Buy to rent market still strong

The latest FNB residential property survey indicates that the percentage of buyers who are buying to rent has dropped from a high 20 months ago of 15% to just above 5%. This suggests that the buy to rent market has fallen apart.

That, however, would be a wrong conclusion, says Tony Clarke, MD of Rawson Properties. He has recently pointed out that, although many tenants are now struggling to pay their rents and it might therefore be advisable for some landlords to hold back on or reduce rental increases – or arrange compromise deals for the next year or two – 80% of rents are still being paid on time and are being increased 5 to 12% annually.

“Buy-to-rent remains a good proposition,” he said, “because with the current credit restrictions, many people, especially those at the lower end of the market, are unable to get bonds and this is creating a strong demand for rented accommodation.”

The general assessment of the property sector, says Clarke, is that the current conditions will begin to be alleviated in the second quarter of 2011 and average rental increases of 9% will be seen by 2012.

Interestingly, various surveys have shown that are a good number of small to medium sized enterprises have been started in the downturn – helped by the State tax packages which are slanted in their favour.

A big advantage here, says Clarke, is that if the entrepreneur works from home, a percentage of his bond is tax deductible. If he is working from separate premises, the total costs are also tax deductible. Many a small businessman, says Clarke, has found that on retiring his former work premises, now fully paid up, can bring in a satisfactory pension supplement.

The question is sometimes asked, “Should the buy to rent investor purchase residential or commercial property, such as a unit in an industrial security park?”

The answer, says Clarke, is that the commercial unit will usually attract a higher rental but, if and when the tenant defaults or ends his lease, it is likely that he will be more difficult to replace than the tenant in a residential unit.

Investors, added Clarke, have discovered one particularly good type of buy to rent proposition and that is the so-called “academic belts”. In all cities with big universities, rooms (whether in a sectional title apartment block or in a home with several bedrooms) can command rentals of R2 500 to R3 500 per month.

It is interesting to note, adds Clarke, that many buy to rent investors are continuing to build up their portfolios right now.

“The philosophy, “let’s wait for the upturn before committing ourselves” is flawed because very few people recognise exactly when a market has bottomed out and by the time that they buy they pay 10 to 15% more. Estate agents countrywide are pointing to increased sales which have not as yet influenced prices significantly (the FNB survey yearly price growth is only 4%) but will inevitably do so later.

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