Mining towns less attractive now for buy-to-let investors

The property markets of mining towns around the world have gone from boom to bust in the past year as a result of the slump in commodity prices, with most now having a serious oversupply of real estate that is driving rentals and purchase prices down.

“And resource-dependent towns and provinces in SA have not escaped the decline, although the weak currency has softened the effect somewhat by boosting the rand value of gold and other precious metals,” says Andrew Schaefer, managing director of national property management company Trafalgar.

“The strong local demand for coal to keep up electricity production at SA’s old and new power stations has also helped, but new mining ventures, exploration projects and infrastructure builds have nevertheless been put on hold in many parts of the North West, Limpopo and Mpumalanga,” he says.

“Existing mines and processing facilities have also scaled back operations, and many towns that used to have waiting lists of incoming mine employees and contractors clamouring for accommodation now have large numbers of empty rental units – and declining rentals.”

Schaefer says this is clearly reflected in the latest Residential Rental Monitor released by specialist credit bureau TPN, which reveals that the average rental in Mpumalanga, for example, showed a year-on-year decline of 1.58 percent in the third quarter of last year, compared with an increase of 7.04 percent in the same period of 2014.

“Similarly, the average rental in North West showed a year-on-year decrease of 6.92 percent, less attractive now for buy-to-let investors in the third quarter, compared with an increase of 10.56 percent in the same period of 2014, and the average rental in Limpopo showed a year-on-year decline of 11.12 percent compared to an increase of 9.2 percent in 2014.

“Consequently, even though mining areas  have some of the highest rates of tenants in ‘good standing’ for paying their rent on time and / or in full, we believe they are increasingly risky choices for buy-to-let investors, with the exception perhaps of Northern Cape, where a lack of infrastructure has prevented the creation of an oversupply of rental units.”

By contrast, he says, rental property investments are looking increasingly attractive in the Eastern Cape and Western Cape, where average rentals are still showing annual rates of increase higher than the national average of 5.1 percent. According to the TPN figures, the year-on-year rate of increase in the Eastern Cape was 6.9 percent in the third quarter of 2015, and that in the Western Cape 7.85 percent.

“According to the TPN figures, the percentage of tenants in good standing in both these provinces is also higher than the national average of 84.7 percent – at 88.7 percent and 88.5 percent respectively.”

As for the type of property to buy as an investment, Schaefer says all indications are that these should be apartments or sectional title townhouses in secure complexes that will generate good returns at rentals of between R3 000 and R7 000 a month.

“The TPN statistics show that 59 percent of tenants in SA fall into this rental range, which means that owners of such units are assured of good demand, boosted by increasing urbanisation and the growing trend in the major metros towards secure living in smaller homes.

“This is also one of the better rental payment categories, with 86.1 percent of tenants in good standing and 71 percent paying in full and on time every month.”

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