Buy-to-let owners who were expecting to push through double-digit rental increases on leases coming up for renewal in second half 2010 may be sorely disappointed, as a glut of rental properties is expected to flood the market over the next two months.

Industry players say hundreds of buy-to-let owners who cancelled leases with tenants in the hope of placing high-paying soccer fans over June/July are now sitting with empty units that have to be returned to the market. Even those who have managed to secure short-term tenants for the duration of the Soccer World Cup will return their units to the market in August.

Michelle Dickens, MD of tenant profile agency TPN, says the glut of rental properties expected to be returned to the market over the next few weeks will place an additional burden on an already over-supplied sector. Dickens says this spells bad news for landlords, as more properties to let will place further pressure on rental growth.

Andrew Schaefer, MD of residential management group Trafalgar, also expects rental growth to slow in second half 2010, albeit mainly on the back of tenants’ deteriorating financial situation.

Trafalgar’s national rental index shows growth has already slowed in the year to date, with rentals rising an average 7,5% from January to June year-on-year. Johannesburg has shown the lowest level of rental growth of all the major cities with annualised growth of only 5,3%.

Schaefer says it’s possible that growth will fall further to December and into 2011, as residential tenants appear to be coming under increasing financial strain. He adds: “Its possible that the index can turn negative next year if job losses continue. At this stage we think a fall is unlikely but if it happens it will be the first time that rentals actually drop since 1976/77.”

Figures from FNB show that buy-to-let activity has decreased markedly over the past five years, with the proportion of buy-to-let investors (of total sales) dropping to less than 10% in first quarter 2010. That’s the lowest level on record and way down from more than 20% during the boom years.

In addition, FNB estimates the average income yield (annual rental as a percentage of market value) earned by buy-to-let investors currently to be at a rather pedestrian 6% to 7%. FNB property strategist John Loos says buy-to-let is clearly not an attractive place for investors to be. ``Households are stressed and few rentals come close to covering bond repayments.’’ Loos says the average buy-to-let investor currently only recovers 65% of his/her monthly bond repayments through rentals.

For example, a buy-to-let owner who has a mortgage bond of R700 000 with a monthly repayment at R6 800 (at the prime interest rate of 10%), is likely to fetch a rental of only R4 420/month. That leaves the owner with a negative cash flow of R2 380/month, excluding other holding costs such as rates and taxes, levies and maintenance. - Joan Muller

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