No Fireworks for Buy-to-Let Investors

Private Property South Africa
Heather D'Alton

The buy-to-let market has gone off the boil, following a short burst of activity in the rental market last year. But not only are potential buy-to-let investors waiting on the sidelines before entering the market; those already in the market could find that rental increases will disappoint in the months ahead. And that means they could be facing some tough choices before the years’ up.

According to the experts, the weak buy-to-let market can partly be blamed on an oversupply of stock. And that’s helped push down the proportion of investors who buy-to-let properties to just 12 percent of total buyers. According to FNB’s residential property survey, this is a long way off the heady days of 25 percent, as was the case in 2004. The survey, which measured activity in the fourth quarter of last year, found buy-to-let was the only headline indicator to actually decline as a percentage of total buying.

What’s more, for now, less seasoned buy-to-let buyers – the majority of the market – will continue to avoid investing, said FNB property strategist John Loos. Because this group of investors uses credit to buy properties; and because banks currently remain extremely strict in their lending criteria, they’re now waiting for interest rates to drop dramatically before buying. That may be good news for the buy-to-let market some months down the line – but it means there’s little relief for the time being.

At the same time, this group of investors would also be concerned about capital growth – or the lack of it – when considering buying a property, Loos says. Most property analysts and economists are forecasting house price deflation for the next six months to a year. And that’s likely to put potential buy-to-let buyers off, until the oversupply in the market has been “mopped up” and house prices increase once more.

As for those already in the market – and letting properties out to tenants – experts warn against raising rentals too far, too fast. For one, the tough economic conditions mean more tenants are already struggling to make their monthly payments. And that’ll get worse as more workers lose their jobs during the economic slowdown and potential recession. According to Joan Muller in Finweek, the number of tenants paying their rent on time fell in the final two quarters of last year to 54 percent. That’s from 70 percent in the first two quarters. And the same goes for those paying their rent late: A figure which rose to around 20 percent in the last two quarters (from around 15 percent before). Muller says buy-to-let investors should “forget” about double-digit rental increases in 2009.

At the same time, pushing rentals up above the official inflation rate could give landlords problems in the future, says Gerhard Kotzé, CEO of the ERA South Africa property group. He says, when the property market turns, “those who are renting now could decide to become property buyers surprisingly quickly”. When that happens, landlords who failed to nurture good tenants with equitable returns could be stuck with high numbers of vacancies. “Nobody disputes that landlords are entitled to a fair return on their investment. But they need to remember that there’s a definite line between exploitation and good business,” he says.

But there’s an exception to the rule: According to Loos, seasoned buy-to-let investors are indeed eyeing the market now. While yields remain low, they’re starting to rise as house prices drop. These more sophisticated investors are also likely to take advantage of distressed sales with more success than less seasoned investors. And this in turn could provide a decent yield for them. Aside from this small group of investors, though, Loos is adamant: 2009 won’t provide “any fireworks in the buy-to-let market”.



As published in issue 79 of .

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