Bringing sexy back?

As house sales cool, demand for accommodation continues to grow. As a result, people are turning to renting — pushing up returns in the process.

The rentals market is buoyant and is set to strengthen further. In some centres, rental properties are snapped up within weeks of being put on the market. Returns are at last moving higher as tenants are prepared to pay more — a situation exacerbated by a shortage of stock.

FNB’s property barometer on rental markets states that 75 percent of rental properties are taken in under one month. In Cape Town, 93 percent of rental properties do not last even one month on the market — an indicator, says the barometer, of greater coastal market strength as well as strength in the middle-to-lower income end compared to the upper income segment.

Dexter Leite, director of Pam Golding Properties’ rentals division for the Western Cape Metro region, says however that the demand for quality properties is tempered by lack of stock.

“The past year has been marked by various influences, mainly the introduction of the National Credit Act (NCA) and of higher interest rates. The NCA does not assess a tenant’s affordability or ability to pay rent, but it has placed tighter restrictions on consumers’ borrowing ability.”

Potential home buyers are being restricted by the NCA and high interest mortgage bonds and so turn to renting. “Demand continues to come from a number of sources, including young professionals and first time home seekers who cannot afford to buy, as well as contract workers (foreign and local) and students,” explains Leite. “Renting is also a popular option for those moving into an area and wanting to get a feel for it before they buy.”

Rentals in short supply

Location, accessibility to the workplace, leisure opportunities, schools and security remain critical factors across all rental categories, while traffic congestion and increased travelling costs play an important role. “People prefer to live near work, with ease of access particularly during peak hours. This puts demand on certain areas, with rentals in specific categories being under pressure and in short supply,” adds Leite.

The FNB barometer, which is a survey of letting agents across the country, reports that we have a market far more upbeat than the home buying market. Gauteng is slightly weaker than the three main coastal regions and the lower down the income bands one goes the stronger the market is. The bank’s property strategist, John Loos, suggests that the mildly higher activity levels in coastal regions may reflect greater deterioration in housing affordability during the property boom compared to Gauteng, which didn’t enjoy extreme price inflation as did the coast.

Middle-to-lower income areas are in great demand, reflecting the apparent greater financial strain we are witnessing in the lower income brackets.

Estate agents claim that not only are lower income groups harder hit by the NCA, they are battling rampant price inflation of essential items such as food and transport.

Again, while the shortage of stock is acute and widespread (only three percent of respondents report any type of oversupply) this is more acute in the middle-to-lower income segments.

Interestingly, higher yields are to be found the lower down the price ladder one goes, says Loos. “This to a large extent should be reflective of relatively higher risk to the buy-to-let investor towards the lower-priced end of the market.

In spite of the high demand for rentals, yields are on the low side. “Given that government bonds 10 years and longer (a relatively risk-free investment) sit at a yield of around nine percent, an average national property yield of 8.1 percent and an even lower 6.5 percent in the R1.5-million plus house price category would appear somewhat low,” comments Loos.

Not an attractive proposition for a buy-to-let investor

Property economist Erwin Rode suggests that as a rule of thumb one subtracts two percentage points from gross yields to get the net income yield, which would be comparable with a long bond yield. This would put the average net income yield for houses priced above R1.5-million at around 4.5 percent and the national net income yield at around 6.1 percent, which is not an attractive proposition for a buy-to-let investor.

Looking to the future, South Africa is probably ripe for a far larger rental market, says Loos. A factor is an increasing lack of mobility in and around the country’s major metros driven by mounting congestion. Another is the fact that buying and selling property is a costly business (not only transfer and bond costs but removal and refitting costs). Yet in the modern world people change jobs frequently and, often, locations. Short term rental agreements could become an increasingly popular option for higher frequency movers.

“In addition,” he says, “I do believe that we will see radical changes in the way many people live and work as a result of mounting congestion and chaos in our cities. We may see increasing demand for rental property arising from weekly commuters who choose to have their main residences outside the hustle and bustle of the city.”

  • Taken from Pam Golding Properties Intellectual Property magazine.

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