Property Talk

Author: Andreas Wassenaar
Date: 2014-08-08

Our mention of buy-to-let opportunities along the North Coast last week has sparked some serious interest amongst property investors and this week we will look at the detail of this market from a national perspective. The first thing we have noticed is that the FNB Estate Agent Survey for the 2nd quarter reported an increase in the proportion of buyers buying-to-let nationally to 10%, which is the 3rd consecutive quarterly increase since the 7% estimate in the 3rd quarter of 2013.

The expected maximum limit of buy-to-let activity could be expected to be approximately 25%, which was achieved in early-2004 at the height of the last property boom. It is unrealistic to expect that level of market activity given our current limited availability of mortgage finance in the market, but the recovery in buy-to-let activity indicates a stronger appetite for property as an investment asset class and the higher yields that are available given the increase in rental rates.

Stats SA break down the Consumer Price Index (CPI inflation) figures into various market segments with rental inflation being one. Their figures confirm that nationally rental inflation has increase from 4.3% in mid 2012 to 5.14% in the most recent CPI figures. In high growth hot-spots such as Ballito, rental inflation is closer to 10% as many new families migrate into the area and typically rent first before they decide to buy.

The payment performance of tenants has also improved from a low of 71% being in good standing according to Tenant Profile Network in 2009 to a recent high of 86% by mid 2013. The 4th quarter of 2013 saw a small dip in this figure to 85% as the general economy deteriorated. This takes us right back to the 84%/85% in good standing experienced before the financial crisis in 2008. An interesting question asked in the FNB Estate Agent Survey is percentage of properties "being sold due to lower than expected investment income". For the 2nd quarter of 2014 this figure was 3,5%, which was sharply down from the 10.25% recorded in 2010.

An increasing interest rate cycle may on the one hand dampen the demand by property buyers who may find it harder to obtain mortgage finance but on the other hand increases the demand for rental properties as prospective buyers (and typically many first time buyers) make the decision to postpone a buying decision in favour of renting for a longer period. The growth in the rental stock and the overall supply of rental properties depends largely on new developments being delivered. For the last six years the delivery of this new stock has been limited and has provided for an overall stock shortage of rental properties. As new stock does become available it is taken up almost immediately, which indicates the strength of the demand in the rental market.

So what does the future hold for buy-to-let buying? According the FNB Estate Agent Survey the near term expectations are further growth, but the rate of this growth is expected to moderate. Weak economic fundamentals would constrain all property buying, including buy-to-let buying. The extent of interest rate increases over the next 12 months will be the key factor to watch.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Seeff KZN Chairman

Principal - Seeff Dolphin Coast

andreasw@seeff.com

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