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Monday Jan 28, 2013

Investment property languishes despite rising rental demand

"Everyone needs somewhere to live and, if possible, it's best to buy a home. This has enabled the residential property market to keep moving.

"However, when it comes to second properties or investment properties, the market has taken strain over the past four years as people tighten their belts," says Jan le Roux, the chief executive of Leapfrog Property Group.

Recent research by John Loos, FNB's household and consumer sector strategist, and Michelle Dickens, the managing director of TPN, indicate that the investment segment of the market may be improving. This is because people want to avoid the costs of owning property.

The latest FNB Property Barometer predicts a further downward correction in house prices, which may boost the investment share of the market.

According t o economist Mike Schüssler, more than 9.2 million households rent property, and 1.6 million are in formal structures. He estimates that around 700 000 households rent properties in the formal suburban market, based on the first half of 2012. Add to this figure the growing shortage of student accommodation and it is obvious that the rental market is sizeable, says Le Roux.

"In the medium and long term, investors will also benefit from capital growth on their properties, as prices will rise again with the need for housing growing all the time," he says.

Dickens says the income stream a property generates relative to the price paid should really be the focus when deciding to buy a property to let out.

"The number to focus on would arguably be the initial yield, the income expected to be earned over the next year divided by the property value," she says. "It is this projected income stream that has come under pressure in recent years."

According to research by PayProp, properties with monthly rentals below R3 000 or above R12 000 carry the highest risk of non-payment.

"Tenants paying less than R3 000 a month in rent are hampered by inflationary pressures, whereas interest rates appear to thwart the more indebted tenants of the aboveR12 000 category," Dickens says.

However, TPN data show that 81 percent of tenants were in good standing in the first quarter of last year, compared with 71 percent in 2009.

PayProp's rental index indicates that the average national rental in June last year was R5 178 a month, slightly up from R5 172 in February 2012.

Current rental increases do not exceed 5 percent a year as all tenants are struggling with the increasing costs of food, fuel and electricity.

"Loos says the average gross yield now stands at 8.58 percent (compared with) 6.655 percent in 2006. Whether this yield is enough to entice investors... is debatable as these are gross yields, meaning that the landlord still has to subtract the general costs associated with a rental property," Dickens says.

She says the sectional title segment is proving attractive to investors and Loos agrees that small properties with fewer bedrooms are showing higher yields than larger homes.

Despite Leapfrog seeing more interest from prospective tenants and buy-to-let investors, Le Roux says he agrees with Loos and Dickens that "2013 will most likely be more of the same as 2012, because similar economic conditions prevail".

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