Johannesburg - Despite the popular South African mindset that property is a safe haven investment, the buy-to-let market received little interest in the last two quarters, said First National Bank's (FNB's) home loans department on Thursday.
Real estate agents polled by FNB said the interest in the buy-to-let market had dropped off since last year.
From a previous quarter's 13% of total buying, agents surveyed estimated that buy-to-let acquisitions dropped to 9% of total buying in the first quarter - the lowest percentage on record since the survey started in 2004.
Erwin Rode of Rode & Associates said that at current prices, the net income from renting out a house offers a return of only 4%. "That's very low; house prices are in reality too high."
According to Rode, the market values at which the properties were bought were too costly in comparison with what households are able to spend on rent. "Vacancies are extremely high."
"The problem is the culture in South Africa that you can't make a mistake by investing in property," he said. "There's still a risk, especially if you buy in a cycle when prices are overvalued, as in 2004."
FNB home loans strategist John Loos said households were still experiencing high debt levels which placed pressure on the rentals landlords expectations.
Rode agreed: "The same factors that put pressure on house prices are depressing people's ability to pay rent."
Bond top-up is a problem
The SA Reserve Bank Quarterly Bulletin showed household finances are still in a state of despair. Households' debt to disposable income ratio rose again from 78.4% to 79.8% in the fourth quarter of 2009.
Funding the difference between rental income and bond repayments also discouraged would-be investors, FNB said in its report.
"Agents are indicating that in most cases such a top-up would be required, with survey respondents estimating that on average only 65% of a bond is covered by rental income," said FNB.
However, Raal Nordin, CEO of residential letting firm Only Rentals, said buy-to-let investors aren't so much concerned with the income yields, but rather with capital growth prospects.
"People are still afraid, what with the economy and Malema, that they won't receive decent capital returns," he said
According to Nordin, a property priced up to R6 000 per month can find a tenant within 72 hours.
"We're getting very good rentals for properties, but the market is short on quality stock."
Low yields in the near term on residential property will constrain buy-to-let acquisitions as well as secondary house buying, like holiday homes.
"The current residential market recovery [will be] predominantly driven by primary residential buying," said FNB report.
- Fin24.com