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Property investments and residential yields

property-investment-igrowTPN (Tenant Profile Network) surveys point to growing supply shortages in the rental market and acceleration in rental inflation, leading to yields increasing in the second and third quarters of 2013. The calculations show rental inflation at 6.6% year-on-year for the third quarter of 2013, marginally ahead of FNB’s average house price growth for Q2 and Q3.

TPN and FNB data for the first quarter of 2013 estimates the revised National Gross Average Yield on residential property at 8.87%, and by the third quarter it had moved to 9.18%. These are gross yields, and operating costs were not factored in.

With further interest rate hikes, Loos notes that we could perhaps see rental inflation start to outpace house price growth more noticeably, with renting becoming a viable option due to lack of affordability and would-be buyers not being able to get a home loan.

The good news is that tenants in general have become better payers, with TPN figures showing Tenants in Good Standing having improved from 71% in early 2009 to 86% in the second and third quarters of 2013. This slipped slightly to 85% in Q4, but according to the latest survey it’s noteworthy that 72% of tenants remained in the Paid on Time category.

For rentals below R3 000 per month 80% of tenants were in good standing in Q4 (77% in Q3) while in the R3 000 to R7 000 band, the figure was 88% in Q3 dropping to 87% in Q4.

Between R12 000 and R25 000 per month 83% were in good standing in Q3 up to 85% in Q4; the percentage stays at 88 percent in the R7 000 to R12 000 category; while the R25 000 plus band showed improvement in Q4, moving up to 81% from 77%.

The Q4 survey notes that 61% of tenants rent between R3 000 and R7 000, where landlords achieve better than average rental collections.

Looking ahead and how to buy investment property

Stock shortages in the market indicate further rental inflation increases for 2014.

Investors who buy distressed properties and below market value properties can benefit from excellent returns and IGrow will show you how to achieve a rental income as high as 70% to 100% of your bond repayment.

Loos says we may see some further mild increases in gross yields in the near term as rental inflation rises. However, the next significant jump in residential yields will most likely occur when interest rates rise again, boosting rental inflation while subduing house price growth.

For those intent on how to build a property investment portfolio, Loos says the “sweet spot” from a landlord risk/yield point of view seems to be in the Lower-Middle-to-Middle Income area value bands where most rentals are between R3 000 and R12 000 per month.

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