For those who believe that it’s all doom and gloom in the residential property market at present, they obviously haven’t spoken to letting agents in recent times.

The first edition of the FNB Residential Property Barometer – Rental Markets, for the first quarter of 2008, paints a very rosy picture of the rental market when compared with the main FNB Residential Property Barometer for the home buying market.

Whereas activity levels in the FNB Residential Property Barometer – Home Buyers Market hover around a very mediocre level not far from 5 (on the scale 1 to 10), the rental market’s activity levels register a “very active” 8,4 on a national basis (run on the same basis as the home buying market barometer). With income yields low in residential property, monthly rental payments are, according to John Loos; FNB Home Loans Property Strategist, very often considerably lower than 100% bond repayments, making the rental option increasingly popular during these times of rising interest rates. Small wonder activity levels are high in this market.

The other answers to key survey questions also make for excellent reading. When asked whether the rental market was stronger than six months ago the overwhelming majority of respondents said yes (80%), with only 3% suggesting that activity levels had declined in their areas. The bulk of rental properties, 75%, get taken up within less than one month of coming onto the market. Eighty-two percent of respondents indicated a shortage of available stock relative to demand.

When splitting the barometer up into regions, Loos says the rental markets in the major coastal regions appear a little stronger than those in Gauteng, although he emphasises that Gauteng is by any means weak. “This relative regional difference should not be too surprising, as coastal yields are a little lower and probably reflective of more rapid price inflation at the peak of the residential property boom, and a resultant greater deterioration in coastal property affordability during those years. The rental option at the coast is probably a little more appealing as a result.

Another feature of the survey is that the lower income rental market appears to be stronger than the higher income end. This ties in with what home buying agents are indicating, i.e. that there currently exists a greater degree of financial strain in lower income groups. Much of the greater degree of financial strain at this end is blamed on the new National Credit Act, which is proving to be restrictive in terms of allowing lower income groups to obtain credit. However, lower income groups are also arguably hit worse by high food and transport cost inflation, as these essential items make up a larger portion of their spending “basket” than is the case for higher income groups.

The letting agents are generally pointing towards low gross income yields (annual operating income as a percentage of property value). The national average gross yield is estimated at 8,1%. Loos says this implies a significantly lower net income yield (i.e. after subtracting operating costs from gross income), and given that government long bond yields hover at near 9%, some yield widening would appear necessary in order to improve residential property’s appeal for buy-to-let investors.

Average gross yields appear lowest along the coast, especially KZN at 6,6%, and highest in Joburg West at 11%. In terms of property value bands, the high-priced band of R1,5m+ properties have low estimated yields averaging 6,5%, while the price band below R500 000 has an estimated average gross yield of 9,5% on a national basis.

Loos says the rental barometer data is highly encouraging from the point of view of promoting an overall residential property recovery. “We remain of the belief that the overall residential market is near to the bottom of its cycle. However, a key pre-requisite for a recovery is a rental market recovery and the “mopping up” of any surplus stock that may have been created by the largest residential buying and building spree on record a few years ago.”

“Certainly, if letting agents are correct in their forecasts, relative oversupplies of primary residential stock around the major metros look to soon be a thing of the past.”

When comparing the rental market with the home buying market Loos says it truly seems to be a tale of two different planets. “ However, although the two market’s cycles thrive on different economic forces, the rental market often benefiting from more adverse circumstances, they are very much inter-linked, with the one (rental market) being a pre-requisite for the other one’s (the home buying market) well-being.