Investor Activity in the Residential Property Market

Private Property South Africa
Gina Schoeman

A significant increase in the property market over recent years has resulted

in an accompanying increase in the level of investor activity taking place in

the market.

While the presence of investors in the residential property market emerged

noticeably when property prices increased, the recent softening of house price

growth highlights the importance of their role. Typically, investors in

residential property hold a higher probability of selling their property when

the market is expected to decrease than those whom reside in their homes. Due to

the impact of a declining market on investment yields, investors are more likely

to depart from this market than that of homeowners, thus creating further

volatility in the movement of house prices. This impact is particularly

attributable to the number of investors participating in the market (see Figure


Following the recent boom in the property market, the presence of investors

owning two or three properties has increased substantially, while those owning

more than three properties also felt the effects of an increase in demand in the

property market. According to data from the Deeds Office, the graph below

illustrates the number of investors present in the residential property market

over the past decade. It is noticeable that a large rise in the number of

persons owning two properties has occurred during the recent property boom. This

can potentially be attributable to the rise in affordability and credit

extension by homeowners, thus taking advantage of the higher yields available

from possessing a secondary property. Capital yields are available through

either the re-sale equity realised from higher house prices, or the rental

income assigned to the property (rental income highly dependent on the area in

which the property is situated). Furthermore, due to a combination of decreased

interest rates, income tax cuts and property increasing in asset class value,

the number of investors participating in the market increased over time (see

Figure 2).

Figure 1: Number of investors

Source: Standard Bank Group; Deeds Office

Figure 2: Investor participation

Source: Standard Bank Group, Deeds Office

According to the graph above, the proportion of investors participating in the

property market has risen increasingly over the past five years. In addition,

the percentage of those owning more than one property has also increased,

although at a slower rate. This indicates that a higher percentage of investors

have participated in the recent property market boom, resulting in a lower

number of properties per investor. This can mostly be attributed to a rise in

the number of property owners purchasing their first investment property.

Figure 3: Average house price for investors

Source: Standard Bank Group; Deeds Office

It is meaningful to note the differential existing between the average house

price for the total residential market and the investor market. Although varying

in value, the gap between average house prices and investment properties has

diminished over the past two years. In light of the reasoning put forth in the

previous paragraph, this further emphasises the fact that a larger number of

participants are prevalent in the market. Where investment property has

increased in value, the overall average for house prices has experienced a

higher growth rate. This may indicate that whereas speculation in the investment

property market may exist more commonly, an increase in speculation within the

overall market during a boom may have a similar effect - thus, tightening the

gap between the investment market and the aggregate market.

Yields gained from investment properties are higher in the middle sector of the

property market for reasons such as a higher likelihood of rental income and a

high demand for affordable housing to provide for the strong emerging middle

class in South Africa. As a result, demand for investment property increased

alongside overall house prices from 2003 to 2005.

Figure 4: Number of investors and average house price for investors - 2005

Source: Standard Bank Group; Deeds Office

2005 experienced the beginning of the consolidation in the residential property

market that is being felt today. Previously attracted to a market of healthy

capital gains owing to increased house prices and appealing rental incomes, 2005

observed the true presence of property investors in the residential property

market. The number of investors owning two properties (although decreasing

slightly from 2004) was 258% higher than those owning three properties. This may

point to the fact that as of late, together with a softening property market and

sharp increases in house prices, the attractiveness of property as an asset

class has subsided. As a result, one may expect that the number of investment

properties per investor may settle lower than in previous years, as the level of

gearing per investor declines.

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