Buy-to-let properties will reap rewards in the long term

Peter Gilmour, chairman of RE/MAX of Southern Africa, says that the rental market is currently in a major slump and that there are no signs of any quick turnaround in the near future.

“There are a number of contributing factors that, when viewed together, paint a pretty gloomy picture for the property rental market going forward.” Gilmour says that according to figures from First National Bank, buy-to-let activity has decreased markedly over the past five years, with the proportion of investors in this sector decreasing to less than 10% of total sales in the first quarter of 2010. This is the lowest level on record, compared to reported figures as high as 20% in the boom years.

“According to a First National Bank Property Barometer for the first quarter of 2010, the buy-to-let purchases dropped from 13% of total buying in the fourth quarter of 2009, to 9% in the first quarter of 2010. I predict that growth will fall even further going forward into 2011, as consumers increasingly come under more financial strain.”

According to Gilmour, there are a number of contributing factors why the rental market is experiencing a lacklustre performance, with the number one issue pivoting on the fact that many South Africans remain heavily indebted. “Reserve Bank data shows a very high ratio of debt compared to disposable income in South Africa’s household sector – which is obvious considering the recent hikes in electricity, rates, petrol and the general cost of living. Although there has been a slight recovery in the residential property market, buy-to-let properties are still considered as a ‘luxury’ purchase and this market is therefore lagging behind as the household sector slowly battles its way back to financial health.”

This coupled with the fact that the average income yield (annual rental as a percentage of market value) that is being earned by landlords in this sector remains pretty low, makes this kind of investment even more unattractive. Says Gilmour: “First National Bank estimates that the average income yield lies at a rather uninspiring 6% to 7%, and few rentals come close to covering bond repayments. In fact, the average buy-to-let investor currently only recovers an average about 65% of the bond repayments through rentals. Over and above this, landlords need to pay levies or rates and taxes, which leaves them even more out of pocket. With the average household under serious financial pressure, it is easy to understand why this sector remains out of reach of the average consumer.”

Gilmour notes that another blow to buy-to-let investors is the fact that come August this year, experts are predicting a flood of rental stock to hit the market: “One of the legacies left from the days of the property boom is an oversupply of buy-to-let stock. However, many believe that this is going to worsen in the short-term as many buy-to-let owners cancelled leases with long-term tenants in the hope of cashing in during the World Cup by earning short-term rentals from high-paying international football fans. However, come the end of this event, many landlords are going to be left holding the can so to speak, when they return their properties to the already over-supplied sector.”

However, it is not all doom and gloom says Gilmour. “On the positive side of things, for investors with fluid capital, this remains an excellent time to invest in the buy-to-let market, as with the rental market underperforming, there are some great bargains to be found. If investors can afford to hold on to these, they are sure to reap great returns when the rental market bounces back, which it will do sooner or later. Considering that most consumers are cash strapped and that financial institutions are more rigid with regards to lending, more and more people are going to have to rent as they won’t be able to qualify for or afford a mortgage to buy their own home.”

Article by: www.remax.co.za