BUY-TO-LET A RISKY BET

Buying a rental flat or two may have been the go-to investment for many South Africans with a little cash to spare 12 to 15 years ago. Back then, you typically only needed a 10% deposit to buy a property; the bank would fund the balance.

Rental yields (annual rental income as a percentage of market value) were fairly attractive, at 7%-10%, and most landlords were assured of a standard annual rental increase of 10%. Vacancies were low, so it was easy to find a new tenant if yours left. It all meant that your investment often started paying for itself in three to five years.

Not any more. Today, buy-to-let owners are lucky to get a 5% annual rental increase when leases come up for renewal. And, for the first time in more than a decade, there is an oversupply of rental stock. As a result, many landlords — most notably those in the oversaturated Cape Town market — have had to drop rentals or risk losing tenants.

The latest flat rental data from property economists Rode & Associates shows that vacancies for rental apartments across SA hit a historical high of 7% in the first quarter of 2019, up from 5.5% a year earlier and substantially ahead of the 1%-3% average of a decade ago.

Kobus Lamprecht, head of research at Rode & Associates, says the percentage of flats standing empty in Cape Town, for instance, surged

from 1.8% to 8.1% over the past 10 years (to the first quarter of 2019).

Joburg has recorded a similar, though less pronounced, increase over the same time — from 2.8% to 7%.

“This is a worrying structural adjustment in the market and bodes ill for flat rental growth prospects,” says Lamprecht.

He says rental growth has already slowed for four consecutive quarters — from an estimated 5.7% in the first quarter of 2018 to 4.5% in the first quarter of 2019.

FNB property sector strategist John Loos says the latest consumer price index (CPI) for housing and utilities underscores just how weak the housing rental market is. Loos says rental inflation decelerated from 5.39% year on year in September 2017 to 3.84% in February.

The latest figures from residential letting processor Payprop show average rentals actually fell in two of the nine provinces last year: Limpopo (-4%) and the North West (-0.09%). That compares with a monthly average of 3.9% for SA as a whole, down from 6.4% in 2017.

In fact, the North West is the cheapest province in which to rent a place, at an average R4,986 a month, against the national average of R7,610.

Despite a slowdown in rental growth in the Western Cape last year, the province’s rental market remains the most expensive, at a monthly average of R9,124, says Payprop.

Industry players blame the structural change in the rental market on the deteriorating financial position of local consumers, coupled with a strong increase in new stock.

Johette Smuts, head of data and analytics at

Payprop, says the company’s research shows that net income levels among residential tenants have stagnated, rising by only 1.56% on average last year.

“With rent and inflation increasing at higher rates, consumers are struggling to keep up,” she says.

Debt-to-income levels have simultaneously increased from 42.3% to 45.5%, which Smuts says has further eroded tenants’ ability to absorb annual rental increases.

Seeff Property Group chair Samuel Seeff says there is no doubt that consumer budgets are under growing pressure from rising living costs — most notably fuel and electricity costs — against weak income growth.

“It is becoming harder for consumers to service their debt,” he says. “It also means

It is becoming harder for consumers to service their debt. It also means they have less to spend on property Samuel Seeff