Buying to let as an investment property seems to have palled as a concept for South Africans

Category Property Advice

Buying to let as an investment property seems to have palled as a concept for South Africans

• BUYING to let as an investment property seems to be less interesting as a concept for South Africans. But does economic reality back up this fear?
• The TPN Rental Monitor for last 2 year's has shown a change in tenant payment behaviour for the first time in four years.
• During lock down, many tenants have gone in arrears and it seems as if they are still battling to catch up.
• This reversal is a sudden change for landlords and property managers who have been enjoying an unusually long period of improving rental payments, prior to lock-down with most tenants deemed to be in good standing compared with 75% delinquencies in the fourth quarter 2020.

What does this mean for those thinking about the buy-to-let market?

• Stock shortages and rapidly escalating property values means that rentals received by landlords are smaller as percentages of the values of the property, which in turn means that the yield - or return - on the property is declining.
• The other factor is the way property buyers tend to look at their investments.
• The less sophisticated buy-to-let buyers, which are the majority, look at recent capital growth and extrapolate that into the future.
• Even seasoned investors found that a lot of yield compression due to price growth, mainly because the rental market hasn't been so as strong as what it should be
• We are at the bottom of the curve and rental demand is growing
• Rental inflation is accelerating and with the rising interest rates could force potential buyers to wait out the rising cycle by renting rather than buying.
• 2020/2021 was the first negative rental collection trend in nearly five years, and the reason was directly related to lock down, loss of income and increased living expenses.
• We've been blessed with very good payment trends since and the last 2 quarters of 2021 and 2022 has shown significant improvements.
• The recent interest rate hike effects will lag by six to nine months because people will have a certain amount of savings to rely on as interest rates go up and they can manage their credit agreements during this time, but thereafter it becomes difficult to sustain the increases in all the agreements on which they have to make payments.
• From a buy-to-let perspective, because there are fewer investment buyers, there are not as many properties coming onto the market. The behaviour is not keeping pace with the growth in the demand form the tenants.
• Yields have averaged around 9% in South Africa, but it depends on sectional title versus full title and size of property, location and size.

A four-bedroom full title property might yield 5% while a one-bedroom sectional title could yield 11%.

Author: Harcourts