So says Peter Gilmour, chairman of RE/MAX of Southern Africa, who adds that “there are a number of contributing factors that, when viewed together, paint a pretty gloomy picture for the property rental market going forward”.
Gilmour says that according to figures from First National Bank, buy-to-let activity has decreased markedly over the past five years, with the proportion of investors in this sector decreasing to less than 10% of total sales in the first quarter of 2010. This is the lowest level on record, compared to reported figures as high as 20% in the boom years.
“According to a First National Bank Property Barometer for the first quarter of 2010, the buy-to-let purchases dropped from 13% of total buying in the fourth quarter of 2009, to 9% in the first quarter of 2010. I predict that growth will fall even further going forward into 2011, as consumers increasingly come under more financial strain.”
According to Gilmour there are a number of contributing factors why the rental market is experiencing a lacklustre performance, with the number one issue pivoting on the fact that many South Africans remain heavily indebted. “Reserve Bank data shows a very high ratio of debt compared to disposable income in South Africa’s household sector – which is obvious considering the recent hikes in electricity, rates, petrol and the general cost of living. Although there has been a slight recovery in the residential property market, buy-to-let properties are still considered a ‘luxury’ purchase and this market is therefore lagging behind as the household sector slowly battles its way back to financial health.”
This coupled with the fact that the average income yield (annual rental as a percentage of market value) that is being earned by landlords in this sector remains pretty low makes this kind of investment even more unattractive.
“First National Bank estimates that the average income yield lies at a rather uninspiring 6% to 7%, and few rentals come close to covering bond repayments. In fact, the average buy-to-let investor currently only recovers an average of about 65% of the bond repayments through rentals. Over and above this, landlords need to pay levies or rates and taxes, which leaves them even more out of pocket. With the average household under serious financial pressure, it is easy to understand why this sector remains out of reach of the average consumer.”
Gilmour notes that another blow to buy-to-let investors is the fact that come August this year, experts are predicting a flood of rental stock will hit the market. “One of the legacies left from the days of the property boom is an oversupply of buy-to-let stock. However, many believe that this is going to worsen in the short-term as many buy-to-let owners cancelled leases with long-term tenants in the hope of cashing in during the World Cup by earning short-term rentals from high-paying international football fans. However, come the end of this event, many landlords are going to be left holding the can so to speak, when they return their properties to the already over-supplied sector.”
However, it is not all doom and gloom says Gilmour. “On the positive side of things, for investors with fluid capital, this remains an excellent time to invest in the buy-to-let market, as with the rental market under performing, there are some great bargains to be found. If investors can afford to hold on to these, they are sure to reap great returns when the rental market bounces back, which it will do sooner or later.
“Considering that most consumers are cash-strapped and that financial institutions are more rigid with regards to lending, more and more people are going to have to rent as they won’t be able to qualify for or afford a mortgage to buy their own home.”
John Loos, property economist at FNB, says the buy-to-let market will remain flat for the next 12 months. “I am expecting the home buying market as a whole to start slowing in the second half of 2010, with a lack of further interest rate stimulus starting to take its toll.
“The buy-to-let component has the added disadvantage that for much of the financially stretched household sector, the prospect of topping up on rental income to repay the first few years of a bond, until such time that rental escalations have taken bond rental income to higher levels than bond repayments, is less appealing than a few years ago when disposable income growth was stronger and financial pressure was far less.”
He says yields on residential property are, on average, seemingly too low still, and significant widening over the next few years is required before buy-to-let buying once again becomes the “flavour”. – Eugene Brink
Readers' Comments Have a comment about this article? Email us now.
Add to this that the tenant is well-protected by the law should he default. It takes time, money and effort to evict a non-paying tenant even if your lease agreement covers everything. The laws should favour the landlord within reason and there will be far less problems selling buy to lets. If you have cash and can find the right property and tenants it can still work though. - Ockert Kruger
As an investment property owner with FNB holding several of my paid up bonds, the one thing FNB does not tell you ... (This having just gone through another highly painful bond application with FNB / ABSA).
Should you be an existing investment property owner wanting to bond another property, FNB's lending criteria dictates that they will only recognise 75% of the NET income (After bond repayments, levies, elect + water etc) from the investment properties you already own.
However, try telling SARS that you are only going to pay tax on 75% of the income earned.
For me, the banks have made investment properties highly unattractive to the point where I am offloading two of mine, not due to financial issues, but because of FNB's lending criteria properties are no longer a viable asset that can be leveraged.
FNB also has a criterion that if one is a company owner, the company itself has to sign surety for the entire bond, even if the bond is being registered as a joint bond.
In my opinion in the case of this article, one should ask FNB how their lending criteria are contributing to the low property investment barometer. It’s great that they get to quote stats, but they are never held accountable for how they are influencing the bad statistics.
Further the costs of bond attorneys, transfer attorneys, being forced to have portion of the bond being registered in favour of the bank, high transfer fees, huge deposits that is a battle to get out of City counsel and the property itself as security makes property not a very viable option any longer. This on-top of rapid decline in properties due to poorly managed or under funded body corporates in some of the complexes. - Johnathan Ingram
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