Profiling your Tenants (The Bugle)

The highest residential rental I have concluded was an R85,000 per month rental for a Zimbali beachfront property. The year’s rental was paid in full, in advance. This sounds like a really good deal for a Landlord, but when you consider the value of the home (R35m) the gross yield at the rental rate is only 2,91%. It was therefore a far better deal for the tenant at the time. That type of return would not usually encourage a property owner to make their home available to rent. In the rental market, the yield curve flattens out as the value of the property increases. In general, tenants will only pay a limited rental for a property regardless of how exceptional the home may be. For buy-to-let investors in residential property the obvious question to ask would be, at what level of property value can I expect to get the best yield and what risk profile can I expect at that level. In general we understand risk as impacting on return – the higher the risk the higher the expected return. We would expect low value properties to present a higher risk profile than expensive properties, and would therefore expect the lower price brackets to offer the highest yields. But is this the case? What does the data of rental properties in South Africa tell us? Can I expect to get better yields in different parts of the country?

Tenant Profile Network (TPN), South Africa’s leading tenant credit bureau, and FNB teamed up to match house price and buyer behaviour with rental yields and tenant behaviour.  Although increases in house prices will often excite homeowners, investors will be more interested in increasing rental rates and yields. Depressed house prices often present the buying opportunities that investors would be looking for. The gross residential property yield, according to the TPN-FNB data is currently 9.18%, which is up marginally from the 8.87% at the beginning of 2013 but still a bit down from the 9.32% peak in 2012. As stock shortages of rental properties become more pronounced, rental rates will be bid upwards and yields increase, as long as this growth is faster than the rate at which house prices rise. The regional yields across the major metropolitan areas in South Africa indicate Johannesburg as the highest at 10.13% and Cape Town as the lowest at 8.15%. The Durban Ethekwini region delivers an average 9.02%. We see however that Gauteng and KZN record slightly poorer payment performance than Cape Town. The percentage of residential rental tenants in good standing in Gauteng is 86%, and KZN very similar at 85%, but Cape Town is higher at 88%. If the market is segmented by house price, the lowest segment (below R600,000) offer the highest yield (9.97%) and the brackets above R1,500,000 quickly start to drop off from 7.62%. When we segment the market in terms of rental value and analyse the tenants in good standing within each of these categories something really interesting emerges. The lowest rental bracket (below R3,000 per month) indicates 81% of tenants in good standing which is below average. The next two brackets – R3,000 to R7,000 and R7,000 to R12,000 both indicate a 88% level of tenants in good standing. The rental bracket from R12,000 to R25,000 represents a drop to 83% which is a little surprising (as lower yield should be associated with lower risk), and then very surprising is the dramatic drop off to 77% of tenants in good standing for rentals above R25,000 p.m. There is therefore a definite sweet-spot in the risk/yield paradigm in the R3,000 to R12,000 p.m. range. This would be the market to target for prospective buy-to-let investors.

Published in The Bugle, 29 January 2014, Author: Andreas Wassenaar