Buy-to-let purchases, which were out of favour pre-Covid as rental returns fizzled and banks tightened lending criteria, are back on investors’ radars.
In fact, the number of home loan applications processed by banks to fund buy-to-let properties surged almost 30% year on year in the third quarter, according to the latest data from mortgage originator ooba.
By end-September, loan applications for investment properties had reached a 12-year high of 8.6% (as a percentage of total mortgage volumes), up from a historical average of 4%-6%.
Industry players believe the rebound has been supported by the cumulative interest rate increase of 275 basis points since November, which has pushed up the relative cost of buying vs renting.
For example, until October last year, when the prime lending rate was at a 50-year low of 7%, the monthly repayment on a R1.4m bond (ooba’s average purchase price in South Africa) came to R10,854 at prime over the standard 20-year repayment period. Repayments on the same bond have since jumped by R2,425 a month to R13,279.
In stark contrast, residential rentals increased by only R193 a month on average across South Africa over the past year to R7,971, according to the latest quarterly rental index from rental processing firm PayProp.
As ooba CEO Rhys Dyer points out: “The sharp uptick in buy-to-let and investment buying is indicative of the rising demand for rentals as rising interest rates put the dream of home ownership on hold.”
The growth in investment property buying is particularly pronounced in the Western Cape, where more than 20% of all bond applications received by ooba in September were for buy-to-let properties.
Dyer says the increased demand for rental properties in the Western Cape has been triggered by the renewed wave of semigration to the province, which has been reinforced by lifestyle opportunities and perceptions of relative safety and good governance.
“Vigorous” competition among the banks have led to attractive lending terms, despite rising rates, which Dyer says have no doubt helped lure investors back.
Apart from more competitive rate concessions, banks have also lowered their cash deposit requirements to 6%-8% of the purchase price, compared with pre-Covid levels of 10%-plus.
Industry players say increased demand for rental properties should translate into stronger rental growth — and thus improved returns for buy-to-let investors.
PayProp figures show that rentals across South Africa have already ticked up this year. In the second quarter, year-on-year growth clocked in at 2.6%, up from less than 1% for most of 2020/2021. In fact, this was the first time in almost five years that all nine provinces recorded positive rental growth, ranging from a low of 0.3% in Gauteng to a high of 9% in the Northern Cape.
If the latest rental and house price data from PayProp and ooba are taken as benchmarks, buy-to-let investors are earning an average gross annual rental yield of 6.8% (annual rental income expressed as a percentage of market value). When property running costs (municipal rates, sectional-title and estate levies and maintenance) are deducted, average net yields typically drop to about 4.8%.
However, industry players say gross rental yields of 8%-12% can be had in many areas, depending on property size and type, price bracket and supply-and-demand dynamics.
Of course, the potential for capital growth over time will also vary. Investors need to consider total return prospects, which means higher price growth could make up for an initial lower rental yield and vice versa.
Home loan applications for buy-to-let properties are up 30% year on year, and had reached a 12-year high of 8.6% by end-September, against a historical average of 4%-6%
— What it means:
So what — and where — should residential property investors be buying now to ensure maximum returns?
PayProp CEO Michelle Dickens says looking at vacancy rates is a good starting point, as these indicate the balance between rental demand and supply in any area.
She believes Gauteng has the highest vacancy rate in South Africa, while the Western Cape has the lowest. Other provinces that are undersupplied and as a result have experienced strong rental growth include the Northern Cape, the Eastern Cape and Mpumalanga.
However, Cobus Odendaal, CEO of Lew Geffen Sotheby’s International Realty in Joburg and Randburg, says that despite an oversupply of rental stock in some areas, there are still plenty of opportunities for Joburg buy-to-let investors to earn above-market yields.
For instance, in Ferndale, Randburg, Odendaal recently sold a duplex townhouse of 166m2 with three bedrooms, two bathrooms and a double garage for R1.3m. It has just been rented out at R12,000 a month, achieving a rental yield of 11%.
In Weltevreden Park, in western Joburg, monthly rentals of R10,000-R13,000 are being achieved for two- to three-bedroom townhouses in the R1m-R1.5m bracket, says Odendaal. That equates to a rental yield of 8.7%-12%.
Other Joburg suburbs where similar pricing and yields can be had include Melrose, Linden, North Riding, Waverley, Paulshof and Fairland.
