Read about the state of the rental market in the wake of the recent interest rate hikes.
It would be easy to assume that the interest rate hikes this country has been experiencing since 2014 would have boosted the gross yields that landlords enjoy. However, according to a report by John Loos, FNB’s household and property strategist and Michelle Dickens, MD TPN, this has not happened, possibly because the increase in interest rates has been very slow and mild.
TPN-FNB residential yield report
The TPN-FNB National Average Gross Residential Yield report shows that rental yields have continued a downward trend throughout 2015, declining from 8.53 percent in the third quarter to 8.48 percent during the fourth quarter of that year.
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. This would put the net yield at around 6.98%, not such an attractive prospect given that the most recent prime rate is standing at 10.5 percent and the average home loan rate is somewhere above prime.
Tenants in good standing
The other issue which the report raises is the percentage of tenants in good standing. In the fourth quarter of 2015 the percentage of ‘good’ tenants was a healthy 85 percent. Although this was slightly lower than the numbers recorded during the highs of 2014 it certainly won't be raising any red flags. However the on-going gradual interest rate hikes, the economic slowdown, the lack of job creation and the impact all of this could have on household income growth, will probably lead to a decline in this percentage this year.
Loos and Dickens say this is something to watch closely, because while tenant payment performance is currently good, the dip to 71% of tenants being in good standing back in 2009 indicates just how sensitive tenants are to economic cycles and interest rates. “Perhaps cushioning the blow this time around is a far more gradual interest rate hiking cycle compared to that previous one. Realistically, though, tenants cannot defy rate hiking and economic decline indefinitely.”
Currently, the TPN data reflects that homes with a monthly rental below R3000 have a relatively low percentage (79.5 percent) of tenants who are in good standing. Many of these homes probably fall into the so-called ‘affordable’ or lower income areas.
The next rental band is between R3 000 and R7 000 and tenants who fall into this sector are significantly better payers with 86.2 percent falling into the good standing bracket. Although slightly lower, 88.4 percent of tenants in the R7 000 to R12 000 bracket are classified as being in good standing.
Interestingly, only 85.4 percent of tenants who rent property for between R12 000 and R15 000 are regarded as being in good standing and the figure drops even further for rents that cost R25 000 plus per month. Only 77.5 percent of tenants in this category are regarded as being in good standing.
What does this mean for home owners?
Basically what these types of reports show are the risks associated with buying an investment property in a less desirable area where rents are very low. Unfortunately, while one would think that those who chose to rent out their upmarket homes would be in the pound seats, the stats indicate that there are problematic tenants who rent in this price band.
As always, it's crucial to do a thorough background check in order to vet any potential tenant before the lease is signed – particularly when dark clouds start to gather on the economic front.