CAN THE CAPE HOUSING RALLY LAST?
Buy-to-let investors still looking to share in the spoils of the Mother City’s real estate boom need to be careful what and where they buy
It’s no secret that, unlike housing markets in other metros, Cape Town has largely shrugged off the effects of higher interest rates. In the rest of South Africa sales volumes and price growth have plummeted over the past two years, as inevitably happens in a rising rate cycle. But not in the Mother City. Cape Town’s residential real estate market has been buoyed by the post-Covid wave of semigration, widespread adoption of work-from-anywhere policies, the rise of digital nomads and a strong rebound in international tourists and investors.
That’s fuelled a surge of investment buying, especially in the city centre, the city bowl, Sea Point and other Atlantic seaboard areas where there’s big demand for both short-term Airbnb stays and long-term rentals.
Developers have responded by pouring millions into new sectional title projects, many of which are “aparthotels” or mixed-use buildings aimed at buy-to-let investors.
These developments offer studio, one- and two-bedroom apartments, designer furniture packages and amenities such as gyms, co-working spaces, 24-hour concierge services, rooftop pools, bars, cafés and delis.
Often there’s a dedicated management team that runs a rental pool on behalf of owners. Some developers and aparthotel operators have added generous rental guarantees to the mix — up to 10% a year (gross).
These include recently completed projects such as The Tokyo and The Carrington in Loop Street in the CBD, The Sage on Sea Point’s Main Street and The Rockefeller, an 18-storey building with 395 hotel-style apartments on Christiaan Barnard Street on the Foreshore.
Prices tend to vary between R1.5m for studios of 20m²-30m² and about R3m for one- or two-bedroom units of 50m²-60m². That translates into a rate of roughly R50,000/m²-R60,000/m². It’s a new high for the city centre, comfortably ahead of the average R34,000/m² recorded pre-pandemic, in 2019, by the Cape Town Central City Improvement District (CCID).
To date, most developments have been selling well, with plenty of rental demand to fill new stock. In fact, CCID figures show that in 2022 rentals for studios and one-bedroom apartments surged by 28%, while two-bedroom units were up a hefty 39%. That pushed monthly rentals for studios to about R12,000 and those for one- and two-bedroom units to an average R15,000 and R25,000 respectively.
Though figures for 2023 aren’t yet available, CCID chair Rob Kane says rentals climbed further last year as the city continued to position itself as a vibrant live, work, play and shopping hub. More restaurants are staying open at night, while retailers, including all major grocers, are also back.
Kane says demand for inner-city rentals (long and short stays) has been underpinned by a return of office workers and international travellers. Well-maintained infrastructure and reliable municipal service delivery support the trend. “The city works, and it’s a cool place to be,” he says.
That said, there is concern that Cape Town could be heading for an oversupply of new sectional title stock and that this will place downward pressure on prices and rentals.
In the City Centre alone, at least 2,500 new residential units have been added to the market since mid-2021, bringing the total estimated tally to more than 8,000. That’s up from about 3,500 in 2014, according to CCID data.
Large developments that have recently been completed include the first of six towers of Harbour Arch, which brought 432 apartments to the Foreshore, and One Thibault Square, a redevelopment of the old BP Centre near St George’s Mall. The latter, now
Cape Town’s tallest residential building, has 270 studio and one-bedroom rental apartments.
At least another 1,000 residential units are expected to come on stream over 12-18 months. Developments under construction include The Rubik, The Barracks and 84 Harrington, which will be the world’s tallest building to be constructed from hempcrete blocks.
There’s also The Fynbos, Africa’s first biophilic building. The exterior of the 24storey development in Upper Bree
Street, comprising 689 apartments, will be draped in a 1,200m² vertical garden made up of 50 species of indigenous shrubs and trees.
The question for buy-to-let investors who are still looking to get a foothold in the Cape Town property market is whether they’ve missed the boat.
Kane doesn’t believe it’s too late to invest in the city centre, but concedes that one has to be more discerning these days. “Buyers need to do their homework. Some blocks have waiting lists of tenants. However, not all developments are going to be successful,” he says. “It all comes down to the quality of an individual development and location.”
Kane refers to high-demand locations as those that aren’t too noisy and offer easy access to cafés, bars, restaurants, art galleries and shops. Bree, Long, Loop and Church streets have become particularly popular.
Jonathan Liebmann, co-founder of aparthotel network BlackBrick, which last year launched its second development in Cape Town, has a similar view. He says that while there’s still money to be made in the Mother City, buy-to-let investors need to target the right neighbourhood and look at the track record of the brand backing the development they consider buying.
“There are a lot of generic residential [units] coming to the market that don’t have an established brand behind them to manage rentals. Some of these developments may get into trouble as more new stock arrives,” he tells the FM.
Liebmann, who was also behind the regeneration of the Maboneng district in downtown Joburg, has chosen Cape Town’s city bowl suburb of Gardens for BlackBrick’s latest venture.
Since the project was launched offplan in March, sales of just more than R100m have been concluded, with only 18 of a total 93 one- and two-bedroom units still available. Prices range from R1.895m (37m²) to R2.595m (52m²), translating into about R50,000/m².
Liebmann expects investors to earn gross annual rental yields of 10%-11.5%. They also get 10 free nights within the BlackBrick network each year.
Liebmann says that though Gardens has been somewhat neglected, the area along Roodehek Street has the potential to become the next Kloof Street. Lots of investment is starting to flow into retail and commercial developments that are expected to lure more cafés, wineries and artisanal bakeries to the suburb. Plans are also in motion to establish a central improvement district to help restore Gardens to its former glory. “So residential values can easily go to R60,000/m² within the next two to three years,” Liebmann says.
Marc Wachsberger, CEO of The Capital Hotels, Apartments & Resorts, says short-stay rentals and occupancies have gone “crazy” in Cape Town, and that this has supported property values.
However, Wachsberger believes investment buyer exuberance has been driven largely by foreigners who are cashing in on the weak rand. He says the problem is that international investors tend to flee quickly when things go wrong, which makes Cape Town’s property market more volatile than that of other cities.
Wachsberger refers to 2017/2018, when the city’s five-year property boom came crashing down on the back of the water crisis and Nenegate (when former president Jacob Zuma replaced his finance minister twice within one week).
Cape Town property values tend to under- or overcorrect, “like a yo-yo”, he says. “But it’s difficult to predict in what direction the market will move.”
Wachsberger says further upside may well be supported by the expected easing of interest rates later this year. Still, he’s not convinced that now is a good time to enter the Mother City, because of the many uncertainties regarding this year’s elections and rising geopolitical tension.
He says: “Cape Town property prices have run hot; there is a risk that foreigners might decide to flee and that everything might fall off a cliff again.”
For investors who have bought units with guaranteed rentals in place, Wachsberger says the question is: “If times get tough, will developers honour their commitments, or will they walk away?”