Rental Returns Rising.
Category Property Market
Rental flats and townhouses have generally delivered humdrum returns for investors over the past few years on the back of muted growth in both house prices and rentals. Industry figures show that annual rental growth has slowed from around 10% two to three years ago to an average 6% currently.
However, now could be a good time for income chasers — cash buyers in particular — to enter the market. Rental returns on buy-to-let properties are expected to rise steadily over the next three years.
FNB property strategist John Loos believes renting will become a more attractive option relative to buying as long as interest rates are rising, because higher rates will place home ownership further out of reach for many.
Loos, like most other property economists, expects house price growth to slow markedly this year, to an average 4.8%, down from 6% in 2015. He believes the market will come under further pressure next year, with a likely house price increase of only 3.1% for both 2017 and 2018. “High social tensions and fragile labour relations pose significant downside risk to forecasts.”
And as rental growth starts to outpace house price growth, buy-to-let yields (annual rental income expressed as a percentage of market value) will automatically rise.
Loos expects yields to increase from an average 8.5% in 2015 to 9.4% in 2018 (see graph).
Louw Liebenberg, CEO of residential letting processing firm PayProp, has a similar view. He says fewer consumers will be able or willing to buy homes in the current tentative economic times, thereby increasing demand for properties to let. “We have seen this before, and expect that rentals will grow as a result.”
But Liebenberg cautions buy-to-let investors not to expect tenants to absorb a sudden surge in rentals, given high household debt levels. PayProp research indicates that the average SA tenant currently spends roughly a third of his or her pre-tax earnings on servicing debt, while still juggling up to eight store accounts and three credit facilities. “The average tenant is using around 69% of the credit available to them, resulting in limited means to absorb any financial shocks that may occur.”
Liebenberg believes tenant selection will become the single biggest differentiator in the rental market. “As tenants are under more pressure to service ever-increasing debt in a stagnating economy, finding and placing the right tenant in a property that they can afford will be key in ensuring landlords don’t end up with rental arrears.”
According to latest figures from credit bureau Tenant Profile Network, the percentage of tenants in good standing (those who pay on time) is still a relatively strong 85%, way ahead of the 71% low recorded during the recession of early 2009.
However, Loos expects some decline in this percentage over the coming months as household balance sheets come under further pressure. “This is something to watch closely, because while tenant payment performance is currently still at healthy levels, the dip in 2009 indicates just how sensitive tenants are to economic cycles and interest rates.”
He says perhaps cushioning the blow this time around is a far more gradual interest rate hiking cycle compared to the previous one. “Realistically, though, tenants cannot defy rate hikes and economic decline indefinitely.”
Key questions for investors are which regions and types of properties now offer the best yields. FNB research shows there isn’t a major divergence in yields across the various cities — Johannesburg has the highest yields at an average 9.01% and Cape Town the lowest at an average 8.03% — but the size and value of properties do play a role.
For instance, two-bedroom sectional title apartments typically generate a yield of more than 9% while four-bedroom stand-alone homes offer only 6% on average. Similarly, the market priced below R600,000 fetches a yield of 9.27% on average while properties priced above R1.5m sit below 6%.
So, typically, midsized flats and townhouses at the lower end of the market offer better income returns than larger, more expensive units.
PayProp figures on actual monthly rentals show that the Northern Cape is the most expensive province in which to rent a residential property, at an average R7,438/month. While that may seem surprising, rentals in the province have been driven higher by growing demand for reasonably priced accommodation as a result of increased mining activity.
The Western Cape and Gauteng follow at an average monthly rental of R7,161 and R7,061 respectively. According to PayProp, North West is the cheapest province in which to rent a home, at an average R4,703/month. www.financialmail.co.za
Author: Financial Mail
