South Africans still too afraid of buy-to-let as an investment

Buying to let as an investment property seems to have palled as a concept for South Africans. But does economic reality back up this fear?

The TPN Rental Monitor for last year's fourth quarter shows worsening residential rental performance across the board.

"This marks a worrisome change in tenant payment behaviour for the first time in nearly three years.

"This reversal is a sudden change for landlords and property managers who have been enjoying an unusually long period of improving rental payments, culminating in the second and third quarters of 2013, with 86% of tenants deemed to be in good standing compared with 85% in the fourth quarter," the report said.

Eighty-seven percent of tenants rent for less than R7000 a month and 61% rent between R3000 and R7000, where landlords are receiving better-than- average rental collections.

What does this mean for those thinking about the buy-to-let market?

John Loos, household and property sector strategist at FNB, said that while in the boom years around 2005 up to 25% of buyers were looking to let those property purchases, that figure had fallen back to 8%.

"I think it's a lag response to the yield compression that happened in the boom years," Loos said.

In short, rapidly escalating property values meant rentals received by landlords were smaller as percentages of the values of the property, which meant the yield - or return - on the property was declining.

The other factor is the way property buyers tend to look at their investments. "The less sophisticated buy-to-let buyers, which is the majority, look at recent capital growth and extrapolate that into the future. Capital growth for the last number of years has been in the single digits, plodding along.

"The desire to buy to let for people who don't know what a yield is, let alone as the most important thing to focus on, has waned.

"Even for seasoned investors there was a lot of yield compression up to 2007, with price growth being so extreme, so for a while even they found it less attractive. We have had some yield increase since, but it's moderate because the rental market hasn't been so strong yet."

Rental demand is growing, however, and rental inflation is accelerating. Loos said rising interest rates could force potential buyers to wait out the rising cycle by renting.

Michelle Dickens, CEO of TPN, said this was the first negative rental collection trend in nearly three years, and the reason is living expenses.

"We've been blessed with very good payment trends up to now but it wasn't sustainable.

"The interest rate hike's effects will lag by six to nine months because people will have a certain amount of savings to rely on as interest rates go up and they can manage their credit agreements during this time, but thereafter it becomes difficult to sustain the increases in all the agreements on which they have to make payments."

According to Dickens, from 18% looking to rent their primary accommodation in 2001, the market has grown to 25% - about 2.5-million people.

"From a buy-to-let perspective, because there are fewer investment buyers there aren't as many properties coming onto the market. It's not keeping pace with the growth in tenants.

"Yields have averaged around 9% in South Africa, but it depends on sectional title versus full title and size of property.

"A four-bedroom full title property might yield 5% while a one-bedroom sectional title could yield 11%.

"Then it also depends on where you are geographically. Johannesburg traditionally gives you a better yield than in the Western Cape, and that could be because there's a higher rate of delinquency in Gauteng and that risk is priced in," said Dickens.