If houses are so unaffordable, why aren’t rentals rising?
08-06-2005
It seems logical to conclude that the more unaffordable houses become, the more rentals will increase. Surely with house prices having increased so much faster than salaries, fewer people are buying their own homes and therefore more people are renting, which means high demand for rented residential space?
If this is your reasoning, don’t act on it just yet. Scraping together every bit of credit you can find to invest in a house or flat to let, is not the wisest investment decision to make right now, warns property economist Erwin Rode, CEO of Rode & Associates property valuers and economists. Instead, he advises, the best bargain out there in the current residential property market, is to rent a place in which to live, rather than buy. The proviso is that the tenant must religiously invest the difference between his rent and what his instalment would have been if he had bought.
Rode says the net return an investor can currently expect from a buy-to-let residential property over the first year is in the region of 4% - 5%, where historically rent returns have been 10% or higher. Over the past two years, the net income yield from residential rentals has halved.
“Compare current residential rental yields with money market yields of about 7%, for instance. Or with yields on commercial properties which are looking even more attractive at 10% – 14%.”
Looking into the future, Rode points out that the only way rental yields can be restored to viable levels, would be if the prices of houses were to come down, or rentals were to rise. At the moment there are no signs in the market that either of these two scenarios is about to happen.
Andrew Collins, manager of Just Letting, Cape Town City Bowl, confirms that demand for rented space has decreased over the past 12 months, while the market has been flooded with high-density townhouse and apartment units.
“The 50 Just Letting franchisees country-wide compared notes recently and we estimated that the rental pool overall has shrunk by about 25% since the same time last year. We don’t foresee the rental pool increasing soon. We’re experiencing that in the current low interest-rate environment, people are being encouraged to buy rather than rent, in spite of the high house prices.”
Collins says a general oversupply of units has aggravated the situation. The trend was slower in hitting Cape Town than other cities, but with big apartment blocks like the Perspective Building in Roeland Street, Mutual Heights in Darling Street and Cartwright’s Corner in Adderley street, among others, in the process of being completed, he is expecting rentals in the Mother City not only to stay low, but to start falling.
Because most South Africans are increasingly skeptical about equity as an asset class, and about the ability of portfolio managers to add value to their investments, Rode suspects they will continue to buy residential property, ignoring the obvious signs that there are better investment opportunities.
Rode also says that the sharp increases in house prices over the past few years have created the impression with potential investors that houses or other residential units are flawless investments.
The bottom line for buy-to-let owners of residential property, warns Rode, is that they are going to live with negative cash-flows for a long time as an already over-supplied market is continuing to be flooded with residential units to let.
