12 Dec 2012
It appears residential property investments in South Africa are fast becoming popular with 2013 expected to see investors buying this asset class.
This is according to a recent FNB and Tenant Profile Network (TPN) Residential Yield Data Report.
Report writers, John Loos, FNB household and consumer sector economist, and Michelle Dickens, managing director of TPN Credit Bureau, say while the average homeowner appears to place much emphasis on the value of their home, when it comes to property as an investment it is actually the income stream that it generates, relative to the price paid, that should really be the focus.
Dickens says investors should rather focus on the initial yield (the income expected to be earned over the next year divided by the property value).
According to Loos, weak house price growth that underperforms rental income growth is actually what is required to improve the attractiveness of property as an investment in future, through leading to a higher yield.
In this first collaboration of data Dickens and Loos say the national average yield is a combination of mean and median, representing the weighted average of the median yields of the six main housing market sub-segments.
These include Sectional Title (one bedroom and less), Sectional Title (two bedrooms), Sectional Title (three bedrooms and more), Full Title (two bedrooms), Full Title (three bedrooms) and Full Title (four bedrooms and more).
According to the FNB/TPN data, the boom era yield decline (compression) ended in December 2006 when the average gross initial yield bottomed out at 6.655 percent.
This yield compression was driven by rapid house price growth in the last decade up until 2006, and good growth in the availability of properties to rent, driven by strong buy-to-let buying, which kept the rental market relatively subdued, explains Loos.
Loos says this implied that property investors had to pay more for the same rental income stream, for example, residential property was steadily becoming a less attractive investment up until late-2006.
“Ongoing rental inflation in some form, coupled with a steady decline in house price growth, led to a gradual rise in average initial yield to 8.58 percent as at November 2012,” he says.
Loos emphasises that these yields are still gross yields, meaning that landlord operating costs associated with the property have not yet been included in the calculation to get to a net initial yield.
He says the 8.58 percent gross initial yield is significantly better than the 2006 low, although not yet highly attractive.
Loos points out that Rode and Associates suggest that as a rough estimate one can take 1.5 percentage points off the gross yield to estimate a net yield.
If one were to do this, that would leave the net yield at around 7.08 percent and such a yield would, for many, still be below the cost of finance given a prime rate of 8.5 percent.
Dickens explains that according to the TPN report, although tenant payment performance has improved since the 2008/9 recession, 17 percent of tenants were not in good standing in terms of their rental payments to landlords as at Q3 2012.
She says an investor would probably be looking for a yield that compensates for the still significant risk associated with buy-to-let property.
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On house segments that have shown the best yields, she says its homes less popular with buyers in recent years. “Since 2010, the full title home segment has seen better house price growth and we find that sectional title gross yield at 10.2 percent has widened the gap on full title’s yield of 7.09 percent.”
According to an Absa House Price Index report, the average nominal value of homes in November was R778 200 for small homes (measuring 80 to 140 square metres), medium-sized (141 to 220 square metres) R1 064 800 and large homes (221 to 400 square metres) R1 575 500, while the average value of homes transacted in the FNB House Price Index was R819 733 in November.
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Loos says a smaller home is generally better in terms of yields with the sub-segments with few bedrooms generally showing higher yields than the larger and on average more pricey homes.
It could be lack of buyer enthusiasm or lack of finance that is driving the slow recovery in attractiveness of residential property as an investment, says Dickens.
The FNB Estate Agent Survey Q4 2012 revealed that buy-to-let accounted for 7 percent of total home buying from 25 percent in 2004.
Dickens notes that the rental market recorded a 3.6 percent year-on-year national average rental growth in November and rental inflation still outstripped the 0.5 percent y/y November FNB House Price Index growth, helping yields to continue to gradually rise.
In 2013, they expect an increase in the national average gross initial yield on residential property.
They add that improving the quality of rental and yield data, and ultimately the ability to calculate total returns on property, will lead to a better understanding of the performance of residential property as an investment, and less of a “perhaps misplaced” focus on price growth alone. – Denise Mhlanga
Denise MhlangaProperty journalist at property24.com
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