Minimal improvement expected for the residential rental market in 2010 says Peter Gilmour, Chairman of RE/MAX of Southern Africa

The latest figures released by credit bureau and rental research agency, Tenant Profile Network (TPN), indicate that the rental market in the upper end of the housing market has become increasingly risky for buy-to-let investors, with a significant jump in the number of tenants in upmarket properties who are no longer able to pay their rent. A total of 21% of tenants paying rent of R12 000 per month and more made no rental payments in the fourth quarter of 2009, which was almost double the total of 12% reported in the third quarter of 2009.

Peter Gilmour, Chairman of RE/MAX of Southern Africa says that the TPN report indicates that only 64% of tenants in the R12 000 per month bracket paid in full and on time, which is in contrast to a total of 82% of all tenants in the R3 000 to R7 000 per month bracket, and 79% in the R7 000 to R12 000 month rental bracket. “Upper LSM tenants are more cash-stressed than their lower income counterparts,” he says, “which raises the risk level for landlords owning more expensive properties. As a result, the lower income buy-to-let properties seem to offer a more reliable income stream than their upper end counterparts.”

Furthermore, the Rode & Associate’s Fourth Quarter 2009 Property Market Report, also indicates a tightening in the rental market across the board. “This report explains that property investors will be demanding higher income returns from their properties to compensate for deflated capital returns, which will no doubt be met with some resistance. It also showed that flat rentals showed lacklustre growth in 2009, with Durban reporting an annual growth of 5%, and Johannesburg and Cape Town coming in at a dismal 2%,” says Gilmour.

The latest research released by FNB notes that on average, only 60% of monthly mortgage repayments on buy-to-let properties were typically covered by rental returns. “As a result of these low income yields, the buy-to-let market is currently not a very attractive one to investors. This, coupled with the fact that property values are only predicted to increase by a mere 6% to 8% in 2010, means that it is not the best time to invest in the buy-to-let market. This is because the cost of credit compared to the current capital growth on housing doesn’t offer such good potential returns,” says Gilmour.

The 2010 FIFA Soccer World Cup has offered some relief for the local residential property market, but it has also led to certain negative backlashes. Gilmour explains: “The hype surrounding the World Cup has lead to an oversupply of short-term rentals, with many landlords holding back from signing long-term tenants in the hope of getting ludicrously high rentals over the World Cup period. It is a concern that many landlords will not manage to get World Cup tenants and in turn, cut themselves off from signing sound long-term rental agreements.”

He notes that although the World Cup will no doubt bolster investor sentiment in the South African property market, the growth in property values and the strengthening of the property market in general will be a gradual process, with the market only boasting a full recovery in a couple of years. “Even though there are clear signs that the South African economy is making progress, tenants will still feel the repercussions of the recession for some time to come. The debt-to-disposable income ratio is still very high in South Africa, which restricts the ability of potential investors to borrow, and there may well still be a number of job losses and redundancies as businesses try to recover from the recession,” concludes Gilmour.

Article by: www.remax.co.za