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Buy-to-let investments on the up

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Experts advise buyers to look at units in new sectional title blocks

Buy-to-let property investment has begun picking up following a sluggish first half of 2019.

After a “complete halt”, Pieter Piek, head of sales at PropInvest, says a record number of investors purchased in the buy-to-let market from mid-August, with 70% buying with cash.

“There is a definite increase, with clients looking at property as a safe investment.”

There has also been a rise in the number of overseas investors, with 10% of sales to this sector. 

Those still considering this investment strategy, but hesitant to take the plunge should buy sooner rather than later to beat expected price increases.

“The banks are all getting on board, offering investors tailor-made packages to encourage property investment. We have seen interest rates of under prime in the past two months and past trends indicate the property market is turning. This will mean higher prices in the near future,” Piek says.

However, as beginner investors do not usually have capital for big deposits and transfer costs, they are advised to look into new sectional title blocks as these normally offer “cost inclusive deals” and, generally, have higher yields than free-standing houses. Sectional title properties remain popular choices for investors as they tend to require lower maintenance, he says.

“Two-bedroom, two-bathroom units are your best bet. They are big enough for the starter family and you can still get away with under R1million. This could give you a rental income of around R8500 a month, and with the right investor’s package you can get a nett yield of 10%.”

While the buy-to-let market undoubtedly offers good investment returns, it is not without its challenges. These include tenant vacancies and payment behaviour.

The national residential vacancy rate is 7.91%, according to the TPN’s Q2 Vacancy Survey. This is a decline from the Q1 rate of 8.64%, although, on a year-to-year basis, it “remains flat”.

Development of new rental stock is seeing increasing supply, which is leading to higher vacancies. Picture: Tolu Olubode

In KwaZulu-Natal, the vacancy rate increased to 7.3%, after falling to a low of 6.4% in Q1, TPN says.

The rental stock supply rating has “climbed steadily” from 38.29 three years ago to 51.15 in the previous quarter.

This, coupled with a current demand rating of 68.5, means there is still more demand than supply for rental stock in the province, the report says.

“KwaZulu-Natal still attracts good tenant demand with market strength of 58.85, meaning relative to the national market this province enjoys higher escalations of 4.5% and lower vacancies of 7.28%.”

But in terms of tenant payment behaviour, only 79.4% of KwaZulu-Natal tenants was regarded as being “in good standing” in Q2. Of this number, 64.36% paid rent on time, 4.09% paid after a grace period, and 10.95% late. Only 12.75% of the province’s tenants made partial rental payments; 7.84% did not pay at all.

For investors committed to rental property, TPM managing director Michelle Dickens says it makes sense to become more vigilant in monitoring returns coupled with being more disciplined in mitigating portfolio risks.

“The monitoring of payments and a quick response to delinquent tenant conduct should be reinforced by proactive behaviour, which is within direct control of all of us in this sector.

“Discipline and vigilance will remain the way forward for both owners and investors in the foreseeable future.”

Additional TPN data shows tenants in the R7000 to R12000 a month rental market are the best payers, with 86.93% in good standing. However, there is increasing oversupply compared to demand.

The R12000 to R25000 bracket performs well in terms of rental payment, with 84.45% of tenants in good standing, but escalations remain “severely low” at 2.9%, and vacancies remain “desperately high” at 13.92%.

Tenants who pay rent of less than R3000 a month remain the most risk-troubled category where 72.54% of tenants are in good standing. One in five tenants fall into this category, which represents a significant number of delinquencies in the property market.

The weakest area of the market is the R25000+ a month segment. Although only 1.2% of tenants can afford to live in such luxury, the good standing percentage is only 77.95%.

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