Buy-to-let flurry
Rodney Hayter

CAPE TOWN (September18) - The residential rentals market has come in from the wilderness with a bang, according to an article in the latest Pam Golding Properties magazine, Intellectual Property.

It’s a swings and roundabouts situation – a downturn in purchases of houses and apartments and a corresponding upturn in rentals. And now that landlords are beginning to see acceptable letting returns, there is awakened interest in the buy-to-let market.

However, there is still considerable caution, amid complaints that landlords are asking for excessive rentals in order to cover their costs – which are rising inexorably. As a result there is a degree of resistance from potential lessees. In fact, the FNB Rental Barometer published in mid-July indicated a surprise decline – albeit small – in activity levels from the first quarter. FNB’s property strategist John Loos suggests this is due to the tenant and prospective tenant market beginning to experience increasing financial pressure, delaying the further strengthening of the rental market. As a result, fewer letting agents are experiencing supply shortages.

Dexter Leite, head of PGP’s Cape Town rentals office, also reports that activity has quietened down, but adds that this is to be expected in the middle of winter. “There appears to be uncertainty in the market, as we have been called in to do many valuations for owners and investors. It is evident that holding costs are increasing, but tenants are not prepared to pay exorbitantly increased rentals.”

Leite adds that potential tenants are shopping around for the best deals: “We are also seeing large numbers of managed properties going to sales, as investors see this as an option in the current market conditions. Invariably these come back to rentals with a buy or let option being looked at.”

The latest published report by Cape-based economist Edwin Rode describes rental growth in Gauteng as “magic”. Says Rode: “Year-on-year nominal flat rentals in this metro ended on average 26% higher, thereby far exceeding the growth rate in consumer inflation of 9%. In other metros, growth was more pedestrian, with Durban up by 13% and Pretoria and Cape Town growing by roughly 8%.”

John Loos comments: “We remain of the belief that the rental market has embarked on a broader strengthening trend which should see significant yield widening.” He does, however, add the caveat: “In these turbulent economic and interest rate times, there are few markets that will have a smooth ride.”

The FNB survey does suggest that the increasing cost of property ownership makes renting an even more attractive option.

And Edwin Rode is adamant that rental is the way to go. According to a report on Real Estate Web, he told a group of agents recently that home owners should sell and rather rent for 10 years. “If it’s not too late, I advise you to get rid of your house.”

Some pointers from the FNB survey include the following:

* Some 43% of letting agents questioned indicated that in the second quarter of this year demand for rental property was much higher than six months ago. Only 11% said demand was lower.

* 59% of rental properties are rented in less than a month and while this represents a quick turnaround, it is significantly less than the 75% recorded in January.

* While there is still generally a shortage of rental stock it is not as severe as it was at the beginning of the year.

Agents still point to disappointing yields. Whereas government long bonds are showing net yields above 9%, letting agents say that only in house price ranges less than R300 000 could such yields possibly be matched.

The situation again raises the question: is it better to rent or to buy? Edwin Rode is not alone in advising people to sell and rent, but what are the factors one must consider when making this choice?

At present, renting may seem a better option. Yields are low so a tenant will have lower monthly payments than an owner with a 100% bond. Also, the tenant does not have to carry the risk of losses in a declining market – or a deteriorating suburb. Nor of maintenance and insurance costs.

The obvious benefits of property ownership are security of tenure and the potential capital gains – from which, on the basis of primary residence, one is partially exempt from capital gains tax. Less obvious is the fact that one is encouraged to make improvements, which can make the property more valuable. Also, John Loos avers, “a very important benefit is the power to shape the asset the way one wants according to one’s individual tastes and lifestyles in order to maximise the usage value derived from it.”

On the other hand, in times of rising interest rates and a shaky economy, as we have now, the cash flow uncertainties surrounding bond repayments can mitigate against ownership.

By renting, one can pass many costs on to the landlord, presuming one has an acceptable lease in its length and terms.

So under current economic circumstances does one rent or buy?

At present interest rates are a burden on property owners with mortgage bonds. In the short term, it appears that rental is a better proposition in terms of cash flow. As Erwin Rode advises, rent and await the upturn in the market. Then buy a bargain. Good luck!

Article by: Rodney Hayter - www.rodneyhayter.com