Real Estate News – South Africa: Fewer Investors in Buy-to-Let Property Market

THE South African residential buy-to-let market is showing definite signs of weakening as the number of gung-ho investors who entered this market looking to make easy money dwindles.

When the residential property boom started about five years ago, buy-to-let investors entered the market hoping to earn an income from letting out second or third properties.

However, as the boom gained momentum more and more people opted to buy property instead of renting to take advantage of the favourable economic conditions.

According to the First National Bank Property Barometer for the first quarter of this year, buy-to-let investors have not been realising their required returns to make the investment viable. FNB Homeloans CEO Ed Grondel says some of these investors are getting out of the rental market, resulting in less rental stock -- and this could potentially drive yields up again in the future.

He says there is "definitely still a rental market" but at "reasonable rentals".

A year ago 25% of residential property buyers were buy-to-let investors, but now they represent only 16%. "There are fewer investors now who feel they can make a quick buck. They are not achieving attractive yields," he says.

Grondel says in the past these investors always had an "insurance policy" of capital growth if they sold. However, residential property price growth year-on-year has slowed to 14,5% in the first quarter of this year, compared with more than 30% more than a year ago.

"If you're not getting yield and much capital growth, it makes it less attractive to get into investment property."

But director of Johannesburg-based developer Renprop Chris Renecle says his company has found that most of the buy-to-let investors who were invested in the property market before the boom are still involved, but are focusing on cheaper properties.

He says the number of investors who were speculators looking for capital growth has dropped substantially.

Executive director of Sotheby's International Realty Barak Geffen says there is too much property supply in the buy-to-let market in general and this is causing a weakening of this investment sector.

He says the supply of townhouse units and other smaller apartments has reached saturation level.

However, there is still opportunity for owners of houses and luxury apartments at the top end of the market to earn attractive rentals.

He says these are properties worth R3m to R4m and upwards.

Geffen says a lot of investors left the stock market when it stopped performing from 1998 and invested in real estate, which started performing from 2000.

"People who had invested in the stock market started investing in developments or supplied developers with capital to develop properties.

"This resulted in an oversupply of rental property across the country. If there is too much supply, obviously rental prices and yields come down."

But, says Geffen, the demand for owning property has also tapered off because property has become expensive.

"There is an affordability argument because salaries, to a significant degree, have not increased in line with price increases."

He says this has caused consumers to reconsider renting as opposed to owning. He says not only do some people at the lower end of the market rent because they cannot buy, but many executives who earn high salaries are also cautious about buying.

"They (executives) are noticing price appreciation is lowering now. They perceive there could be some kind of correction in prices and it is causing them at this stage in the property cycle to be hesitant when it comes to buying."

Geffen says a 100% bond on a R4m property will cost the new owner R40000 a month, but an individual could rent the same property for R15000 to R18000 a month. He says because executives are building wealth they do not want to live beneath their means so would rather rent a luxury property than possibly come into the property market at the wrong time.

Geffen says these executives invest in middle- and lower-priced properties to finance their lifestyle at the top end of the market.

"In the upmarket areas there is a very buoyant rental market where demand is climbing, but in the development market where there are townhouse developments and apartments where it is oversaturated, investors are struggling to realise the yields that they expected upon making their investment."

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