What’s happening in the market

● The improved mood in the country following the appointment of President Cyril Ramaphosa is yet to translate into meaningful economic growth, says Samuel Seeff, chairman of the Seeff Property Group.

The property market closely tracks the economy, and for a good property market you need a good economy, which is still lacking, he says.

While the expectation is that the property market will again pick up and some Johannesburg and Pretoria areas are beginning to see better sales conditions, overall the market remains favourable for buyers and rentals are under pressure.

Rental investments always carry the risk of being dependent on the economy in terms of the rental rates. So when consumers face financial difficulties they battle to pay high rental rates, something that is evident in a market such as Cape Town, where landlord rental expectations are often too high, Seeff says.

Imtiaz Adam, a Seeff agent in Cape Town’s southern suburbs, says the sectional-title rental market has softened notably over the past few months and average rental rates have declined by up to 36%.

While many landlords have taken note of the market deterioration and have adjusted their rentals downwards to avoid rising vacancies, many are still unaware of the market shift.

“We are still finding landlords coming to us from other agencies hoping that we can find them a tenant willing to pay high rental rates. Unfortunately, tenants are facing financial pressure due to rising costs and the overall economic decline,” Adam says.

While there is some expectation that the property market will start recovering, the lag effect of the economic decline is only now being felt in the rental market. As a consequence, rental rates that tenants are able to pay have declined notably.

Adam cites an example of a furnished two-bedroom apartment in Claremont which was rented out for

R15 000 a month last year but can now only achieve R11 000 to R12 000 a month.

Even the lower end of the market is feeling the decline, he adds. In Plumstead, for example, a onebedroom apartment could be rented out at R7 500 a month last year but will now only achieve R6 500 a month.

Smart landlords have reduced rentals considerably to accommodate the market shift and tenants. At the same time, rather than sitting with empty properties, they are still earning a return on their investment, he says.

Property commentator Erwin Rode, who heads Rode and Associates, a valuation, property research and town-planning firm, says: “If you have to finance the purchase of a house or flat through a mortgage bond, the expected returns when you buy to let, or notional returns when occupying it as an owner, are very low if not negative. This is known as negative gearing.”

Rode says capital growth over the next few years is expected to be low because house prices are still very high in real terms, after deducting expected inflation, so there is lots of scope for prices to decline in real terms, especially in light of the poor prognosis for economic growth. Furthermore, it is inevitable that interest rates will have to rise soon.

When you can buy a house for cash, there is of course no negative gearing, in which case you could generally expect a total return in the high single digits. Total return is initial yield plus capital appreciation.

Thus, renting a house will be a smart choice for capital-poor households, provided they save the difference between their rent and what their instalment would have been if they had bought a similar house.

The only argument in favour of capital-poor households buying rather than letting during this phase of the property cycle is it forces them to save, even though the return on their saving is abysmal, Rode says.

Rental rates that tenants are able to pay have declined notably