Residential buy-to-let investment increasingly popular

Towards the end of 2011, Bill Rawson, Chairman of the Rawson Property Group, the fastest growing major residential marketers in South Africa today, predicted that three factors would drive up rentals faster than at any time in the last few years — and this week he was able to confirm that that is exactly what has been happening.

“The three factors which we then identified remain relevant and, in fact, are even more pertinent today,” said Rawson. “They are:

1.    Growing shortages of stock in all the more popular urban and suburban areas.

2.    A serious lack of mortgage finance (something we have seen ever since the implementation of the National Credit Act).

3.    A return of buy-to-let investment in a slow but steady stream to the market.  This has resulted in certain popular new sectional title developments being able to attract as many as 20% of their buyers from the buy-to-let fraternity.”

Quoting a January 2014 statement from Tenant Profile Network (TPN), Rawson said that gross rental returns on houses (i.e. the returns before allowance is made for commission, maintenance, rates and taxes) have risen from a low point in 2008, when they stood at only 7,38%, to a high point soon after the start of this year when they rose to over 9%. The indications, he said, are that they will continue to rise.

“The welcome rise in rentals,” said Rawson, “is outperforming the increases in home prices, which have also been very satisfactory recently. It should be appreciated that these figures quoted are national averages and are held down by rural and outlying rentals which are not rising in the same way as urban and suburban rentals. It should also be appreciated that the anticipated further increases in the interest rate will further boost rental incomes.”

TPN, said Rawson, lists Johannesburg rental stock as giving a 10,13% return, while Tshwane, Ekurhuleni, Ethekwini and Maungaung all give over 9% returns. Cape Town’s figure is just above 8%, but also rising.

The TPN analysis, added Rawson, also shows that low and lower middle income homes, valued at below R600,000 and in the R600,000 to R900,000 brackets, give higher percentage yields than the more expensive properties, again because demand here tends to outstrip supply more markedly than elsewhere – but the best paying/performing tenants are those in the R3,000 to R12,000 per month brackets. Surprisingly the worst performers are those renting at R20,000 per month plus.

The welcome return of buy-to-let investors, said Rawson, means that 8% of all homes bought in South Africa are required for investment purposes. This figure is, however, still a long way below the 15% buy-to-let component from 2004 to 2009, when buy-to-let investment was exceptionally popular.

A factor encouraging to perspective buy-to-let landlords, added Rawson, is that selection and control of tenants appears to be improving year by year, with the result that some 85% of tenants are now listed by TPN as being in good standing, a significant increase on the low point of 71% in early 2009.

“TPN,” said Rawson, “predict that the next major increase in rentals will be sparked by significant rises in interest rates. This ties in with what many of our commentators have also said will happen.”

Rawson repeated a warning which he made to buy-to-let investors in 2011.

“Although, in my view, it is always less stressful and therefore worthwhile to employ a good rental agent, one has to remind investors in this field to beware of abdicating full control.  Buy-to-let investors are, in our experience, far too inclined to leave matters entirely in the hands of their rental agents and, in the case of sectional title schemes, the managing agent and the trustees.  All of these have, however, to be watched carefully because inevitably some will underperform – and we have to accept that some 15% to 20% of South Africa’s sectional title schemes have, in recent years, experienced serious financial difficulties.”

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