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Friday, 23 September 2011

How is buy-to-let property faring?

Growing rental returns are beginning to attract property investors to the buy-to-let market, which has shown very little growth of late.

High rental yields and low valuations begin to make the buy-to-let market viable once again.

Residential rental demand has been driven to some extent by homeowners selling due to financial pressures. And a survey of estate agents recently estimates that of those homeowners selling due to money problems, 51 percent will rent rather than buy a cheaper property.

Rental returns and interest rates are key factors moving the buy-to-let market. During the boom years, when new property developments blossomed and outstanding capital gains were to be made from off-plan projects, profit was the major force driving amateur speculators and professional investors alike.

During the boom property values spiralled upwards, one sale chasing another - by 2004 the proportion of persons buying to let peaked at around 25%. This proportion has currently fallen to about 7% of the residential market. However, sharp investors are seeing opportunities again as values have plummeted while bargain buys are widely available, including a large number of forced sales and bank repos.

High rental yields and low valuations begin to make the buy-to-let market viable once again. The imponderable is when interest rates will rise, either later this year or during the course of next year. Another issue is the threat to impose commercial municipal rates on secondary or income-producing residential homes. The suggestion (that’s all it is at present) comes from the national government, but it may come to nothing and could well be simply some official tossing a pebble into the pond.

Rental yields are critical, and the current signs are encouraging. According to the Stats SA quarterly survey, rental growth moved up from 6% year-on-year as at June 2010 to 8,3% in June 2011. More recently we have seen more noticeable growth in both townhouse and house rental yields. Good yields, however, are dominant in the central urban nodes, where business activity is strong. This also applies to the buy-to-let market. According to the latest Rode Report, flat rentals in Pretoria led the board in the first quarter with 6% year-on-year growth, followed by Cape Town (4%).

Investors stirring

According to the Stats SA quarterly survey, rental growth improved. Good news for buy-to-let investors, says the report, is that, after peaking at the end of 2009, flat vacancies have since been drifting downwards. This improvement in demand obviously bodes well for market rentals. The investor market can well do with a boost in confidence. Current surveys indicate that the percentage of buyers (as a factor of the total residential market) is in the region of 8% compared with the boom years when the buy-to-let market peaked at around 25%.

In Johannesburg rentals in the middle market have been exceptionally strong, with some pressure on the high end. Shaun Groves, PGP’s rental manager at its Gauteng head office, reports: “Quality stock remains a constant challenge as we let these units faster than we can find them. Some landlords, however, are demanding excessively high rentals which means they can sit on the market for a while.”

Groves adds that July was a record month for PGP rentals in Johannesburg’s northern suburbs, with 70% of this being new business. “We have experienced strong demand, especially below R25 000 a month. This has resulted in high turnover in Bryanston and Parkhurst especially. Demand is always high in Morningside and the immediate areas surrounding Sandton City. There has, however, been pressure at the high end of the market. Only ex-pats are willing to entertain asking rentals of R50 000 a month or more. Corporates have revised their budgets and reluctant to exceed R35 000.”

The buy-to-let market in general tends to be most active in flats and townhouses. There, says Groves, is demand for 1 and 3 bedroom units and a little less for 2 bedroom units.

In Cape Town, rental activity continued to improve (July on June) says PGP Rentals Division manager Dexter Leite. The agents concluded 128 lease transactions and 86 valuations in July. Examples are a house in Fresnaye let at R59 900 a month, a home in Constantia at R55 000 and two apartments at the V&A Waterfron at R32 500 and R30 000 monthly.

Some landlords are looking to rent their properties on a furnished basis, seeking higher rentals, says Leite, adding: “Unfortunately there is not much demand for furnished properties.”

One specific aspect of the buy-to-let market which appears to be growing in popularity is joint ownership, particularly useful when gearing is required. One can assemble a group of friends, or like-minded investors, form a partnership and pool resources. One advantage is that the group can normally generate a reasonable amount of cash, which used as a deposit makes getting a mortgage easier (the banks are quite happy with joint ownership agreements as long as they are properly drawn up).

For the first-time investor there are important factors to consider in selecting a property to let. Obviously rental income and a sound tenant are paramount, but Laurie Wener, PGP’s managing director for the Western Cape metro region cautions that there are other important factors in selecting an investment property.

“These include the suburb, the location, the value based on current market conditions and the general appeal and condition of the property. Get these elements right and the medium-to-long-term growth of your investment will be assured, regardless of the overriding market climate.”

Wener encourages investors not to turn a blind eye to investment opportunities in the current market. “For example, we are marketing a 106 sqm two bedroom, canal-facing apartment at the V&A Waterfront for R4,995 million.”

Article courtesy of Pam Golding Properties' Intellectual Property magazine.

4 comments:

paulfinnch said...

This is such a amazing article. it will help me. This needs to obviously indicates that the market rent.

HOA

buying investment property said...

There is a common misconception that the lower end of the market is driven by first-time buyers but, until recently, it is the buy-to-let market that has set the tone here. As the recession has taken hold, this area has weakened considerably.

Eric S Doms said...

The reason buy-to-let has set the tone is because there are no first time buyers left.

First time buyers make up the majority of growth, hence we now have a situation where the only growth being recorded is by buy-to-let buyers. The market will only improve once easier credit control is re-introduced, but with the world economy I think this is a while off

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