The Q2 2013 FNB Estate Agents Survey reveals that the total percentage of buy-to-let investors in South Africa remains low at 8 percent of total buyers.
Furthermore, buy-to-let investors favoured KwaZulu-Natal recording the highest number of investors (11 percent) followed by the Western Cape (8 percent) and Gauteng (6 percent).
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In Top tips for buy-to-let investments, experts believe that investors looking to secure a good pension and earn passive income should have buy-to-let property investment at the top of their list.
This goes without saying that investors need to do their homework in terms of what they are buying, where they buy into and also ensure the property will have a paying tenant.
According to Mike van Alphen, national manager of the Rawson Finance, buy-to-let investment is surprisingly low in view of the way residential property rents are continuing to climb.
“It has to be confessed that property rates, taxes and maintenance have escalated dangerously and house price growth is less than half what it was in 2002 to 2006.
“These facts do take much of the glamour out of the housing market and have led to a significant drop in buy-to-let investment,” he says.
He notes that with many people battling to obtain home loan finance, this will increase demand for rentals, particularly in the lower price brackets, and ensure that rents rise year-on-year fairly steadily in the foreseeable future.
“It is this belief that makes buy-to-let property a viable proposition and one which is particularly well suited to less experienced investors without a real understanding of the Johannesburg Stock Exchange and the money market.”
However, he says while in favour of buy-to-let, this does not apply across the board, as this may be favourable in some price brackets and not all.
He urges investors to ‘do sums’ before investing as he is convinced that in a volatile economy with no signs of a powerful recovery, property is the asset channel in which cautious investors should be putting between 20 and 35 percent of their assets.
KwaZulu-Natal buy-to-let market
Myles Wakefield, chief executive officer of Wakefields Real Estate, says an 11 percent increase in the number of buy-to-let investors is a good/bad number.
It may be the highest in the country now but it is nowhere near the 25 to 30 percent of the boom years, explains Wakefield.
“Nevertheless, now is an excellent time for investors who see property as a long-term investment to get into the market and there is no indication that interest rates will rise anytime soon, and there is value for money property to be found.”
He notes a critical shortage of good properties to sell and shortage of rental stock.
“Limited supply inevitably means that prices will start to rise even without the effects of inflation.”
Caroll Heyns, principal of Just Property Group in Richards Bay, says the market is unable to keep pace with the changes in the needs of the salaried, middle income group.
Few cluster housing projects and flats are being built at present and of those that get off the ground, if priced and located well, are being snapped up by the investor and the individual buyers for own use.
Lawrence Homan, general manager for Just Property Margate and Port Shepstone, notes that the last four property sales indicate that those buying, bought for investment purposes and the market is seeing a few cash buyers coming through.
Going forward, he says the market will be a buyers’ market with plenty of value deals and sellers are very prepared to negotiate on pricing as well.
According to Shaun du Bois of Just Property Pietermaritzburg, there is strong demand for buy-to-let due to government employees and university students and this is especially seen in the lower to middle income earners.
Because of this demand, he notes a shortage of investment properties on the market.
Priced at R 3 500 per month, this one bedroom cottage in Chase Valley is available for rent through Just Property Pietermaritzburg. Click here to view.
“Investors looking to get into the property market should look at bank repossessed and auction properties as these are normally sold at good prices,” says Du Bois.
Brad Allen, principal at Only Rentals in Ballito in KwaZulu-Natal, says the buy-to-let market in KwaZulu-Natal has improved in certain areas, generally in properties priced below R1 million.
These include areas such as beachfront properties and those located in secure complexes in the upper highway, Durban Berea and beachfront and north coast areas.
“Properties on the South Coast seem to have been affected by both the relocation of the international airport to the North Coast and the current market conditions, with the South Coast historically being more seasonal and therefore affecting holiday home purchases which have declined.”
Wakefield concurs, saying the best areas for buy-to-let investment will be in the below R1 million price bracket that are close to work and are in demand.
“The ideal properties are those where investors can be cash positive as soon as possible and thus free of the costs of holding the investment property.”
Over a period of 10 to 20 years even at a modest five percent compound capital growth investors will make good returns, he says.
In the Margate and Port Shepstone areas, Homan says investors buy homes priced between R499 000 to R950 000 and these are easily rented out.
However, he points out that homes priced over R600 000 are not recovering the money being invested although many of these investors do not mind topping up towards bond repayment; two out of four are cash buyers and sometimes in the R600 000 price bracket.
In Pietermaritzburg, buy-to-let investors are reportedly buying homes priced between R500 000 and R800 000, mainly two bedroom units close to the university, especially on Roberts Road.
Du Bois says the lower the buying price, the better for the investor for rental returns.
He says Scottsville is always popular because of its close proximity to varsity and it is ideal for government employees who can walk to work.
