Residential rental revival

Slowdown in economic growth, combined with an interest rate hiking cycle, has begun to exert downward pressure on the country’s house price growth, which is expected to average around 3% in 2017, down from 5% in 2016, according to FNB.  

But slower house price inflation that underperforms rental inflation is exactly what is needed in order to lift rental yields, says John Loos, FNB’s household and property sector strategist.  

The average rental escalation showed a moderate increase to 4.25% by the third quarter of 2016, up from a low of 2.8% year-on-year in the final quarter of 2015, according to FNB-TPN Average Residential Yield data (see graph below). 

There is an expectation that 2017 will be a year in which average gross rental yields could rise more noticeably from 9.1% in 2016 to 9.3% by the end of 2017, boosting demand for rental property as well as creating an attractive buy-to-let buying opportunity.   

“The challenging economic environment of the last few years has boosted the demand for rentals,” Seeff chairman, Samuel Seeff, tells finweek.   

Rising property prices affecting affordability and more stringent vetting criteria for home loans have further aided the rental market, he says, adding that rates have climbed at above inflation rates, so that in many areas there are rental stock shortages.  

Apartments in prime urban hubs like Sandton and Cape Town’s Atlantic Seaboard, while often expensive to purchase (thus generating lower rental yields), are hot investments and high on the rental demand list.   

As it is situated in the hub of the country’s economic capital, gross rental yields of up to 8% in Sandton are currently possible, especially in rental stock at lower price levels, says Charles Vining, managing director of Seeff Sandton.  

“A bachelor or studio apartment in Sandton central will cost around R7 500/month. A one-bedroom apartment can be picked up for the same price or even less in suburbs like Bryanston or Houghton.”    

Two-bedroom, two-bathroom garden units in secure complexes renting for between R8 500 and R10 500 a month can be found in suburbs like Bryanston and Houghton, although the same units will cost around R15 000 a month in Hyde Park or Sandhurst, he adds.  

Family homes with gardens and good security can fetch anything from R20 000 a month in Houghton to R25 000 a month in Hyde Park and R30 000 a month in Sandhurst and Bryanston, says Vining.  

The rental price range most in demand along the Atlantic Seaboard and City Bowl is between R20 000 and R30 000 a month, for two- to three-bedroom units, says Dinis Martins, chief operating officer of Seeff Atlantic Seaboard & City Bowl. 

But he says there is a surge in “next level” rentals – R40 000 to R55 000 a month – such as those paid for large premium security complexes. 

Gross yields of between 6% and 7% are achievable in the active, buoyant market of the Atlantic Seaboard and Cape Town’s City Bowl, says Martins. He expects the same to hold true in 2017. 

This article originally appeared in the 26 January edition of finweek. Buy and download the magazine here.