Smaller properties best for buy-to-let investors
Category Cape Town Property Market
Small sectional title properties are, on average, providing buy-to-let investors with the highest gross yields in the residential property sector, according to the latest Residential Yields Review, for the fourth quarter of 2014.
However, the review also shows that the average gross yield from residential property declined further in 2014, to 8.7 percent, from its high of 9.3 percent in 2011 and 2012. The yield dropped slightly to 9.1 percent in 2013.
The review is produced by First National Bank (FNB) and TPN, a credit bureau that specialises in residential letting.
The average gross residential yield was 8.61 percent in the final quarter of 2014, down from 8.77 percent in the third quarter, according to the review. Sectional title properties out-performed the national average, whereas full-title properties underperformed.
The gross average yields for sectional title properties in the fourth quarter of 2014 were:
- One-bedroom: 9.53 percent (9.9 percent in the third quarter of 2014);
- Two-bedroom: 9.28 percent (9.29 percent); and
- More than two bedrooms: 8.92 percent (8.5 percent).
The "smaller is better" trend also held true for full-title properties:
- Less than three bedrooms: 7.99 percent (7.93 percent in the third quarter of 2014);
- Three bedrooms: 7.94 percent (8.01 percent); and
- More than three bedrooms: 7.45 percent (7.11 percent).
It is important to note that these are gross yields, which means that landlords' operating costs have not been included. Operating costs are subtracted to obtain a net yield.
Property market specialists Rode & Associates suggest that you can subtract about 1.5 percentage points from the gross yield to estimate a net yield, the review says. If you were to do this, the national average net yield in the fourth quarter would be about 7.1 percent (7.27 percent in the third quarter).
Such a yield would not make buy-to-let an attractive proposition for many investors, because it is below the cost of financing the purchase. The prime rate is 9.25 percent, and the average home loan rate is above that. FNB says this might explain why, based on recent FNB Estate Agent Surveys, buyto-let investors comprise a relatively low nine percent of all home buyers.
The review says the decline in the average rental yield seems to have been caused by a slowdown in rental increases during 2014. The absence of further interest rate increases in 2014 (after the 25-basis-point hike in the repo rate in July) also worked against rental yields. A rise in interest rates often reduces demand from home buyers, who depend on more expensive credit, and boosts demand for rented properties as aspiring home buyers postpone their purchase and keep renting.
Data from TPN shows a steady decline in the average annual rental escalation from 8.6 percent in the fourth quarter of 2013 to 6.49 percent in the fourth quarter of 2014. This is still above consumer price index (CPI) inflation for the period, which, according to the Reserve Bank, was 5.6 percent in the fourth quarter of 2014.
High rental escalations and the repo rate increases in January and July last year saw the average gross yield rise from 8.5 percent in the first quarter to 8.9 percent in the second quarter However, the yield fell to 8.77 percent in the third quarter as rental escalations decreased in the second half of the year.
Michelle Dickens, the managing director of TPN, says tenants, particularly at the low end of the market, are becoming more comfortable with moving if they are unhappy with an increase in the rent they are paying.
Although there is an undersupply of residential rental property, Dickens says landlords may find it difficult to find quality tenants. Therefore, tenants with a good credit rating are in a position to negotiate a lower rental increase or move elsewhere if they are unhappy with a rental escalation.
Residential rental yields peaked at 9.65 percent in the fourth quarter of 2011. From 2012, gross yields declined as he home-buying market strengthened.
The review says interest rate movements will determine the direction of residential yields this year, although a further decline is expected in the short term.
Source: Personal Finance
Author: IOL
