Bugle Sales Talk Editorial

According to Erwin Rode of Rode and Associates, the average cost structure of investment properties takes on average 1,5% off the gross yield. Following the analysis on the South African rental market by Payprop, it is interesting to review the recently published report by Tenant Profile Network (TPN) and FNB. Together they have come up with a very clever way to create a data series as a proxy for the aggregated national initial rental yield across multiple property price brackets. FNB are experts at valuations and analyzing time series data and TPN are expert in rental and tenant related data. Their approach has been to take all the properties for which TPN rental data exists, utilize the FNB valuation model to estimate current market values and then calculate the gross initial yield - genius!

If we analyse the gross yield data produced we note the 2007 low point of 7,31% as property prices peaked just prior to the crash of the global financial crisis. By the end of 2011 the gross yield had recovered to a peak of 9,92% on the back of firstly significantly reduced property prices, and secondly more people choosing to rent as an alternate to buying. Since then the property market has followed a recovery trend with the result that gross yields have been compressed (decreased) to the current 8,3%.

Having this national aggregated data on hand is useful for buy-to-let investors as they can immediately discern as to how any particular property they may be considering compares on a yield basis. If we deduct the estimate of costs at 1,5% from the gross current yield of 8,3% we have an estimate average net yield of 6,8%. This is then what must be compared to the cost of capital or interest rates. Our Prime rate, as of 19th November 2015, is now 9,75%. Most mortgages have rates of at least this rate and typically a little higher of say 10%. It therefore means that investment properties require more equity capital from owners than what a fully bonded home will service from its expected rental stream, assuming all monthly costs are still being paid for by the owner.

This could be an important reason why the proportion of buyers buying to let is still relatively low at 8% compared to its estimate in 2004 of over 25%. However, interest rates only provide part of the picture, as at December 2004 the Prime interest rate was in fact higher at 11% than where it is today. The overwhelming factor to encourage buy-to-let properties at that stage was the peak in the GDP growth rate at 7,2% in September 2004 with strong future prospects in further economic growth at the time. Currently the scenario is dramatically different with 2015 expected to have overall GDP growth of only 1,3% and its level for the 3rd Quarter of 2015 according to StatsSA being a mere 0,7%. The Stellenbosch Bureau of Economic Research business confidence index is currently at a 5-year low and the consumer confidence index, although partially recovered from the plunge indicated in the 2nd quarter of 2015 is still at a multi-year low. When people feel less confident about the future in general, they tend to hold off on relatively long term investment decisions.

TPN's regional yield comparisons show us that the highest yields have come from Johannesburg at 9,24% and Tshwane at 8,87%. Ethekwini (as a proxy for KZN) is however not far below this at 8,48%.

My assessment is that it is still a great time to invest in a buy-to-let property within a high growth area such as our Dolphin Coast.

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

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com