Building costs expected to drive up rentals to new heights

Neville Schaefer - expects double digit increases in rents

“Expect double digit increases into the next decade,” he adds.

Schaefer says that early this year developers were shocked by the sudden increase in building prices and many ditched their development because there was not enough profit in them. “According to the Bureau of Economic Research and Absa economic research, building costs increased by over 15% in the first half of this year,” he says. “But we are advised that this is only the start of a long upswing.”
At the same time new residential developments in prime areas such as Sandton and Cape Town CBDs and Century City ran ahead of tenant demand and rents fell. “These rents have bottomed out at, for instance, about R4 500/ month for a two bed unit,” he says. “This has dampened demand for buy-to-let investment in these areas.

“As a result, the selling prices of townhouses and apartments that are usually rented out could rise less quickly, at 10% annually or even less -- that is below the expected building cost increases”

He says that initial investment yields will become the key issue in deciding whether to buy a property.

“I imagine that an acceptable initial yield – annual rent minus annual levies and other operating costs –will be between 7% and 8% if inflation is below 6% and borrowing costs are below 10%, “ notes Schaefer. “It’s difficult to build and profitably sell a residential unit in a good urban area for less than about R9 000/sq.m.

A 7,5% yield on that would be R675/sm./ year net or R56,25/ month. If the levy is R20/sm./month, the landlord would have to get R75,25/ sm./month or R5 625/ month rent on a 100 sm two bed apartment before its worth his while buying. If building costs rise by 15% next year the investor would have to get R6 187/month.

“If investors fail to achieve these yields, they’ll stop buying and the growing demand for flats in the cities will not be met,” says Schaefer. “So rents will rise.

“In other words, it looks like we could be returning to a sane rental and residential investment market.”
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