Some flat returns in a saturated market

Posted On Monday, 03 October 2005 02:00 Published by eProp Commercial Property News
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Developers get a reality check while buy-to-let investors mostly manage to pip inflation - provided they bought in the right places, writes Chris Needham

Neville SchaeferWhile rental growth has mostly been increasing among flats in the major metropolitan areas of South Africa in the past two years, rental growth in Cape Town has been falling in real terms - and in Pretoria has turned negative, a survey shows.

According to the findings of the latest Rode's Report, a property survey, for the third quarter of this year, landlords and property investors have generally beaten inflation but appear to have been having a particularly tough time of it in Pretoria.

The report was released this week.

It shows that in nominal terms the growth in rentals for one-, two- and three-bedroom flats in Pretoria has been an annual compound rate of 0.2% in the two years to June 2005. Inflation (CPIX) was 3.7% over the period, meaning that rental growth has been firmly negative in real terms.

Cape Town continued its declining trend but narrowly pipped inflation by recording nominal growth of 5%, though Durban, Johannesburg and Port Elizabeth enjoyed good growth of 10.4%, 10.4% and 10.8% respectively. (The tax implications of rental income have been ignored: after-tax yields will be lower.)

In June, the report states, rentals for a two-bedroom flat in Johannesburg, Durban and Cape Town were around R2,600 a month. Pretoria rentals were about 20% lower at R2,200 a month. Port Elizabeth rentals were even lower at R1,900 a month.

However, the report states that "developers would be disappointed with this performance, as not one region managed to beat building-cost inflation (BCI), which grew at a compound 13.1% per annum over the past two years".

Property economist and valuer Erwin Rode, at Rode & Associates, explained Pretoria's difficulties in the rental market by saying: "I suspect that Pretoria has been flooded - more than other cities - with buy-to-let townhouses, and together with "overzealous development", this has created lots of supply.

Too much supply might be bad for South Africa's band of buy-to-let investors - Trafalgar CEO Neville Schaefer estimates that about 20% of the market in urban areas is buy-to-let investment properties, and that this has "grown significantly over the past number of years" - but is good news for prospective tenants.

"It makes reasonably more sense to rent in Pretoria than to buy at this stage, with rentals being about 20% cheaper than in Johannesburg," said Rode.

Today's bad news could also be tomorrow's investment opportunity: He says going forward, the area likely to show the strongest growth "is probably Pretoria - because its [the city's] economy is doing very well".

"It's a question of time and of when the balance of supply and demand will return to normal. Then rentals will rise again."

However, Rode said that across South Africa the current so-called tenant's market could last for many years.

"The property cycle is a very long cycle and once you reach the peak, as we are now, it takes many years for prices to climb in real terms - so it could take five years or longer for a tenant's market to be turned into a landlord's market again."

Rode said that when property turns - especially upward - it does so sharply, but the run down happens slowly.

"This upturn started in 1999 and will peak in 2005 - a short, sharp six-year run up. The run down could be longer than that."

With regard to new residential developments coming on stream, Rode said that next year there could be "a serious oversupply", adding that profit margins for most players would be squeezed next year.

Trafalgar's Schaefer said that generally, in South Africa's upmarket urban areas, it's possibly smarter to rent rather than buy. This is because rental yields there are as low as 4% to 6% or even less.

However, for plucky buy-to-let investors, he says that in the "more affordable" areas one can still get a gross yield of 12%, because "inner-city rental demand is very strong".

?Looking at the longer term, Rode's Report says over the 10 years to June 2005, annual compound growth on flat rentals was: Johannesburg 12%, Pretoria 12.2%, Durban 10.2%, Cape Town 12.3%, Port Elizabeth 8.8%, CPIX 7.4%, BCI 8.8%.

 

Last modified on Monday, 05 May 2014 13:40

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