Experts recommend investment properties to be small

Property investors shopping for buy-to-let apartments this Christmas would do well to heed the advice of experts: buy smaller flats in the best area you can afford, but tread lightly because the market has not yet recovered.

This week, Soula Proxenos, managing partner of International Housing Solutions said small apartments let for up to R2 400 a month were being snapped up "like hot cakes" in South Africa's main cities.

"Bigger family units with two bedrooms or more at rentals from R3 500 are testing affordability."

Proxenos said there was a supply and demand mismatch, with consumer interest limited above the R3 000 a month mark.

She said overall the demand for housing in the affordable property sector was "huge", but lack of access to finance was making people rent rather than buy.

"There are clear bands of affordability in terms of monthly rental or bond repayment levels. There are no current vacancies for the small and cheaper flats, but the larger ones priced from R2 800 to R3 200 are not let so fast."

She said there was significant buyer interest in the inner city of Joburg.

"Unit prices average R350 000 downtown, but access to end-user finance is still a challenge for this market. Affordability becomes a problem at over R450 000 and our research shows sales above R500 000 are slow."

Proxenos said while there was a "massive opportunity" in demand for accommodation and the lack of new stock was driving up prices.

But end-user finance was difficult, with banks requiring big deposits from households that conventionally had little or no savings.

Carol Reynolds, Pam Golding Properties area manager for Durban North agreed. "Given the lending climate, the tenant pool has certainly grown as would-be buyers are struggling to get bonds and have to rent instead of buy."

But the reality is that rental returns are in general never high enough to service bonds, so buy-to-let investors need to ensure they have sizeable deposits, at least 20 percent, to gear their investments properly.

"The best buy-to-let investments are one-bedroom flats. They are affordable and the returns are higher. My best advice is to buy a one-bedroom apartment in a good block rather than a larger apartment in a less well-run complex."

Keith Wakefield, CEO of Wakefields Estate Agents, concurred. "The adage location, location, location is as applicable to the buy-to-let market as any other.

"There is always demand for rental properties in good locations and one tends to find a better quality of tenant for these properties.

"Remember, too, that smaller is better, so look to buy bachelor and one-bedroom flats that are in greater demand simply because the pool of potential tenants is bigger."

Pat Acutt, who chairs Acutts, said about 15 percent of buyers are investors. But "caution is the word. Wherever you buy, make sure the body corporate trustees have water-tight management policies to deal swiftly and appropriately with unruly tenants".

Property Guide (Sunday Tribune)

Posted at 09:13AM Dec 14, 2009 by Editor in Residential  |