Rental market – good for investment?

Due to the current economic conditions fewer people are able to purchase a home – albeit it to live in or to buy-to-let.

“Everyone needs somewhere to live and, if possible, it’s always best to purchase a home; as such the residential property market has continued to see movement. However when it comes to second properties or investment properties the market has taken strain over the past four years as people tighten their belts,” says Jan le Roux, CEO of Leapfrog Property Group.

Recent research conducted by John Loos, FNB Household and Consumer Sector Strategist and Michelle Dickens, Managing Director of TPN (Tenant Profile Network) indicate that the investment segment of the market may be improving. The reason being that more people are looking to rent in an effort to avoid the costs associated with owning a property, boosting the rental markets across the country.  The latest FNB Property Barometer also predicts a further downward correction in terms of house prices which may well boost the investment share of the market.

According to economist Mike Schüssler more than 9.2 million households rent, of which 1.6 million rent formal structures. His estimates, based on the first and second quarter of 2012, also indicate that around 700 000 households rent properties in the formal suburban market. Add to this figure the growing shortage of student accommodation around universities across the country and it is obvious that the rental market is sizeable.
When it comes to purchasing-to-let Dickens points out that “it is actually the income stream that it generates, relative to the price paid, that should really be the focus... “In investor-speak, a far better number to focus on would arguably be the “initial yield”, i.e. the income expected to be earned over the next year divided by the property value”. Le Roux adds that "investors will also benefit from capital growth on their properties, in the medium and long term, as prices will rise again with the need for housing growing all the time".

It is this projected income stream that has come under pressure in recent years: according to research released by PayProp “the biggest risk for non-payment is encountered in the sub-R3 000 and above-R12 000 rental brackets. Below R3 000, tenants are hampered by inflationary pressures, while interest rates appear to thwart the more indebted tenants of the above-R12 000 category”.
However TPN data does illustrate that as of the first quarter of 2012, 81% of tenants were in good standing as opposed to 71% in 2009.

Apart from the issue of late rental payment or non-payment PayProp’s Rental Index for the second quarter this year indicates that the average national rental for June was R5,178 per month, slightly higher than the February figure of R5,172. Figures indicate that current rental increases don’t go over 5% as tenants struggle with the increasing costs of food, fuel and electricity.

John Loos indicates that the average gross yield now stands at 8.58%. Not much of an improvement but, it is higher than the 6.655% yield in 2006. Whether this yield is enough to entice investors back to the market is debatable as these are gross yields meaning that the landlord still has to subtract the general costs associated with a rental property.

Dickens points out that the sectional title segment of the market is currently proving more attractive to investors with Loos agreeing that small properties with fewer bedrooms are currently showing higher yields than larger and pricier homes.

“Whilst Leapfrog has certainly seen an increase in interest from tenants looking to rent and from investors seeking to buy-to-let the market is still fairly subdued and I agree with Loos and Dickens that 2013 will most likely see more of the same as economic conditions prevail”, says Le Roux.

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