Property Talk

Author: Andreas Wassenaar
Date: 2014-10-24

If you are like me and an eternal property bull, who loves to invest in buy-to-let properties, then the recently published report by FNB on the status of the Buy-to-Let market is of interest and provides insight into what we can expect in the near term. When you live in a high growth node such as the greater Ballito area characterized by families migrating into the area from regional as well as national geographical areas, you soon realize that the rental stock comes under pressure and rental rates increase above the national averages. Most people rent before they decide to buy when moving to a new area.

This is not a bad strategy, but when everybody is doing it at once, it becomes difficult to find suitable rental accommodation. Scarcity drives up rentals, which in turn encourages rent seeking individuals to invest in buy-to-let properties, which drives development of new properties to satisfy this demand. This has started to happen along our north coast area and available land for development projects has been snapped up and several new projects are in the planning pipeline.

On a national basis the buy-to-let purchases as a percentage of total buying for the 3rd quarter of 2014 was measured by FNB as 9%, down marginally from the 10% in the previous quarter. When buying rental properties, the decision should be based on the expected future yield derived from the rental flow rather than any expectation of capital growth. Although capital growth will undoubtedly occur, the strategy should not be to flip the asset but to hold it, leverage it using mortgage finance to balance costs to income, making it tax efficient and releasing capital for additional investments.

Banks love property. Because of this you have the opportunity to raise finance and thereby grow your rental portfolio. A buy-to-let property that generates cash is an asset. The home you live in which is financed to a mortgage lender is an asset in the bank's hands but a liability to you. Robert Kiyosaki has been preaching this for decades by advocating investing in income generating properties.

According to Tenant Profile Network the payment performance of tenants is good with 85% of residential rental tenants in good standing. This figure hit a low of 71% in 2009 as the financial crisis took hold and has since been on a generally upward trend of recovery. We can expect payment behavior to flatten out at the current levels. Interestingly the worst payment performance is in the lowest (below R3,000 p.m. at 80% in good standing) and highest categories (over R25,000 p.m. at 81% in good standing) with the mid level rental levels of between R7,000 and R12,000 being the best at 88% in good standing.

The percentage of properties being sold due to lower than expected investment income, as measured by FNB's Estate Agent Survey, is currently 3,75%. This is marginally up from the 3% measured in the 1st quarter of 2014, but far below the 10,25% measured in 2010.

The general outlook for the next 12 months is that rental demand will continue to increase and the supply of new rental opportunities will lag this demand. Rental rates can be expected to increase at between 7% and 10% per annum, ahead of the Stats SA published current national average of 5,16%.

I would therefore put a big buy signal out there regarding buy-to-let properties. 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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