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Johannesburg - Buy-to-let investors who were hoping to pass on double-digit rental increases to tenants this year are in for a nasty surprise.
Industry players told Fin24.com that the recession was forcing tenants to shop around for better deals before they renewed a lease. That, coupled with a lingering oversupply of properties to let, had placed a firm lid on rental growth, they said.
In fact, rentals have fallen 15% in many areas across the major cities, said Raal Nordin, CEO of residential letting firm Only Rentals.
He cited a typical example of a two-bedroom townhouse in Centurion that fetched a monthly rental of R4 400 earlier this year. When the lease expired two months ago, there were no takers at that price. The unit was re-let last week at R3 900/month.
Nordin said that in Sandton, a tenant who was paying R10 000/month for a luxury one-bed unit, was now moving two blocks further away where he secured a flat of similar size and quality for R7 500/month.
The bottom line was that landlords who wanted to retain tenants had no choice but to lower their asking rentals, he said.
"Landlords have become over-ambitious in their rental growth expectations," said Nordin in an interview. "Everyone thought that rental demand would boom when banks tightened their mortgage lending taps, but that hasn't materialised."
Buy-to-let investors were currently earning gross rental yields (rental income as a percentage of market value) of no more than 6%/annum.
That meant that if you owned a townhouse worth R1m, you should not expect to fetch a monthly rental of more than R5 000. Two to three years ago, rental yields of 10% to 12% were the norm, said Nordin.
Buy-to-let investors were not only being squeezed by falling rentals, but also by falling capital values. Said Nordin: "The residential market is not an attractive place for investors to be, with poor prospects for both capital and income gains."
John Lottering of property economists Rode & Associates confirmed that rental growth had fizzled out across all major cities.
There had been no magic on the flat rental front in recent months and it appeared that a marked increase in vacant properties was to blame.
"There is no doubt that rental growth has been creeping down while vacancies have been creeping up," he said.
- Fin24.com