Buy-to-let market on the up again?

News > news - 22 Nov 2006

Has the buy-to-let property market turned? Feedback from the marketplace is that the first tentative signs of a return to a better balance of supply and demand in this sector of the property market are beginning to appear.

So says Gerhard Kotzé CEO of the ERA South Africa property group, who notes:
"Indications are that the market is entering a fresh cycle spurred on by a number of factors which may point to a revival of the relevance of buy-to-let property investment.

"If these assessments are correct then the last 18 to 24 months of poor returns in this segment may be coming to an end."

He says that during the recent property boom there was undoubtedly over-investment in buy-to-let properties.  Figures quoted by Standard Bank for instance show that the number of people on its home loan books with two properties increased by 95% from 28 000 in 2000 to 56 000 in 2004.

"Owners of three or more properties increased by an even greater quantum of 150% from just less than 17 000 in the year 2000 to over 50 000 in 2004. And anecdotal evidence was that some developers were selling anything up to 70-75% of units in new projects to buy-to-let investors."

Subsequently, of course, a typical scenario of property musical chairs ensued and when the music stopped, many such investors were left, not without a chair but "stuck with properties they could neither rent nor sell or at best that are earning rentals that don't even cover the bond installments".

"However," says Kotzé, "the slump in demand for rental properties may well be bottoming out, thanks primarily to a decline in affordability in the wake of recent interest rate increases and further high building cost increases this year.

"In short, it is once again becoming more attractive to many people to rent than to buy."

At the same time, the pace of development has slowed substantially as the current stock of good rental accommodation is being absorbed, so the rental market could shortly find itself in healthier demand/supply territory.

"And such a change in the market would obviously bring about an improvement in returns - which is what canny investors are now anticipating as they return, albeit cautiously, to the buy-to-let market."

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