here goes!

I feel like I should strongly caveat this post before it starts by saying I love South Africa, I'm a permanent resident now and I plan to call this home for the foreseeable future and whilst my reasons to come to South Africa were mostly commercial, my reasons for staying are completely different. I'll try and explain both but as this is a personal finance blog, I'm going to assume the question was more inclined toward the commercial aspect than the emotional.

I'm also going to be completely honest based on my own experiences and opinions thereof, I don't want to offend any of my South African readers or get into any political or macro-economic debate about my experiences, the fact I'm in immigrant or that I am British-African (is that even a thing?) the intent is purely aimed at the geo-arbitrage drivers of living a FIRE lifestyle.

Ok, with that out of the way, what is Geo-Arbitrage in the context of FIRE?

The simplest explanation is that by moving from a country with a higher cost of living to another with a lower cost of living, you need less money to live. By needing less money to live, you need to save less to retire early. By needing to save less you get to retire earlier than you would if you stayed put.

Got it? good!

So how did moving from the UK to SA improve my chances of early retirement?

I should start with what, or more importantly who made the move from the UK to South Africa. Firstly there was me, I was 38 years young, not-married in a good senior management job in a large UK plc. Mrs H, or Miss H as she was then was a little older than me (My mother always told me not to reveal a ladies age) and was also in a senior management position in the same company as me. Then there was Winston the wonder puppy who was 4 years old and had no job other than chasing birds, pupping around and eating the odd bee on his adventures in the garden.

We all lived in a nice little 3 bedroomed house in a small village in Yorkshire in the north of England. We both had company cars and other than a mortgage (around 50% cleared) we basically had no debt other than low credit card or store card balances. We had good salaries with good bonuses and although Miss H has 3 boys, they were pretty much grown up and out on their own so didn't cost us vast amounts (although they never stop costing you, never!) . I guess you could say we were young professionals making our way into the middle classes by our forties.

I had always planned to retire early and had saved fairly hard but at that time, FIRE wasn't even really a thing and I guess my thoughts on retiring early meant 55 rather than 65 in my head.

My job saw me doing a lot of travel to places like India, South Africa, USA, Philippines as well as pretty much everywhere in the UK. So I had seen a bit of the world and the extremes of living; from the slums of Mumbai to the most affluent streets of London. I was under no illusion that even living in the countryside of the north of England, I had a privileged position and was paying a premium for our lifestyle.

My two favourite cities in the world are New Orleans and Cape Town. I feel strangely comfortable in both and I think it's because I don't feel judged for what I'm wearing, how I look, what I sound like or what I drive. Everyone is welcome and people are genuinely interested in you as a human being and not just to compare themselves against or benefit from knowing you. I guess it's a feeling of community and I like it.

Moving to the US always attracted me and the opportunity arose a couple of times but never really panned out and commercially and from a lifestyle perspective was no real gain, so when opportunities to move to Cape Town presented themselves I looked at the same factors and things looked significantly different.

Firstly let's talk about property. Compared to the UK, property in South Africa is incredibly cheap. To illustrate that fact, let me show you an "Average" middle class home in a major metro in the UK and then what the equivalent property in Cape Town would cost (Cape Town is the second biggest/most prosperous city in South Africa after Johannesburg). I'm going to use Edinburgh as the comparative as London is in a league of its own when it comes to house prices.

So a new-build 3 bedroomed semi-detached home in the suburbs of Edinburgh is going to set you back around R9,000,000 / $640,000 / £450,000

Just so there's no confusion, the picture above is of 3 houses, you only get one of them for that money!

And now let me show you firstly what you get in the suburbs of Cape Town for a slightly lesser investment of : R8,350,000 / £600,000 / £417,500:

A palatial 5 bed pile overlooking the sea in a private mountain estate!

But the point is not to buy for the same amount, it is to reduce your living costs and that is exactly what we did. We used the equity in our UK house to buy a house in South Africa outright. For us, the simple math was our 3 bedroomed semi-detached house in the UK was worth R5,000,000 / £350,000 / £250,000 and we had R3,200,000 / $225,000 / £160,000 in cash after we'd sold it and paid off any small remaining debt we had like loans or credit cards.

We used that money to buy ourselves a 6 bedroomed detached house in the leafy suburbs of Cape Town around 30 minutes from the city centre and the beach.

Now let me admit at this point, that buying a 6 bedroomed house for 2 hoomans and a dog was a tad excessive, I get that, but in my defence I was still young and greedy and believed that investments in property were always a good idea. I have learned about investing since then and realise I was a dumb-ass.

So what would it have really cost to get a nice suburban 3-bed in Cape Town which would have been comparative to our one in the UK? The answer is around R1,500,000 / $100,000 / £75,000 so had I not been so greedy I could have had 2 houses for the price of half of one in the UK.

So the end state is we ended up with no mortgage and no debt which massively cut our living costs.

So the next consideration was salaries. In 2014 when I quit my UK job, my total package including salary, bonus car, pension and healthcare was right around R2,500,000 / $180,000 / £125,000 and Miss H ws around 60% of my salary with the same package.

My first job in SA had a package of around R1,800,000 / $130,000 / £90,000 but didn't come with a car. Once you add back in what I need to make the package back to the equivalent I took a salary haircut of around 35%.

So we were earning 65% of our UK salaries but had no debt of any kind, no mortgage, credit card or loans, zippo, nadda nicht, nowt. So that only leaves cost of living and that is where the win is.

