Rental property shows some life
The attractiveness of residential property as an investment appears to be gradually improving despite the depressingly poor growth in house prices in recent years.
However, John Loos, a household and consumer sector strategist at FNB, stressed this week that weak house price growth that was underperforming rental income growth "is actually what is required to improve the attractiveness of property as an investment in future through leading to a higher yield".
Michelle Dickens, the managing director of Tenant Profile Network (TPN) Credit Bureau, said that whereas the average homeowner appeared to place most emphasis on the value of their property, the income stream a property generated relative to the price paid should really be the focus with investment property.
From an investment perspective, it was arguably far better to focus on the "initial yield", which was the income expected to be earned over the next year divided by the property value, she said.
FNB and TPN have teamed up to produce the FNB-TPN residential yield dataset in the hope that it will lead to a better understanding of the performance of residential property as an investment and less "misplaced" focus on price growth alone.
Loos said that the yield decline of the boom era ended in December 2006 when the average gross initial yield bottomed out at 6.655 percent.
He said ongoing rental inflation in some form, coupled with a steady decline in house price growth, since then had led to a gradual rise in average initial yield to 8.58 percent last month, which was significantly better than the 2006 low but not yet highly attractive.
Loos emphasised that gross yields excluded landlord operating costs associated with the property to get to a net initial yield. Rode & Associates suggested as a rough estimate that 1.5 percentage points could be taken off the gross yield to estimate a net yield.
Loos said this would leave the net yield at about 7.08 percent, which would still be below the cost of finance given the 8.5 percent prime rate.
Dickens said TPN tenant payment data revealed that although tenant payment performance had improved since the 2008/09 recession, 17 percent of tenants were not in good standing in terms of their rental payments to landlords in the third quarter of this year.
"So an investor would probably be looking for a yield that compensates for the still significant risk associated with buying to let property," she said.
Dickens believed that in these tough economic times it was a lack of enthusiasm, and perhaps a lack of finance, that was driving the slow recovery in the attractiveness of residential property as an investment as indicated by slow buying of properties to let.
Loos said buy-to-let buying was estimated in the latest FNB estate agent survey at a mere 7 percent of total buying in the fourth quarter, which was a shadow of the 25 percent level recorded in "the glory years around 2004".
But Loos said this slow pace of buy-to-let buying was "just what the doctor ordered" to constrain the growth in homes available to rent.
Dickens said that with 3.6 percent year-on-year national average rental growth last month, rental inflation still outstripped the 0.5 percent year-on-year FNB house price index growth for last month, which was helping yields to continue to gradually rise.
Loos and Dickens expect "more of the same" next year, with mediocre rental inflation in a weak economy still managing to beat even weaker house price growth by a small margin and translating into a further rise in the national average gross initial yield on residential property.
Posted at 07:10AM Dec 13, 2012 by Editor in Residential |