Buy-to-let investors earned an average net yield of 5.05 percent in 2015, and it is expected that net yields will not exceed 5.5 percent this year, according to PayProp’s annual report for 2015.
PayProp provides an automated payment system for rented residential properties managed by estate agencies, and therefore the findings may be more indicative of trends in the middle-income buy-to-let market than the rental market overall. Only eight percent of the tenants included in the survey paid rent of R2 500 a month or less. Nearly a third paid between R2 500 and R5 000, while slightly less than 32 percent paid between R5 001 and R7 500 a month.
PayProp estimates that 38 percent of formal rented dwellings are managed by some 3 000 estate agencies and that about 900 agencies use PayProp.
The national average gross yield was 7.16 percent in 2015, almost unchanged from 7.38 percent in 2014, according to the report. To calculate the gross yield, PayProp compares the national average rental income of the 75 000 properties that use PayProp with national average property values (based on data from Absa Home Loans).
The net yield, which measures profit (rather than income) in relation to asset value, is the gross yield after operating expenses (based on payments processed by PayProp).
When the average net yield of 5.05 percent is seen in the context of an average inflation rate of 5.2 percent for 2015, it seems that a buy-to-let investment was a bad idea.
However, the yield is your return if you bought a property for the current average price and generated an income at the current average national rental, Louw Liebenberg, the chief executive of PayProp, says. It ignores that, historically, rentals have increased at between six and eight percent a year, whereas the purchase price is fixed, he says.
In addition, the property increases in value every year.
Another problem with a simple comparison between a buy-to-let investment and other investments is that most buy-to-let investments are heavily leveraged (the purchase is financed with debt), which generally improves the return. However, if property values fall, or if you can’t repay your loan because your tenants default on the rental, leveraging increases the risk that you will lose money.
Rental growth
Average rental growth in 2015 was 6.12 percent compared with 7.25 percent in 2014, PayProp says. The average national monthly rental was R6 616 in 2015 (R6 207 in 2014).
The Northern Cape was the most expensive province in which to rent, with an average rental of R7 438 a month at the end of the 2015, PayProp says. It was followed by the Western Cape (R7 161), Gauteng (R7 061), KwaZulu-Natal (R6 967), Mpumalanga (R6 582), Limpopo (R6 496), the Eastern Cape (R5 164), the Free State (R5 024) and North West (R4 703).
PayProp says the Northern Cape was the only province to produce double-digit average rental growth (12.3 percent) in 2015. The province with the next-highest average growth was the Western Cape, with 9.7 percent. It was followed by KwaZulu-Natal (8.1 percent), Gauteng (7.63 percent), the Free State (5.55 percent), the Eastern Cape (3.3 percent) and North West (1.95 percent). On average, rentals declined in Limpopo (minus 0.48 percent) and Mpumalanga (minus 1.58 percent) in 2015.
Despite rentals declining in two quarters in 2015, Limpopo had the highest average net yield of 8.58 percent in 2015, because property values in the province were only 85 percent of the national average, PayProp says. Property values in Mpumalanga were 84 percent of the national average, which explained the yield of 6.47 percent, despite the decline, on average, in rentals in every quarter of 2015.
In the Northern Cape, the rapid increase in property values (96 percent of the national average in 2015) has not kept pace with rental growth, which is why the net yield was lower than one might expect (it was 7.04 percent), PayProp says.
“Ironically, high rentals and yields may be what sparked investor interest in the first place, driving up high property values and eroding landlord returns,” PayProp says.
Impact of commodity slump
Rental growth in the Northern Cape has been driven by mining companies paying above-market rents to lease properties for their staff. PayProp says it is concerned that if the decline in commodity prices results in industries leaving the area, the growth in the rental market will not be sustainable.
PayProp says its concern about the Northern Cape is corroborated by what happened in Mpumalanga and Limpopo over the past three years. At the beginning of 2012, these two provinces were the most expensive in which to rent, with average monthly rentals of R6 117 (Mpumalanga) and R5 891 (Limpopo). This was a result of a short-term burst in economic activity in many small towns – for example, the construction of the Medupi power station in Limpopo. As development scaled back, local capacity could not prop up rental growth.
PayProp’s view was echoed by Andrew Schaefer, the managing director of property management company Trafalgar, who says the property markets of mining towns around the world have gone from boom to bust in the past year as a result of the slump in commodity prices, with most now having a serious oversupply of real estate that is driving down both rentals and purchase prices.
In a statement last month, Schaefer said the weak currency has softened the effect somewhat by boosting the rand value of gold and other precious metals.
“The high local demand for coal to keep up electricity production at South Africa’s old and new power stations has also helped, but new mining ventures, exploration projects and infrastructure builds have been put on hold in many parts of the North West, Limpopo and Mpumalanga.
“Existing mines and processing facilities have also scaled back operations, and many towns that used to have waiting lists of incoming mine employees and contractors clamouring for accommodation now have large numbers of empty rental units – and declining rentals,” he says.
PayProp says the average net yields in the other provinces were: KwaZulu-Natal, 5.43 percent; North West, 5.1 percent; Eastern Cape, 4.7 percent; Gauteng, 4.52 percent; Free State, 4.5 percent; Western Cape, 4.28 percent.
PayProp says it expects rents to increase by an average of six to seven percent this year. Landlords can expect net yields to remain at five to 5.5 percent, mostly because rental growth will slightly outstrip the growth in property prices.