Buy-to-let investors should forget about trying to pass on double-digit rental increases to their tenants when leases expire.
In fact, residential rental growth has slowed to less than 5% in most cities in third quarter 2009, latest figures from property economists Rode & Associates show.
John Lottering, author of Rode's Report for third quarter 2009, says the fact that flat rentals have failed to keep pace with inflation is bad news for buy-to-let owners, as rental returns have not lived up to expectations.
Most industry players expected that landlords would be able to push through rental increases of at least 10% to 15% this year, as stricter mortgage lending would force would-be buyers to rent for longer and create additional demand for rental accommodation.
But that hasn't materialised, no doubt as the recession has forced many tenants to downgrade to cheaper properties or move back in with family or friends. In fact, figures from online rental agency Rentproperty.co.za show that asking rentals have dropped in recent months – from an average R6,576 per month in July to the current R5,869 per month.
Rode's figures show that Durban was the only city to record rental growth exceeding 5% (6,8%) in third quarter 2009 year-on-year (y/y). Johannesburg saw rentals rise 4,5% during the same period, followed by Cape Town at 3,2%, Port Elizabeth at 3,8% and Pretoria with growth of only 0,4%.
Lottering says that given the average consumer price growth (inflation) of 8% over the past 12 months, flat rentals have been falling in real terms across all South Africa's major cities. He notes that more flats are also standing empty, as an oversupply of buy-to-let stock still lingers on the market. Both Pretoria and Durban are currently sitting with flat vacancy levels of more than 10%.
Flat rentals have put in an equally poor performance over the longer term, with Durban being the only city able to convincingly beat inflation over the past three years.
According to Rode's figures, Durban recorded average rental growth of 12,6% per annum over the past three years, followed by Port Elizabeth at 9,5% per annum, Cape Town at 9,3% per annum, Johannesburg at 8,5% per annum and Pretoria at 4,8% per annum. - Joan Muller
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