Buy-to-let: you can't argue with the logic

Private Property South Africa
Seeff

Andreas Wassenaar, MD of Seeff Dolphin Coast and also Seeff KZN Chairperson, tells us what the future holds for buy-to-let buying, and the factors that underpin his forecast.

The FNB Estate Agent Survey for the second quarter reported an increase to 10% in the proportion of buyers buying-to-let nationally – the third consecutive quarterly increase since the 7% estimate in the third quarter of 2013. The expected maximum limit of buy-to-let activity could be expected to be approximately 25%, which was achieved in early 2004 at the height of the last property boom. It is unrealistic to expect that level of market activity, given the current limited availability of mortgage finance in the market, but recovery in buy-to-let activity indicates a stronger appetite for property as an investment asset class and the higher yields that are available given the increase in rental rates.

CPI and market segments

Stats SA breaks down the Consumer Price Index (CPI inflation) figures into various market segments, with rental inflation being one of them. Their figures confirm that nationally rental inflation has increased from 4.3% in mid-2012 to 5.14% in the most recent CPI figures. In high-growth hot-spots such as Ballito on the KZN North Coast, rental inflation is closer to 10% as many new families migrate into the area and typically rent first before they decide to buy.

The payment performance of tenants has also improved: from a low of 71% being in good standing according to Tenant Profile Network in 2009, to a recent high of 86% by mid-2013. The fourth quarter of 2013 saw a small dip in this figure to 85% as the general economy deteriorated. This takes us right back to the 84% to 85% in good standing experienced before the financial crisis in 2008. An interesting question asked in the FNB Estate Agent Survey is the percentage of properties “being sold due to lower than expected investment income”. For the second quarter of 2014 this figure was 3.5%, which was sharply down from the 10.25% recorded in 2010.

Interest rate cycle

While an increasing interest rate cycle may dampen the demand by property buyers who may find it harder to obtain mortgage finance, on the other hand it increases the demand for rental properties as prospective buyers (typically many first-time buyers) make the decision to postpone buying in favour of renting for a longer period.

The growth in rental stock and the overall supply of rental properties largely depends on new developments being delivered. For the last six years the delivery of this new stock has been limited and has resulted in an overall stock shortage of rental properties. As new stock does become available it is taken up almost immediately, which indicates the strength of the demand in the rental market.

So what does the future hold for buy-to-let buying? According to the FNB Estate Agent Survey, the near-term expectations are further growth, but the rate of this growth is expected to moderate. Weak economic fundamentals would constrain all property buying, including buy-to-let buying. The extent of interest rate increases over the next 12 months will be the key factor to watch.

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