Affordable rental market is promising

One of the big four, Standard Bank, says the South African residential market is offering an attractive opportunity in the affordable housing rental segment, with returns of up to 9% after tax.

Head of real estate finance, Gerhard Zeelie, says this is mainly driven by low and middle income earners who do not qualify for bonds, as well as an increased demand for housing closer to economic hubs.

Zeelie says rentals in the affordable housing market can typically offer returns of between 8.5% and 9% after tax, assuming conservative gearing (which measures the extent to which a company is funded by debt) and taking moderate capital growth into account.

He adds: “Investors who select good locations, efficiently manage their assets and look after their tenants can reap good returns from affordable housing rentals.”

This view has been largely supported by leading estate agents and other banks.

Zeelie says the returns offered by the upper rental market are significantly less. This is mainly due to the lower rental yield achievable on these properties and the fact that the capital growth outlook is lower.

The market opportunity is for households earning between R250 000 and R450 000 a year and paying rentals of between R3 500 and R6 500 a month. This view has been supported by developers in the affordable housing sector.

Zeelie says the increase in demand for affordable housing rentals is also due to consumers seeking housing closer to work, school and public amenities, coupled with the fixed, predictable cost of renting.

He adds while a few large players have entered this rental segment over the past few years, there is room for growth: “As a start you need an economically viable location, in close proximity to public transport, access to shopping and schools.”

According to Statistics SA’s 12-month moving average of the value of building plans approved, there has been a dramatic increase in the demand for houses smaller than 80m². Zeelie says this points to increased activity in the affordable housing sector.

At a media briefing in Cape Town recently, Pam Golding Properties’ CEO, Andrew Golding said some regions in South Africa had seen an increase in rental demand, boosted largely by strict bank lending requirements prohibiting some consumers from acquiring their own homes. This, Golding said, had encouraged investment buyers with financial resources to purchase property for rental returns.

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