Buy-to-let remains down and out

Johannesburg – Although rental yields look set to increase slightly, the down and out buy-to-let market is not expected to show capital growth any time soon, said FNB.

FNB's home loans division on Wednesday reported buy-to-let buying is still stuck in the doldrums, compared to overall buying trends.

"The reason for this is that the recent house price recovery is led by primary residential buying," said FNB property expert John Loos. According to him, households are still under significant financial pressure, with little leeway for "non-essentials".

As a percentage of total buying, buy-to-let sales accounted for 7% of all transactions in the second quarter, compared to the previous quarter's 9%.

FNB last week reported that primary house price growth continued on its march towards real returns, with an annual increase to 10.1% in April, from 8.1% in March. The average house price in the index was R790 087.

According to the report, many would-be investors in buy-to-let property are interested in capital growth rather than mere rental income. Until recently, this has not been attractive enough to lure investors to the market.

These investors are taking their cue from the recent dismal history of investment property performance. Agents estimate 47% of investment properties were sold at their previous purchase price in the last couple of years.

Easing of oversupply brings hope

Loos said lower interest rates also contributed to the flaccid buy-to-let market, as they made debt more affordable and convinced some households to take the plunge to become home owners.

However, the report said the low buy-to-let numbers will be the cure for the buy-to-let market. "The glut of rentals has been whittled away by the low levels of buying," said Loos. "This slowdown in supply growth will result in something of an improvement in rentals."

The report said data from estate agents suggest an increasing number of properties achieved rentals that cover a 100% bond repayment.

The average yield for the second quarter was 7.9%, compared to 5.6% and 7.4% for the fourth and first quarters respectively.

"Estimated yields remain far higher on the lower end of the market, but at a dismal low of 5.2% on homes priced above R1.5m," the report said.

"For potential buy-to-let investors, we don't believe that now is the time to expect rapid capital growth on properties in general," said Loos.

 - Fin24.com