Buy-to-let investors set their sights lower.

News > news - 20 Mar 2007

Buy-to-let property investors are setting their sights on the lower end of the market, driving up demand in residential suburbs that are ripe for refurbishment and new developments. 


Gerhard Kotzé, CEO of the ERA South Africa property group, explains:

"Conventional investment ideas with regards to buy-to-let real estate are being turned upside down. The old adage that if you buy expensively, you can sell expensively, no longer applies. 


"Return on investment for the more up-market properties has slipped as the ratio between price and rental returns widens. Currently, estimates are that returns in the 'conventional' rental market have dropped from 10%, realised at the height of the property boom, to around 4% to 5%. 


As such, says Kotzé, buy-to-let investors who have invested in the top end of the market, have to contribute a greater proportion of bond servicing costs in a rental scenario. Prudent investors are therefore looking down-market and have identified opportunities in areas that have been less than fashionable in the past. 


"In suburbs in the Cape Flats, such as Mitchells Plain and Khayelitsha for example, investment buying is on the increase," notes Kotzé. "These are classic property stepping stone areas - where a growing number of residents aspire to more expensive homes and are leveraging the increasing values of their properties to do so, while other residents are upgrading their existing properties simply to improve their standard of living." 


These bottom-end areas are presently very favourable for investment, and many investors are achieving excellent returns through capital gains and rentals that are not achievable elsewhere. Says Kotzé: "A buy-to-let investor who in the past may have bought one or two expensive upmarket properties, is now acquiring perhaps several less expensive properties - making it possible to achieve higher returns for similar amounts of initial investment, while simultaneously spreading the risk. It's a trend that is repeating itself in numerous parts of the country, including areas such as Sunnyside in Pretoria, Cosmo City in Johannesburg, and Parklands in the Western Cape." 


He says that the major problem with this new trend is the fact that banks have a tendency to value homes in some areas at less than their realisable market value. However he says that at least the notorious practice of "red-lining" (in which some areas are point blank refused any bonds) appears to be disappearing. 


On the other hand, positive spinoffs of this trend will include a surge in new development of affordable, good quality properties and a general improvement in housing environments in previously neglected areas. "As such," concludes Kotzé, "increasing numbers of South Africans will benefit from wealth creation through property."

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