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Thinking of buying a buy-to-let property, opt for an ‘ordinary’ home

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If you’re thinking of purchasing a buy-to-let property, choose an ‘ordinary’ home rather than a luxury one

When it comes to investing in residential buy-to-let property, “unsexy is probably the new sexy” – in other words, stick to a simple three-bedroom, full-title home or a two-bedroom cluster unit.

The wiser choice in the current economic climate may be to stay away from investing in property at all. FNB property economist John Loos says, generally speaking, while there will always be a bargain property or two to pick up, the investment market is “not wonderful” at present. And it will be a while before that changes.

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He says the current environment for property investment is “mediocre at best”. “There is no sufficient sign of meaningful structural reform in the economy yet to anticipate higher economic growth rates. It is not really an environment that is going to make the property market shoot the lights out, even with very low-interest rates.

“Yes, there was a surge in demand but that is starting to taper off. The South African Reserve Bank is hinting that the next move in interest rates will be up and that probably continues to cool the market down.” With a cooling residential market in the near term, interest rates likely to rise, albeit it gradually, and an economy that is not really growing, property investors should not expect to see strong returns any time soon.

Paul Stevens, chief executive of Just Property, agrees somewhat. Industry commentators are seeing early indications of a slowdown in the residential sales market and, in the rental sphere, there is an oversupply of vacant properties which is driving rents down.

“However, these are broad trends and there are plenty of opportunities for savvy property investors.” While there will be some cases of investors picking up stress bargains and making money, Loos believes that, generally, real property values will be correcting and coming down over the coming years.

“The ideal time to buy is at the bottom of the big cycle and the last big buying opportunity was, with hindsight, probably around 1998 when interest rates were astronomically high and property values, in real terms, relatively low. I think we are some way from there. “It is not the big buying opportunity of the late 1990s after which there was a massive property boom and many people made a few hundred percent capital growth.”

Opportunities

Loos advises those who insist on taking advantage of the low-interest rates to invest in residential property to stay away from luxury homes. “In a tough economic environment, it is all about affordability. There are people who want to live in suburban areas that they consider good but they will want more affordable homes in those areas. So, it is the non-sexy, non-luxury, under-capitalised homes that are probably going to perform best and be in demand.

“It is the very basic, primary homes that will predominantly be in demand – simple, secure, three-bedroom family-type houses and two or even three-bedroom cluster homes,” he says. Stevens adds that mixed-use developments will become increasingly sought after and valuable, especially in sprawling cities like Johannesburg and Cape Town where commuting can be time-consuming and difficult. “Homes close to transport nodes are also likely to offer exceptional returns on investment.”

Challenges

The residential buy-to-let market is, however, under pressure, particularly in the rental range below R7000 a month, he says, a pressure that will continue for “some time”. “The poor credit-worthiness of most tenants is also a major problem and not something that is going to be resolved quickly.”

Echoing this, Loos says managing tenants, vetting them, and keeping good tenants is “crucial”. “It is a challenging environment for landlords and they also need to look at the operating costs. Eskom continues to escalate its electricity tariffs well above inflation, so municipalities and other utility providers are doing something similar. You need to do your homework as municipalities differ in approach.

“If a property is located in a dysfunctional municipality, with escalating rates and tariffs well above inflation, that is probably not the place you want to get excited about… Property in well-managed municipalities probably comes at more of a premium as that is where people want to live.”

Returns

Investors should always ensure their returns align with their investment goals, Stevens says, explaining they should unpack their return on investment by asking these questions:

• What buying costs will I have to account for?

• What running costs will there be?

• What contingencies do I need to make provision for? He adds: “Property investment is a long game – not something you do for the short term. “It is difficult to conceive what the future will look like, let alone bank on it.

This is evident in the market sentiment, right now, which is starting to show reluctance – a wait-it-out approach – as the socioeconomic and political impact of the pandemic play out.” Loos says buy-to-let rental yields are still relatively low, financial times are tough and tenants are not performing well. This means this market is “not wildly attractive” at the moment.

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