Rental returns for landlords bounce back from slump

It has been a tough five years for residential buy-to-let investors given the humdrum rental growth and property returns that have dimmed the allure of owning a rental property as an investment.

But there are signs of green shoots in the residential buy-to-let market, which has been in revival mode since the 2007/8 global housing slump.

Latest figures from credit bureau Tenant Profile Network (TPN) and FNB show a rise in buy-to-let rental yields since two years ago.

National gross rental yields (before the rental properties’ operating costs such as electricity, water, maintenance, rates and taxes are accounted for) marginally rose to 8.6% in the second quarter of 2016 from 8.5% in the first quarter.

Rental yields are a key metric for a rental property’s return on investment, expressed as rental income over costs associated with the property.

However, one-quarter of growth doesn’t mean that the rental market is out of the woods yet.

Owning a rental flat or townhouse appears to be falling out of favour among investors, with buy-to-let home buying as a percentage of total home buying declining from highs of over 25% in 2004 (the boom year in SA’s housing market) to 10.1% for the third quarter of 2016, according to FNB.

The odds continue to stack up against landlords as the rental market typically mirrors the state of the primary residential market, which is also muddling along.

Already industry players have downgraded the house price growth for 2016 given the worrying state of the economy, the interest rate hiking cycle and a lull in consumer confidence.

Absa Home Loans property analyst Jacques du Toit expects a nominal house price growth (before accounting for inflation) of 4% to 4.5% for 2016, which is well below the 6% achieved in 2015.

To make matters worse for landlords, the upkeep costs of a rental property continue to rise faster than rental growth, eroding returns.

Finding value in the rental market is fast-becoming area specific.  For example, if landlords are looking for better rental yields, TPN and FNB figures suggest that they might have better luck Johannesburg (9.51%) than in Cape Town (7.71%). See full rankings below.

Source: FNB-TPN 

Tenant affordability and the Western Cape

At the centre of rental market pressures is the affordability dynamics of tenants, who are not in a position to afford substantial rental increases as they face sluggish income growth while debt repayments continue to surge.

TPN MD Michelle Dickens said in some cases landlords are holding back on rental escalations given the pressures of consumers, who spend at least 30% to 40% of their income on rental payments.

“Landlords don’t put in an escalation in year one but they put a 10% escalation in year two. Landlords are still prepared to hold on to quality tenants and not always put their rental escalations up annually,” said Dickens.

Tenants in the Western Cape are proving to be in a better position.  TPN and FNB figures show that the percentage of tenants in good standing (those who pay their rent on time) are stronger in the Western Cape at 89% – ahead of the national average of 85%.

Even the percentage of rental increases is higher in the region, pulling in 12% compared with the average national escalation of 7%.

The Western Cape, mainly Cape Town, has also seen greater demand for rental accommodation among tenants, with some parts, like the city bowl, being under-supplied – giving landlords the flexibility to charge higher rentals.

The demand for accommodation in the region is attributed to the steady influx of people from other cities such as Johannesburg, Durban and to some extent foreigners. Also, the perception that the city is the best-run metro is a big draw card.

Big rental money spinners

The Northern Cape has yet again emerged as the most expensive province to rent, with an average rental of R7 407 for the second quarter of 2016, according to SA’s largest processor of residential rental transactions PayProp.  See other rankings below.

Source: PayProp. 

The Northern Cape’s dominance is due to the insatiable demand for rental units.  PayProp CEO Louw Liebenberg said, based on the deceleration of the Northern Cape’s rental growth during the quarter under review (5.8%) compared with 9.3% in the previous quarter, that he doesn’t expect the province to retain its top spot in the next quarter.

“Should current provincial growth trends continue, the Western Cape will take its place at just over R8 100 per month – at least R300 more than average rentals in the Northern Cape,” said Liebenberg.

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