Now remember, we're now living in a palace compared to what we lived in in the UK. We're driving comparative cars and have comparative jobs in one of my favourite cities in the world. We'd benefitted from major lifestyle upgrade at this point. However, don't lose sight that it's not about the lifestyle upgrade, it's about the early retirement and that's where the cost of living is everything.

In the UK, I estimate that our cost of living was in the region of R110,000 / $8,000 / £5,500 per month including our personal spending, mortgage payment, groceries, insurance, heating, rates and taxes, etc. When we arrived in South Africa in 2104, that same living cost dropped to R48,000 / $3,500 / £2,4000.

A 35% drop in salary but a 57% drop in living costs. We were 22% better off AFTER a massive lifestyle upgrade. Win, win and definitely win.

The final commercially relevant element of this math is about our savings. Bearing in mind we have no debt and have savings. Interest rates in South Africa for savings accounts (and mortgages) can easily be 10% (Africa Bank as an example). In the UK I could get close to 2% at best. That means our savings were growing 5 times faster than they would in the UK and even if you take inflation into consideration, it was still more than 3 times faster.

So all of this together simply meant we were able to retire 6 years after moving to South Africa when I was 44 instead of 55 if we'd stayed in the UK with a higher standard of living into the bargain.

So that's the commercial case for Labour Arbitrage from the UK to South Africa and from the small country village of Barton-Upon-Humber to the coastal city of Cape Town.

But what about the emotional side of moving your life literally to the other side of the world?

Nowhere near the emotional and logistical upheaval you would think it would be!

Moving away from friends and family was always going to be the hardest but in reality we didn't live so close to our friends in the UK as due to the moving around we had to do with our jobs, they were spread across the country. Visiting them meant driving long distances and hotels and stay overs. And as for family, the internet is a wonderful thing and whilst I miss the occasional family get-together I talk to my mother more now than I did when we lived in the same village. Importantly, when it's one to one on Facetime or FB Messenger and by video, it's a proper conversation instead of popping around to her house and watching telly with a cup of tea and a jammie dodger for an hour!

Also, I can promise you that nobody turns down a holiday to South Africa for only the cost of a flight to stay with us in the sun and barbecue next to the pool or go to bars and restaurants that cost 25% of what they do in the UK. We get full use of those spare 4 bedrooms, I can promise you that.

Plus, if you're willing to be flexible, a flight from Cape Town to the UK (in normal times) costs less than R10,000 / $650 / £500 per person so if we do get homesick, we can book a house-sitter to look after our home and the puppy for a couple of weeks for an additional R5,000 / $350 / £250 and we can leave in the evening and be drinking Yorkshire tea in Leeds by lunchtime the next day.

And what about living in a "Foreign" country? Well it's not foreign because it's home. We've made a point of integrating and picking up the customs and trying to look less like tourists. Don't get me wrong, my Afrikaans, Zulu and Xhosa needs work but I can get by in most situations now.

Cape Town is a small place despite its popularity and we have made tons of new friends while we've been here and we live no more than 45 minutes from any of them so we socialise five times more than we did when we lived in the UK and we constantly have visitors from the UK who are now even friends with our South African friends!

I often get asked what I miss most from the UK and the answer is Ebay, Amazon and Royal Mail. I miss the convenience of being able to buy that little thing that I need or want online and have it in my hands the next day, online shopping and shipping is not great in SA, yet. Other than that I occasionally miss the British sense of humour, sarcasm and I guess national pride (British people are proud to be British. It's a bit more complicated in South Africa). But that's it, you can keep the rest Britain. Oh, apart from pork sausages, they're not great here (with the exception of Woolworths pork bangers, they're not bad)

There are a lot of preconceptions of non-South Africans about SA and in particular, crime and racism. They both exist, it would be a lie to say they don't. But when it comes to crime, you have to be smart, know how to behave, secure your home and keep an eye out for your neighbour. My British friends freak out when I tell them that I have an app on my phone that if I launch it, some big men with machine guns arrive a few moments later and the same happens if the burglar alarm goes off, or that I have laser beams and electric fencing around my house that are on even when we're at home. That is the reality of life here yet I've experienced less crime personally than we did in the UK over the same time period.

Racism is a complex subject and not one for this blog but suffice to say I abhor all forms of racism regardless of its origin. I am subjected to racism living in South Africa on a daily basis but South Africa has a long history and if you understand it then you understand why. You could strongly argue that in South Africa 2021, everybody here is subject to a level of racism in one way or another regardless of your race. I don't think it's massively different elsewhere in the world it's just more openly discussed here which I think is healthier than pretending it doesn't exist. Needless to say, I was brought up to treat everybody equally and if we don't get along, it's not because of yours or my race, it's much more likely to be because you're a bit of a tool (or I am!).

Those things aside, Cape Town is a beautiful city full of welcoming and interesting people with hundreds of amazing things to see and do. I moved here and made this my home. I got married here, I retired here and unless they tell me to go, I'll probably die here. I consider myself a British-South African. I love Britain also, and am proud to be British, it's where I was born but South Africa is my home now.

I guess my final point would be that if you are on your FIRE journey and have considered Geo-arbitrage as a way to bring your FI date closer, I highly recommend it. Don't just look for a place that's cheaper to live, find somewhere that you'll love to live for 5-10 years, you are allowed to move again! Find somewhere you feel like you can fit in and make new friends. Don't just think about it, do the research, ask yourself if you're really ready for a totally new life, but most importantly don't be afraid of it. The worst that can happen is that you decide you don't like it and you either go back or find somewhere new. Maybe you have to find another job or apply for another visa. In the grand scheme of the reward, the risk is fairly miniscule when you consider the benefits of early retirement on the rest of your life.

Until next time, keep living.