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An oversupply of rental properties and rental rates under pressure is making buy-to-let unattractive for investors currently.
Estates agents are reporting that property activity is mainly around buying to live rather than buy-to-let.
Curated data suggests capital and income growth await brave investors in select areas
Data from the TPN Credit Bureau Rental Index Q2- Q3 2020 recorded an increase in vacancies to 11.39% from 9.13% in Q2 2020. This figure has been steadily rising from 7.47% in the first quarter.
Now more than ever, it is important that investors thoroughly research the area and tenant payment behaviour before buying.
“Area specific buy-to-let property data is an essential tool for any investor,” says Michelle Dickens, TPN managing director.
From this data, you will able to see what rental escalations for different rental prices bands are. Information on rental payments assists investors decide which price bracket to buy into.
Recent TPN data shows that over 80% of tenants renting properties ranging between R7 000 and R12 000 were in good standing. Tenants paying rent below R3 000 per month recorded 62.12%. Provincially, the Western Cape recorded the highest percentage of tenants in good standing (80.86%). KwaZulu-Natal had the lowest percentage of 70.83% in good standing.
“When purchasing buy-to-let, look for properties in suburbs with low tenant delinquencies and low vacancy rates.”
Where are these suburbs located?
TPN did a buy-to-let sectional title property comparison in some areas in Gauteng, KwaZulu-Natal and the Western Cape. In all these suburbs, investors can have a glimpse of what they are in for if they choose to invest – now or later.
Western Cape areas
Vacancy rates for the region reached 10.0%, with the Winelands recording the highest rate of 13.6% during this period.
Bellville: Good for income stream
Bellville will be a good area for investors chasing income growth. Average property prices are just over R1 million, with growth yields of 11% says Dickens.
According to Krishca Du Toit, Seeff Brackenfell intern agent, this middle-class area is experiencing a high demand for rental property. Many owners battling financially are turning to the market to alleviate financial pressure.
However, rental rates are expected to decline by about 10% – 15% this year, especially expensive apartments. A two-bedroom apartment which rented out for R7 200 two years ago, now goes for R6 400 per month. Those that would have be rented for R10 000 –R20 000 per month two years ago, are now achieving R8 000 to R16 000 per month.
Although capital growth is not that high, here you have a steady rental income stream.
Sea Point: Great for capital growth but low yields
From a capital growth perspective, Sea Point in the Western Cape would make a good buy-to-let investment. In 2010, a two bedroom apartment with a market value of R1.5 million is now R3.7 million. In order to achieve a 12% rental yield, this apartment should be rented for R37 000 a month. Currently, it is achieving only R15.600 per month, notes Dickens.
Income and yield could be increased by turning the apartment to an Airbnb since it is a coastal holiday hotspot. However, you may find that economic cycles influence tourism, says Samuel Seeff, chairman of the Seeff Property Group. “This could mean higher vacancy rates, as a result, your risk is increased, but rewards are higher with short-term rentals.”
He explains that rental increases, especially in the upper income areas have been flat. Prices have fallen by approximately 20% in certain Cape luxury areas like the Southern Suburbs and Atlantic Seaboard since 2017.
The attraction of Sea Point is its excellent location on the Atlantic Seaboard, and close to the Sea Point Promenade. It offers a number of amenities, cosmopolitan lifestyle, easy access to Clifton and Camps Bay beaches, the Waterfront and CBD.
Currently, a two bedroom apartment can achieve between R14 000 – +R16 000 depending on location, views and finishes.
“Demand is high for residential and short-term rentals. Since 2018, rental yields have generally remained fairly flat in the 3% – 4% range on average depending on the property.”
Stellenbosch: Over 90% of tenants pay rent
Sectional title property prices average is R1.9 million in Stellenbosch. During lockdown, a total of 93% of tenants paid their rent – and this would make a case for investment.
The area has a diverse rental market. It comprise long-term (1 -4 years), student rentals, as well as short-term, Airbnb and holiday rental market. Rental income is relatively steady, but high with short-lets for Airbnb or holiday purposes.
