Landlords’ rude awakening

HANNA ZIADY: Now the residential rental market should brace for staged growth. PayProp, South Africa’s largest processor of residential rental transactions finds in its annual report for 2015 that rental yields, in other words the return on investment that landlords can expect on their rental properties, are under pressure.

We’re joined now by PayProp CEO, Louw Liebenberg. Louw thanks for your time today, and welcome.

Tell us what is driving pressure on rental yields.

Louw Liebenberg: Firstly thank you for having us. What’s driving pressure at the moment is a combination of factors. The one is the binary one, the rentals aren’t growing at the fast rate that we used to see two, three years ago. Rental growth currently sits at about 6% growth and that’s partly driven or mostly driven by the fact that consumers are under pressure. Consumer incomes aren’t growing, consumer expenses are growing, so consumers really cannot afford to have rentals increase at rapid rates.

A few months ago we were seeing rental growth year on year averaging at about 5%, its now currently at about 6.17% and as long as the income on your property only grows by 6% or 7% a year, your yield is going to be under pressure.

HANNA ZIADY: And this as rates, taxes, electricity and water also continue to increase.

Louw Liebenberg: Absolutely. There is a little bit of a silver lining around the dark cloud is the way that we calculate the yield number is that it’s a snapshot of buying investment property right now which does start off with a smaller yield. Over time your rental income does grow but that piece of runway that you need for your rental income to grow while your asset price stays stable, for it to become a significant investment is now becoming a bit longer. So it’s not an absolute no for the buyer to invest in the market but it’s telling investors, patience is going to be the key to making money. The buy and flip or buy and get your money back in three years markets are long gone. It’s a patient investor market. We do however see some opportunity for buying buy-to-let properties on the other hand as landlords faced with low yields sell into the market properties as they become under pressure from these costs.

HANNA ZIADY: Now what is the average national monthly rent and broadly speaking for what size of property?

Louw Liebenberg: Yes, the average monthly rental is just under R6,700 a month and that averages absolutely everything from flats to townhouses to homes. Interestingly people look at these luxury rentals which we term luxury rentals at R15,000 and they make up less than 5% of the total rentals space. Consider that 85% of rentals are under R7,000 and that’s the South African market which we trade in.

HANNA ZIADY: PayProp finds, and I found this very interesting, that the Northern Cape is the most expensive province in which to rent in the country, ahead of the Western Cape and Gauteng which would be my obvious choices. Why is that?

Louw Liebenberg: Its beautiful to see economics in action because what you really have is a massive increase in demand as mining companies open mines in places like Kathu and Kuruman which are really small little towns initially and then theres just so much demand and not enough supply of rental property, and in those cases landlords are able to push up the prices dramatically. We saw this in Lephalale and other towns where power stations and mines were built. But unfortunately in towns like this, as quick as the swing goes up the swings also comes down and we feel that the Northern Cape although the trend growth is beautiful and the higher rentals are great because of this industrial investment, it may be short-lived as commodity prices are under pressure and mines start scaling down.

We could see the swing dramatically different in the other direction. So investment in places like Gauteng, Western Cape, KwaZulu Natal seem to be the more stable ones I would say, but you do see these rising stars, these anomalies that pop up as industrial development goes through the country and you’re at the whims of investment really.

HANNA ZIADY: Briefly just to end off, you mentioned earlier, it’s a patience game. The days of buy and flip are gone. What are you expecting from rental yields this year?

Louw Liebenberg: We don’t really expect net yields to be above 5.5%. If they reach 5.25% we would be very happy. It would surprise us if they get that high.

HANNA ZIADY: There we go, Louw Liebenberg is CEO of PayProp.