A three bedroom house in Umtentweni, Port Shepstone is available for rent through Just Property Port Shepstone. It is priced at R8 250 per month. Click here to view.
Other popular locations include Clarendon and Prestbury along taxi routes.
Scottsville flat rentals range from R3 000 per month and up to R8 000 in the outlying areas.
Heyns explains that new property developments, which sell units up to R500 000, are likely to have each unit sold off plan and in the very early stages of construction.
Rental properties situated within walking distance of the CBD are exceptionally popular for the middle income group. On the opposite end of the scale, upmarket developments in the areas far from town are clearly in an entirely different price bracket, yet fully tenanted as well.
“It is going to require investors with courage to provide sufficient unsubsidised housing for our population,” she says.
House price growth
Generally house prices have declined slightly since the peak in 2007/2008 but there are signs of slight improvement over the past couple of months, says Allen.
He says it has been difficult to negotiate with sellers over the past couple of years due to the fact that they still want to achieve peak of the market prices, which often takes some education from their side i.e. showing current similar properties on the market, current Deeds Office transfers taking place, current properties waiting to transfer etc. which helps motivate the offer.
House prices remain fairly stable with only marginal upward movement for the seller who is able to wait for the right buyer, according to Heyns.
“I have noticed a slight but steady growth in property prices, there is a demand for good value homes and this demand will get the seller closer to his asking price,” says Du Bois.
What attracts investors?
Price, location and value especially on the South Coast where property is affordable when compared to the North Coast, says Homan.
According to Allen, a number of investors purchase property in KwaZulu-Natal with the intention of one day using the property for holiday accommodation.
“Rental yields in KwaZulu-Natal have historically not been as good as Gauteng generally speaking due to the high demand for properties in the Johannesburg areas, with people moving closer to the city for work reasons.”
He says historically, Johannesburg has the highest rental yield nationally with average yields between 8 to 10 percent.
Priced at R7 600 per month, this three bedroom house in Meer En See, Richards Bay is available for rent through Just Property Richards Bay. Click here to view.
According to Heyns, the City of uMhlathuze and surrounding villages owe the buy-to-let interest in this area to the continuous good news regarding development, both commercial and industrial, the solid foothold of industry in greater Zululand, including but not limited to RBM, Foskor, CTC, Alusaf Hillsides and Bayside, Tata Steel, Exxaro and even as far North as the Somkele Mine at Mtubatuba.
Another positive is the expansion of Inkwazi Boardwalk mall in order to keep up with the ever changing demands for higher standards and more variety.
The active harbour and proposed dry dock facilities as well as the nature of the Zululander to seek and build on the many opportunities which piggy-back on a successful commercial/industrial platform, attract buy-to-let investors into the province.
Du Bois says investors buy into Pietermaritzburg because of good rental returns, demand is high with guaranteed paying tenants and current low interest rate environment.
Rentals and yields
Homan points out that homes rented out for between R4 000 and R9 000 a month are popular with investors as they always find tenants, but those properties over the R600 000 market normally experience shortfalls of approximately 25 percent.
According to Du Bois, rentals range from R3 000 to R10 000 a month with 8 percent a common return and savvy investors are cash positive within 3 to 5 years of investing.
Allen says rental yields should increase as prospective buyers still struggle to obtain home loan finance and new developments launches have been put on hold until market conditions improve.
“So while there is still an under supply of rental stock in the market in general, rentals should generally go up.”
He says this is good for investors but not necessarily good for tenants, with a number of tenants already under financial pressure due to the economy.
“Rent payment defaults are always a risk any investor needs to take into consideration when buying an investment property.
“There are still a huge number of property owners struggling to afford the repayments and I continue to see lists and lists of property owners due to go to Sale in Execution auctions,” according to Allen.
Located in Ballito, this one bedroom apartment is available for rent through Only Rentals Ballito. Click here to view.
What’s more, he says rental yields are normally slightly lower when buying a property off plan (directly from a developer) compared to buying an existing property.
Developers are generally the ones extracting the full value out of the deal.
Investors will achieve yields of around 7 percent on average for new development units and closer to 10 percent for existing properties in certain areas like the beachfront, explains Allen.
“The higher the risk the higher the reward/yield, is the general rule with investment properties within reason, and an investor should always check the financials of a block to make sure the body corporate is liquid.”
Allen points out that there are some blocks that have been “red flagged” by banks, which means that they will not lend due to the risk and this will affect chances of resale later down the line.
If a body corporate has huge outstanding levies then maintenance and security could become issues and property values in the block could decline, he says.
Heyns points out that rentals are fairly stable at an average of R6 500 per month.
“Wisely invested money in properties which let for less than R5 500 would relate to an initial out-of-pocket expense of R500 per month,” she says.
Those who survived the boom and bust cycle of the property market are needed to invest now in a future, which is uncertain in the short term but will be true to property trends over time – possibly a step for the courageous, adds Heyns. – Denise Mhlanga