Covid-19 has significantly impacted the short-term Airbnb, holiday and student rental markets, according to Seeff Stellenbosch rental agent, Livene Mwansa.
There is an oversupply of stock especially furnished apartments resulting in reduced rentals in the market.
Some tenants have either been retrenched or have taken salary cuts. In response to this, certain landlords have chosen not increase rent for the new rental term starting 1 December 2020.
In Nuutgevonden for example, a two-bedroom apartment has seen a decrease in rental listing price. Pre-Covid-19, the listing price of R8 500, has since dropped to between R7 000 and R8 000 per month.
Gauteng is the best province in terms of gross yields. The province has delinquent tenants accounting for 20% in some areas with rentals below R4 000 per month. Centurion has the lowest vacancy rates (5.7%) compared to Sandton (19.2 %) and Soweto reaching a high of 19.4%.
Centurion: +90% of tenants are in good standing
This once sleepy area is a drawcard for buy-to-let investors for many reasons. Entry-level prices are affordable starting from R650 000 for one bedroom units. It is still a growing area attracting new investments and higher demand offering a higher return on property investments.
Data from TPN shows that the average price of a sectional title in Centurion is R850 000. Average rentals are R7.300 per month. In this area, over 90% of tenants pay rent on time.
Rudi van den Berg, RE/MAX Jowic broker/owner says apartments in secure estates are popular with tenants. In areas such as Die Hoewes and Wierdapark, rentals range between R7 000 and R9 000 per month. Garden apartments are most sought-after by families, and it’s possible to achieve high rentals on these units. However, rates are quite high in some complexes, and these can impact on return on investment.
Those investors that bought for R500 000 10 years, have seen prices grow to R700 000 in today’s market. “An investor would have gained at least 8% guaranteed return on his investment from rental income, making a rental property a very good investment.”
Pretoria West: High delinquency rates
This area is very affordable with an average property price of R341 000. Rents are R3.400 per month, and achieving growth yields of 15%.
A quick search on Private Property shows that rental properties start from around R3.300 per month.
Dickens points out that despite low rents, only 80% of tenants are in good standing. The delinquency rate is 20%. “It’s not about yield, but about good standing. Secure a quality tenant to avoid the risk of default.”
With a regional vacancy rate of 13.0%, eThekwini saw vacancies rise to 19.4% compared to 7.5% in the North Coast.
Although not accounting for a significant component of sales, property investors are purchasing investment properties in affordable areas in Durban. Berea attracts more buy-to-let investors than affluent areas like Umhlanga Rocks, according to Myles Wakefield, CEO of Wakefields Real Estate.
Durban: Good rental yields but difficult area for rent collection
In Berea, buy-to-let investors are cash rich, and eyeing a large number of apartments priced below R500 000. Achievable rentals at this price are between R5 500 and R6 000 per month. “When investors follow stringent tenant checks, they are guaranteed to get reliable ones who pay on time.”
On the surface, capital growth wouldn’t be close to what is achievable in Umhlanga – more properties could change the situation. An investor with 10 apartments valued at R500 000 each, and achieves good rentals will see surprising capital growth figures.
Durban offers attractive yields of 11.6%, with average rental prices currently at R6.500 per month. However, it is difficult to collect rent with 75% of tenants in good standing, says Dickens.
Umhlanga: Capital growth and rent collection is good
Lightstone data shows capital growth has been good in Umhlanga. A case in point is La Lucia suburb extension like Somerset Park with no views or easy sea access. An apartment which sold for R2 million 10 years ago, will now sell for between R3. 6 million and R4 million.
In Umhlanga, a similar property with ‘front-line’ beachfront or view sold for R3.3 million in 2010 is now selling for R5.2 million.
The average price of sectional title in Umhlanga is R1.8 million up from R1.6 million in 2016. Average monthly rentals are R11 000 per month, with 7.4% yields. Unlike Durban, tenants in this area pay their rent on time.
Dickens adds that research is key when purchasing buy-to-let properties. “You can be a better investor than average, but this is a good benchmark to start your investment journey.”
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