While positive news on the residential property front is hard to come by in the current high interest rate environment, there is some respite for buy-to-let investors, as demand for rental property surges to new levels.
Figures released this week by property management companies, real estate agents and economists suggest that for the first time in years landlords should be able to pass on double-digit increases to tenants when leases come up for renewal.
That could see the 6% to 8% average gross rental yields (annual rental income as a percentage of property value) that buy-to-let investors have had to be satisfied with over the past few years start moving back to the 10% plus level.
Letting agents Trafalgar's latest index shows that residential rentals rose nationally by 12,5% in the first half of 2008 (y-o-y). That is double the growth of 6,2% recorded over the same time last year. Trafalgar MD Andrew Schaefer says tenants face 'substantial' double-digit rental increases over the next six months, as rentals generally tend to accelerate quicker in the second half of the year.
East London recorded growth of 18% in the six months to June 2008, followed by Port Elizabeth (12%), Pretoria (11,5%) and Durban (10,5%). Pretoria had a substantial turnaround from -3% in the six month to end-June 2007 to 11,5% a year later. Cape Town nearly quadrupled its rental increase, from 4% to 14%.
Schaefer says that residential rentals are now rising faster than the price of sectional title units, after nearly a decade of lagging price increases.
"If this trend continues, buy-to-let investors could see income yields move towards the 10% level by year-end," says Schaefer.
Investors are currently earning an average 7% yield on rental apartments. That means a two bedroom unit in Fourways north of Sandton currently worth say R720 000 would typically fetch a monthly rental of R4 200.
Trafalgar's figures show that Johannesburg rentals were up 11% in the six months to June (y-o-y) although that was off a relatively high base, with the index rising a hefty 18% in the six months to end-December 2007. Schaefer expects Johannesburg rental growth to exceed 18% for the 2008 calendar year.
His view is supported by Rode & Associates' latest figures, which show that the Johannesburg rental market is experiencing a particularly sharp recovery. According to Rode & Associates, flat rentals in Johannesburg are up 26% in first quarter 2008 (y-o-y).
In fact, rentals for upmarket, two bedroom units in Johannesburg's leafier suburbs jumped 54% over the past year - two bedroom flats that cost an average R3,867/month to rent a year ago are now fetching R5,955/month.
Estate agents are reporting a similar trend. Shirley Tolstrup, Chas Everitt International's rental manager in Johannesburg's northern and north-western suburbs, notes that the number of units that they have rented in the first half of this year is up 50% on 2007.
Tolstrup says the biggest demand for properties to let is in the R6,000/month to R12,000/month category.
Industry players say the main driver of rental growth is interest rates and the knock-on effects of the National Credit Act, which is making renting a far cheaper – and easier *option than buying.
Rental growth has been further supported by a sharp slowdown in building activity, with a lot less new rental stock coming on to the market to meet rising demand. FNB property strategist John Loos expects the number of new residential units to be completed to drop by as much as 25,5% this year. And he doesn't see building activity returning to positive growth territory before the second half of 2009. - Joan Muller