It’s no secret that buy-to-let hasn’t been a great money-spinner in recent years, with Cape Town a notable exception.
Most other cities have struggled post-pandemic with an oversupply of residential properties to let, forcing landlords to be satisfied with no or low rental increases when leases come up for renewal.
Property values have also been under pressure on the back of higher-for-longer interest rates. The upshot is that buy-to-let returns have been squeezed for both income and capital growth.
Add rapidly rising municipal rates, utilities and other running costs, and it’s not difficult to see why many have steered clear of residential investments.
However, the latest data points to a marked improvement in rental market metrics. In addition, it appears that house prices have bottomed, which will support capital returns on buy-to-let investments.
PayProp South Africa’s quarterly index, which tracks a portfolio of more than 150,000 residential properties across South Africa, shows that rental growth spiked to a seven-year high of 5.4% in the fourth quarter, taking the average monthly rent in the country to more than R9,000 for the first time.
It’s the highest growth recorded by the index since December 2017, and is comfortably ahead of the multiyear lows of between 0.2% and 0.8% in 2020/2021.
PayProp head of sales André van Rooyen says rentals have steadily gathered pace since early 2022, when the national average was still sitting at just more than R8,000 a month. “The residential rental market has gone into 2025 looking healthier than it has in many years,” he notes.
The rebound comes on the back of the aggressive interest rate hiking cycle, which started in November 2021 and forced many to rent instead of buy. At the same time, limited new housing stock was added to the market, which meant dwindling supply.
Van Rooyen points out that the rental growth recovery comes at a time when consumer price inflation has dipped to multiyear lows. In fact, landlords have started seeing real, after-inflation rental growth since mid-2024, for the first time in several years (see graph).
In provincial performance, Limpopo and the Western Cape lead the pack with double-digit year-on-year rental growth of 11.1% and 10.1% in the fourth quarter, followed by North West at 7.2%. Mpumalanga (0.2%), the Northern Cape (2.6%) and Gauteng (3.4%) recorded the lowest growth.
Van Rooyen believes the outperformance of Limpopo, the Western Cape and North West is mainly due to supply and demand issues. That’s particularly true for the Western Cape, where surging semigration has caused a shortage of rental stock.
Unsurprisingly, the Western Cape is now the most expensive province in which to rent a residential property, at an average of R11,141 a month. That’s 64% more than a property of similar size and quality can demand in North West, South Africa’s cheapest province at an average of R6,798 a month (see graph).
Data from TPN Credit Bureau confirms that rising tenant demand has led to a shrinking pool of properties to let — not only in the Western Cape but across the country.
TPN’s national residential vacancy rate is down to 5.07% in the third quarter, from a peak of about 13% in early 2021. It’s the lowest rate since TPN’s survey began in 2016.
The quarterly Rode Report shows a similar trend of a declining number of rental properties standing empty, though its sample only covers flats (sectional-title properties).
According to Rode’s figures, the Western Cape town of George has the lowest vacancy rate in the country at only 1.2%, followed by Cape Town and Stellenbosch, both at 2.4%.
Durban has the highest flat vacancy rate at 10.3%, followed by Joburg at 6.9%, East London at 6%, Bloemfontein at 5.9%, Pretoria at 4.6% and Gqeberha at 3.6%.
Figures from home loan lenders suggest that investors are already returning to the buy-to-let market to cash in on lower vacancies and higher rentals.
Mortgage originator ooba says buy-to-let sales have surged to a record high in the fourth quarter. By December, 15.1% of all mortgage applications came from investment buyers, the highest level on record (see graph).
Ooba CEO Rhys Dyer says the increase in buy-to-let investment activity has been driven by Western Cape buyers, who account for nearly 40% of all mortgage applications processed by the group in the fourth quarter.
He believes the potential for more rate cuts this year will support a further sales recovery, both of primary homes and buy-to-let properties.
It appears that residential property prices are also finally on the rise. FNB’s house price index accelerated to 1.2% year on year in January, up from an average 0.8% recorded for 2024 as a whole (see graph). January’s increase marks the highest monthly growth rate since June 2023.
FNB senior economist Siphamandla Mkhwanazi confirms that the bank has seen a notable uptick in buy-to-let sales “on the back of improved confidence in property as an investment class”. He says investors are clearly anticipating better rental yields and sustained tenant demand.
“If wage growth continues to outpace inflation and interest rates decline further, housing demand — both for ownership and rental purposes — should strengthen.’’ He expects average house price growth to climb towards 1.7% in 2025, with a gradual acceleration to 3% or more by 2026.
Investors are no doubt wondering how much steam is left in the rental market, especially in the Western Cape, which some believe may be heading for a correction.
TPN director Waldo Marcus says while the province’s outperformance on the back of high demand and limited supply is positive for property investors, affordability issues are likely to come increasingly into play as more tenants are priced out of the market. That could place a lid on rental growth, he says.
Kobus Lamprecht, chief economist at Rode & Associates Publications & Media, shares this view. He says given already elevated levels in the Western Cape, rental growth in the province is likely to slow this year — especially if the department of tourism introduces proposed new regulations to force Airbnb owners and similar short-stay platforms to comply with more stringent registration and taxation requirements.
He says that could result in a rush of short-term tourist property lets being placed back on the long-term market, especially in Cape Town, which could ultimately result in higher vacancies and lower rentals.
Van Rooyen has a slightly more bullish view, saying the province has far fewer defaulting tenants than the rest of the country, which suggests there’s still room for rental growth.
PayProp figures show that only 13.2% of Western Cape tenants didn’t pay rent in full or on time in the fourth quarter, compared with a 17.1% national average.
“Tenants appear to be coping well with the Western Cape’s high rents. Affordability metrics may not be under the same pressure as elsewhere in South Africa,” he says.
The residential rental market has gone into 2025 looking healthier than it has in many years
— André van Rooyen
Besides, Van Rooyen believes a potentially stronger economy and further rate cuts will underpin continued rental growth in the Western Cape and the rest of the country.
While it’s true that cheaper debt funding costs encourage more people to buy instead of rent, lower rates also tend to support rental growth. Lower rates leave more money in tenants’ pockets via savings on other debt repayments, ultimately boosting their ability to absorb rental increases.
But where will new entrants to the buy-to-let market find the best returns?
Jonathan Kohler, CEO of Landsdowne Property Group, one of the country’s largest residential property managers, tells the FM that investors will now find significantly more value for money in Joburg than in Cape Town.
Prices in the city have hardly moved over the past decade, he says. That means initial rental yield (annual rental income expressed as a percentage of market value) tends to be slightly higher in Joburg than in Cape Town, despite the latter outpacing Joburg in rental demand and growth in recent years.
Kohler cites an example of a 51m² one-bedroom flat sold in Paulshof, Joburg, last month for R690,000, which fetches a monthly rental of R7,500. After accounting for levies and rates of R1,737 a month, the landlord’s net yield comes to just more than 10%.
A flat of similar size and quality in Landsdowne’s Somerset West portfolio recently sold for R1.1m and rents for R9,800 a month. Levies and rates are lower than the Joburg example at R1,224 a month, leaving the landlord with a net rental yield of 9.36%.
However, Kohler notes that investors need to consider total return prospects. The latter depends on what sort of property price growth they will achieve in Cape Town vs Joburg.
Kohler estimates that values of one-bedroom flats in the broader Cape Town area have risen by an average 6% a year in the past five to 10 years vs 0% in Joburg.
The million-rand question is whether the trend will continue.
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