Buy-to-Let Property Review (The Bugle)

Have you invested in a buy-to-let property recently? Possibly not yet as national buy-to-let house buying remains slow at only 8% of all buying. Are there opportunities? Yes, and especially when few people in a market are chasing these investment properties, it is the right time to buy. There are two upside advantages of owning an investment property – the rental yield received from the outset and the future expected capital growth over time. The first is certain and can be calculated from the point of ownership. The second however is uncertain and would typically be a poor basis on which to invest in a buy-to-let property. It is therefore the initial rental yield on the property that we should consider when making a decision to invest. 

So what has happened to yields lately? After slow house price growth from 2008 to late-2011, rental yields increased catching up to property values, but an improvement in house price growth through 2012 and into the 1^st quarter of 2013 translated into yields declining. FNB and Tenant Profile Network (TPN) recently published their Investment Property Review, which indicates that the current national gross average yield on residential property is 8,87%. The national yield curve peaked at 9,18% in the final quarter of 2011, where-after the upward trend lost momentum. Better than putting your money in the bank, but there are costs associated to this.  Levies, municipal rates, and maintenance are those familiar line items that can take a few percentage points off your gross yield. Rode & Associates have suggested that as a rough estimate one can take 1,5 percentage points off the gross yield to estimate the net yield. If we applied this to the current national gross average we get a net average yield of 7,37%. This is still below the cost of finance of 8,5% which means that you are not going to be in a place where rentals will cover a full bond on a property. 

Rental agents all over the country are currently pointing to rental stock constraints. For prospective tenants looking for a property this is bad news but for an investment property owner it is great news as a strong driver of rental yields, given a level of demand, is the available stock of properties to rent. The property boom years pre-2007 created an over-supply, which has slowly been eroded over the past few years, to the point where stock shortages are now the norm. It is interesting to note that the different regions within the country have different yields. In general Gauteng and KZN have the highest yields but at the same time have slightly lower quality tenants as measured by the percentage of tenant’s in good standing. Johannesburg yields are as high as 10.03% but they have 82% of tenants in good standing versus Cape Town’s 7,91% yield and 88% of tenants in good standing. By comparison Ethekwini has a yield of 8,56% and tenants in good standing of 81%, the lowest of the major regions. It is therefore a scenario of higher risk providing higher reward. Do the lower income rentals provide higher risk? By looking at the tenant quality by rental level, TPN report that the best performing rental brackets are R3,000 – R7,000 p.m. and R7,000 p.m – R12,000 p.m. with a 86% of tenants in good standing. This drops off on either side of the spectrum with rental levels below R3,000 p.m. showing a 77% on tenants in good standing and only 67% of tenants in good standing in the rental bracket greater than R25,000 p.m.

(Author: Andreas Wassenaar, published in The Bugle, 2 Oct 2013)