Odendaal says the general rule is that cheaper, lower-priced properties offer higher rental yields than pricier properties. “Astute investors are buying the smallest property in a good area rather than the biggest house in a shoddy neighbourhood,” he says.
Odendaal says two- and three-bedroom, two-bathroom units in well-maintained, secure sectional-title complexes and estates close to good schools, shopping centres, sporting and health-care amenities are most in demand.
According to Jason Shaw, area manager for Pam Golding Properties (PGP) in Hyde Park, gross yields are ranging from 6%-12% — the lower the price, the higher the yield and vice versa. He says the best rental investments tend to be sectional-title apartments priced below R1.5m in medium- to high-density complexes.
Shaw cautions that rapidly rising levies, rates and taxes are a big consideration these days, as they eat into returns. Savvy investors are looking for complexes where communal costs are spread among a relatively large number of units.
Bryanston is particularly popular in this regard, with gross yields of 10% available.
Further north, Seeff Centurion manager Tiaan Pretorius says the highest rental demand in the area is for two- to three-bedroom units in sectional-title complexes, typically priced from R750,000-R2m, or three- to four-bedroom standalone cluster homes in secure estates priced from R2.6m.
Pretorius says investors with R1m-R1.5m to spend should consider Eco Park, where you can buy a two-bedroom, one-bathroom first-floor unit for about R750,000 and fetch a monthly rental of R7,000-R7,500.
“If you are able to invest about R3m, Centurion Golf Estate and Midstream offer excellent value for money and are always in high demand,” he adds.
PGP Pretoria development manager Ilma Brink singles out two-bedroom apartments at Menlyn Maine Residences in the popular eastern suburbs as a particularly attractive buy-to-let bet. She says units are let for R25,000-R32,000 a month (for a term of at least six months) and are popular with international staff working for Pretoria’s numerous embassies.
New two-bedroom units in Menlyn Maine’s Phase 2 are now selling off-plan from R2.5m and should fetch rental yields of up to 9%.
Brink says investors can also place their units in The Capital Hotels & Apartments short-term rental pool, which offers a three-year guaranteed rental return of about 7% (inclusive of furniture and maintenance).
Astute investors are buying the smallest property in a good area rather than the biggest house in a shoddy neighbourhood
— Cobus Odendaal
Cape Town estate agents confirm a growing shortage of rental stock in many sought-after suburbs, which has been supported by ongoing semigration.
People who relocate to the Cape generally prefer to rent before buying, especially given that they tend to get more bang for their buck when renting.
Initial yields have historically tended to be lower in the Mother City than in Joburg and Pretoria due to relatively higher house prices in Cape Town. But Basil Moraitis, regional head for PGP in the Western Cape, says the “huge” shortage of rental stock developing in many areas is pushing up rentals and yields. The latter now average a gross 7%-10%.
In Sea Point, for instance, some landlords are getting more than the asking price: a 102m2 apartment in Piazza St John that sold for R4m recently attracted more than 20 viewers in an open hour, at a rental listing price of R25,000 a month.
“Such was the competitive process that it was let for R32,500 a month,” Moraitis says.
In Upper Sea Point a 38m2 studio apartment in Silverhow that sold for R1.46m demands about R8,500 a month.
The student letting market is also thriving, especially in the southern suburbs near the University of Cape Town.
Studio, one- and two-bedroom sectional-title units priced at below R1.5m are most in demand, offering gross yields of as much as 9.5%-10.5%.
In Claremont Upper, PGP is marketing a studio apartment for R895,000 for R7,500 a month. In Observatory, 77m2 two-bedroom, two-bathroom units at Obs Court are selling for R1.595m and fetch monthly rentals of R12,500, while a 37m2 studio in the same building with a price tag of R950,000 is let for R8,500 a month.
In Cape Town’s northern suburbs, mixed-use precinct Century City, near Milnerton, has become an increasingly sought-after buy-to-let destination, with gross yields averaging about 8.5%.
Helga Clemo, licensee for Seeff Century City, says two-bedroom, two-bathroom apartments tend to generate the best returns. Prices vary considerably from complex to complex, but investors should try to shop at about the R1.85m mark. Good options in this bracket include Villa Italia and Bougain Villas, where units are let for an average R13,500 a month.
Clemo advises those with less to invest to consider a loft apartment (65m2) in Century On Lake for about R1.35m. These fetch R9,500 a month. Meanwhile, studio apartments in Waterstone East or Waterstone West, sized at about 40m2 and priced at R1.3m, are let for R9,000 a month.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.