Rental demand surges
CBD income yields still in excess of 10%
SOUTH AFRICA’S inner cities remain a profitable place for buy-to-let investors to be, as demand for affordable rental accommodation continues to outstrip supply. Property management group Trafalgar’s City Report 2008 (released last week) shows a whopping 105 000 new residential units are required each year to meet the growing demand for rental accommodation in SA.
The report shows an estimated 20% of SA households live in rental accommodation, with the bulk of those being among poor and low-income earners. Black households dominate the local rental market, followed by the coloured population.
The report shows that close to 80% of the demand for all rental accommodation comes from families who earn less than R7 500/ month. If you assume households would generally spend about one-third of their income on accommodation costs, the bulk of residential tenants in SA can’t afford to spend more than R2 250/month on rent.
Trafalgar MD Andrew Schaefer says the provision of rental housing for lower-income earners caught between Government-subsidised homes and having the capital to buy their own home is becoming a major challenge.
However, SA’s inner cities are becoming increasingly desirable places to live, as both the private and public sectors continue to invest millions in upgrading inner city buildings, public amenities and other infrastructure.
In Johannesburg’s inner city alone it’s estimated there are currently around 35 000 low-income residential units. That number is expected to increase to 85 000 by 2014.
Schaefer says Johannesburg inner city investors can earn gross income yields of 10% to 12% on rental apartments, provided rentals don’t exceed R4 000/month. That compares favourably with rental yields of around 5% to 7% that investors generally have to be satisfied with in Johannesburg’s leafy northern suburbs.
Until recently, Trafalgar was signing annual lease renewals at rental increases of 12% to 15% in some inner city buildings. But Schaefer says rental growth in Johannesburg’s inner city is likely to revert back to an average 10%/year as more stock is brought to the market.
A major incentive for investors is that Jo’burg’s inner city tenant population is stabilising, with a noticeably lower turnover of tenants. Schaefer says tenants are no longer moving out after their 12-month lease expires, which creates steadier and predictable income streams for buy-to-let investors.
The report also highlights that investors who have braved previously no-go areas such as Hillbrow and Berea have reaped big capital growth rewards in recent years. The report shows in both suburbs apartment prices rose from an average R50 000 in 2001 to R112 000 and R146 000 respectively in July this year.
Rental demand exceeds 100 000 units/annum. Andrew Schaefer