Good rental returns achieved on residential property

Is it worthwhile purchasing a residential property for the purposes of letting it and does residential property represent a sound investment in the current South African economic climate? 

Jason Shaw, manager of the Pam Golding Properties Fourways and Midrand offices, says that many properties in Gauteng are purchased for purposes of letting them out and notes that carefully chosen properties are an excellent investment.

Pam Golding Properties recently placed this fully furnished luxury home in Dainfern Valley on the rental market for R150 000 a month.
“The residential property rental market in Gauteng is a complex one with opportunities and markets varying from area to area. However, many astute investors are achieving excellent returns on their investments through the buy-to-let market,” observes Shaw. “Some of these are foreign investors, including a number from other African countries. These investors have taken advantage of the weak Rand to purchase local properties as rental investments.”
He says that quality homes offered at the right rental prices in good areas within Gauteng are snapped up fairly quickly. In some suburbs, there is such a strong demand for homes that there is a shortage of rental properties available. He adds that the rental division of Pam Golding Properties in Gauteng is performing particularly well.
According to Shaw, one of the many advantages of purchasing property for the rental market is that these homes can offer investors not only the opportunity for rental income, but also for capital appreciation returns, or, in other words, the value of the home appreciates and the owner is able to make a profit when he or she sells the home.
According to the recently released TPN Property Barometer, which undertakes annual research into the rental property market in South Africa, the FNB-TPN National Average Gross Residential Yield rose from 8.5% in the first quarter of 2014 to 8.8% in the third quarter. This follows after a number of years during which a slight decline in rental yields were noted.
Linda Prigge, the rental manager at Pam Golding Properties Hyde Park office, says that this increase is good news for the rental market and she expects a gradual upward trend to continue over the next few years.
“Both the purchase and rental markets in Gauteng are currently sturdy due to an ongoing demand for homes in the province,” she notes. “We expect the sales market to be stimulated by the recent announcement that transfer duties are to be reduced on medium to lower level homes. Rentals are also a popular option for those who are not able to obtain bonds or for those who may be feeling inflationary pressures. There are also a number of individuals who for various reason prefer renting instead of owning their own home.”
Prigge says that a wisely chosen property can yield a gross annual return up to a 12 percent and a net return of approximately 9,5 percent. For example, a R1,5 million property should fetch a rental of approximately region of R15 000 with an average rental escalations of between 8 and 10 percent year on year. “These kinds of returns are attractive to many investors,” she adds.
According to Prigge, where properties are correctly priced, landlords generally have little trouble in renting them out. However, some owners do overprice their properties and, as a result, these homes do not rent out as well or as quickly as they should. In such cases Pam Golding Properties agents have to undertake some price counselling with the property owner to ensure that a realistic, market-related rental is set and achieved.
There is a range of potentially lucrative residential property options available to investors in Gauteng ranging from freestanding homes to townhouses, cluster homes, homes in residential estates as well as apartments throughout Gauteng’s residential suburbs. Rental homes in suburbs such as Westcliff, Bryanston, Parkhurst, Parktown, Dunkeld, Morningside, Sandown and Hurlingham, Dainfern and Fourways Gardens, to name just a few, are in tremendous demand, points out Shaw.
“Foreign corporates and local professionals are creating a considerable demand for accommodation closer to Gauteng’s vibrant business centres and apartment living is increasingly sought after in the rapidly developing hubs of Sandton, Rosebank and Menlyn in Pretoria,” suggests Shaw.
“The demand from multinational companies provides an important stimulus for the rental market, in both Johannesburg and Pretoria. There are many multi-national companies doing business in South Africa seeking upmarket accommodation for their senior staff members. These companies tend to sign rental agreements for periods of between one to three years.
He emphasises that the corporate rentals market is fastidious and homes must therefore meet a number of exacting requirements before they will be considered. These homes often need to be furnished while upmarket clusters within secure developments or upmarket apartments, in close proximity to the central business district of Sandton, continue to be in high demand.
According to Linda Prigge, outstanding security, convenience and lifestyle are major draw cards while many executives with families appreciate having excellent schools within easy reach. “The executives at these companies have a preference for upmarket homes with bedrooms all en suite. A swimming pool, underfloor heating and staff rooms are also usually requirements. Companies will also insist on homes having an alarm and an armed response service so that they are able to meet their legal obligations to keep their employees safe.”
Properties in estates such as Dainfern, Fourways Gardens, Cedar Lakes in Johannesburg, and Waterkloof Ridge, Waterkloof and Brooklyn in Pretoria, are offering particularly excellent returns to those landlords who have an understanding of this corporate market and its unique requirements. These homes generally represent a sound, long-term investment, according to Shaw. In Pretoria, the high-end rental property market is also stimulated by the large number of embassy and foreign mission personnel seeking accommodation in the city.
Shaw says that the rental corporate rental market can be highly lucrative. Some 30 to 35 percent of all rentals in areas such as the Dainfern Golf Estate are made to corporate institutions and it is a very rewarding market for investors. Pam Golding Properties recently placed a fully furnished home in Dainfern Valley on the rental market for R150 000 a month. In addition, a property in Dainfern was rented to an executive for a record R85 000 a month late last year, a rental that does not include levies, services and utility costs.
He adds that some 90 percent of the properties being rented out in Dainfern are to companies, while in Fourways Gardens and Cedar Lakes this figure stands at approximately 50 percent. He notes that 30 percent of the properties in the three estates are purchased for the purposes of letting.
“The prices of rental units depend very much upon the area in question. It should be kept in mind that multinational corporates do have limits to their budgets and are price sensitive. Rentals should therefore remain competitive and realistic. There is a demand for everything to be included in the rental such as furniture, servicing, security and so on. Corporates want to be able to offer their employees an all-inclusive package,” advises Shaw.
Some multinational companies with operations in Gauteng are seeking to accommodate large numbers of employees. Shaw points out that, while many corporates rent homes on behalf their employees, others provide a rental allowance and allow their people to find their own accommodation.
“It is critical for anyone who is looking to invest in property to rent to obtain quality advice,” he adds. “One needs to be able to gain an idea of what kind of returns the home will fetch and which areas are the best to invest in. You also need to know what kinds of individuals and companies are likely to rent a particular property and what features and facilities they are looking for.”
Shaw advises tenants to maintain a good credit record because PGP looks at this closely before renting out a property in order to offer peace of mind to landlords. The agency checks credit scores with the applicant’s bank in order to ensure creditworthiness and previous landlords are contacted for references. If any problems such as rent default come to light these are reported to the landlord. “We consider such checks vital in protecting our clients,” he adds.
“Our agents have years of experience in the rental field and are known for their professional knowledge and the valuable advice that they can offer,” he concludes. “We believe that it is in everyone’s best interests for properties in the rental market to move rather than to remain unoccupied for long periods of time. In today’s challenging economic climate it is important that assets deliver a sound return.”

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