Buy-to-let market bounces back

IN A surprise twist following the recent interest rate hikes, investor interest in the buy-to-let market is again on the rise.

Over the past year or so, buy-to-let investors felt the squeeze as a declining interest rate environment made buying a more attractive prospect than renting. Some investors were forced to accept lower rentals in their bids to service the bond instalments on their investment properties.

But now it appears these investors believe that as interest rates rise, more people will opt to rent instead of buy.

According to the latest First National Bank (FNB) Residential Property Barometer, released last week, the size of the buy-to-let market increased from 15% of the whole property market to 20%, after this month’s interest-rate hike.

In April, 16% of residential property buyers were buy-to-let investors, down from 25% a year earlier.

FNB Homeloans CEO Ed Grondel said the percentage of buy-to-let investors had been steadily falling, but the interest-rate hike “put life back into the sector”, as investors took the view that higher interest rates would move potential buyers into the rental market instead.

“It was a surprise that it (the percentage figure) moved so quickly,” Grondel said. The number of buy-to-let investors had been falling because lower interest rates were leading people to buy rather than rent.

But is the increased interest in buy-to-let properties a smart move on the part of investors?

Property economist Erwin Rode, of Rode & Associates, says: “One must be careful not to ascribe it (the shift) to the interest rate hikes. It could just be statistical noise in the data.”

Rode says the effects of interest rates take longer to filter through to the residential market.

It takes three quarters before interest rates start influencing house prices, he says.

But he does not think it is a “smart move to buy to let”.

He says if investors are expecting strong capital appreciation to make up for the “deficit in their geared investment” they are in for an “unpleasant surprise”.

“I’m not expecting much capital in residential property over the next five years or so.”

David Green, MD of residential and commercial property brokers Pace Property Group, says residential property is the one asset class where a buyer can get 100% bond finance and that this is why smaller investors find it easier to invest in residential property.

He says that when interest rates rise, owner-occupiers tend to take a short-term view and then prefer to rent. “That always stimulates the buy-to-let market.”

Pace, which is marketing the new office-to-residential conversion College House in Braamfontein, is finding a lot of demand for rental accommodation.

Green says College House was 70% let after it was launched last week. “That is very positive. In terms of the buy-to-let market, it hasn’t really been tested and so this is a very good sign to see there has been very good take-up on new units in Braamfontein.”

He says Millpark Mews, another residential development marketed by Pace in Millpark, has waiting lists of potential tenants.

The 340-apartment complex is due to be completed towards the end of the year.

“If one took a longer term view of interest rates, you would still be better off buying. But what is true is that you can rent residential accommodation of a better quality than you could buy at the same amount. People are renting apartments they couldn’t afford to buy in any event.”

Article By: Nick Wilson - www.businessday.co.za