Cape Town’s high-flying rental market offers investors solid returns

The rental market in Cape Town is more buoyant than it’s ever been, with many areas experiencing stock shortages and skyrocketing rental prices which continue to outpace the current consumer inflation rate of 7%.

IDEAL INVESTMENT: This three-bedroom family home on Rondebosch’s sought-after Silver Mile will yield a solid rental return. On the market for R3.375 million, it offers spacious open plan living, excellent security and is close to several top schools. 

Recent data compiled by economists at Rode & Associates reveals that Cape Town’s rental inflation for 2015 was 9.6% whilst the national average rental inflation during the same period averaged at 6%.

This is corroborated by Lorraine Dellbridge, Rentals Manager for Lew Geffen Sotheby’s International Realty in the Southern Suburbs, Noordhoek and False Bay who says: “Last year we saw a really sharp hike in rental rates in the Southern suburbs; often unrealistic and unachievable.

“Although prices are still high, they have stabilised this year and we are finding that many landlords who start very high, generally come back to us within two or three weeks and ask us to drop the price. It can be a huge financial burden to carry an unlet property and therefore a costly drain on resources to hold out in the hope of realising an unrealistically high rental.”

Dellbridge says that the sharp increase in rental prices has also prompted an increase in downgrading where tenants move to cheaper areas so that they can maintain their standard of living.

“In the face of rising costs, many families are opting to move to a suburb where they can rent a similar home for far less. For instance, a modern four bedroom home in Plumstead generally costs between R15 000 and R20 000 per month whilst a similar home in Constantia for under R35 000 would be a rare find.”

According to Brendan Miller, Lew Geffen Sotheby’s International Realty Atlantic Seaboard CEO, there are several key factors driving the city’s expanding rental market.

“The basic economic principal of supply and demand is at the core of the meteoric growth, but other contributors have been at play over the past decade.

“The once-abundant supply of available rental stock has been dwindling for a number of years, fuelled to a large extent by the ever-growing influx of South Africans migrating to the Western Cape, the exponential increase in property prices, regular interest rate hikes and banks’ reluctance to lend money.

“It has become increasingly difficult for first-time buyers to enter the market in Cape Town, with many prospective buyers being forced to rent for longer while they save for larger deposits. 

Miller adds: “Further fuelling the dearth of long-term rental property, especially in popular tourist areas like the Atlantic Seaboard, is the fact that many more landlords now prefer to service the short-term market in an effort to reap higher yields from holiday lets.

“This is very evident when one looks at rental property offered online where it is common to see homes in areas like Hout Bay and Camps Bay priced per day in summer, then perhaps offered on a five- to six-month let through winter.”

He cautions that this market carries higher risk because unless a home is ideally positioned or the owner has an established reputation and client base, the property could stand vacant for long stretches and then prove to be a financial drain the rest of the time.

Di Pelman, Rentals Manager for Lew Geffen Sotheby’s International Realty on the Atlantic Seaboard, says: “There has been notable increase in requests for medium-term lets of up to 12 months, mainly from upcountry semigrants seeking temporary accommodation whilst their new homes are being built or they familiarise themselves with the city before deciding where to buy.

“The Atlantic Seaboard is very popular because of its proximity to the city and multiple top class amenities as well as its scenic setting and oceanfront lifestyle. However, these drawcards come at a price and houses along this sought-after coastal strip, especially those with views in suburbs like Fresnaye and Camps Bay, can cost anywhere between R35 000 and R90 000 a month.”

Dellbridge also reports a growing demand for medium-term accommodation in the Southern Suburbs, especially from families moving to the city, but she says that on that side of the mountain landlords are generally reluctant to offer leases for less than a year, which leaves tenants little choice.

“Areas like the Atlantic Seaboard have a much more active tourist market and therefore a greater demand for shorter lets, so landlords are more inclined to offer leases for a few months, especially during the off-peak season.”

Although the property market in Cape Town generally defies national trends and remains strong despite the current economic slump, it has not been completely impervious and house prices are expected to drop in real terms over the next two years.

This is according to FNB property economist John Loos, citing the bank’s most recent house price index.

“It is clear that year-on-year growth in prices is on a declining trend nationally and house price inflation has been slowing steadily for several months. Average house price inflation could to fall to a paltry 4.8% this year, which is considerably lower than last year’s rate of 6%.” 

While this isn’t good news and doesn’t bode well for the country’s economy, it does present an excellent investment opportunity for those looking to enter the property rental market.

Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty says: “In contrast to the declining house price inflation rental returns on buy-to-let properties, especially with the fast-growing population in Cape Town, are expected to rise steadily over the next three years and savvy buyers with cash in hand stand to realise excellent returns if they do their homework.

“Now is the time to buy, especially as rising interest rates are placing home ownership further out of reach for many people who have no choice but to rent.”

He says that while the days of rental income covering the monthly bond repayments are long gone, it is still one of the best investment options available as at least 50% is subsidised by the tenant.

“Additionally, your original capital investment will have year-on-year capital growth and, adding the approximately 4% annual rental income, property in the right area could realise a year-on-year return of up to 14%.”

However, Geffen cautions investors not to enter this market to try to make a quick buck.

“In order to realise the maximum return on your investment, property is a medium to long-term investment which requires at least five to eight years, depending on the area, to reach full growth potential.”

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