Rental de­mand surges

CBD in­come yields still in ex­cess of 10%

Finweek English Edition - - Property - JOAN MULLER joanm@fin­

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

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