Current state of the buy-to-let market

The key to growing your wealth through buy-to-let is experiencing adequate capital growth in the value of your property while the bond repayments are being covered by your tenants.

As far as capital growth is concerned, the authoritative Rode’s report recently indicated that the housing market – which initially defied the odds during the Covid-19 pandemic – is starting to cool down. Based on data from FNB, house prices increased nationally by 4,1% year on year in May 2021. This was a slowdown from April’s 4,5% increase, and price growth failed to beat consumer inflation.

Kobus Lamprecht, Rode’s Report editor and head of research and publications at Rode & Associates, says that the decline in house price growth is due to the weak domestic economy, which have taken a further hit from restrictions to combat the third Covid-19 wave, as well as high and rising unemployment. “The prospect of rising local interest rates from 2022/23 also does not bode well for house prices over the medium term,” Lamprecht says.

In terms of rentals, Lamprecht says vacancy rates are well above the 5% average recorded in the three years – from 2017 to 2019 – that preceded the pandemic. High vacancy rates have put enormous pressure on rentals, which will almost certainly continue in the short term as tenants remain under significant financial pressure. From a 7.47% rate in the 1st quarter of 2020, the estimated national vacancy rate rose sharply to 12.91% in the 4th quarter of 2020.

TPN, a registered credit bureau, reports that the rental relief provided by residential landlords during the hard lockdown reflected in the age analysis of arrears. Rental relief was a short-term solution to assist tenants who had lost some or all of their income during a period where they were restricted from moving. When the restriction of movement was lifted in May 2020, TPN data indicates that tenant arrears shot up in value to new records. 13% of tenants in arrears are now more than 6 months behind on rent, while still in occupation of the property.

In the low end of the market, rentals below R3,000 per month remain under pressure with 65.73% of tenants in good standing. A significant 17.76% are unable to make any contribution to rental payment and occupy the “did not pay” payment category. In the more expensive segment, the category of R7,000 – R12,000 rental per month has grown to 23.3% market share, with 84.37% of tenants in good standing. Only 4.86% of tenants in this category were unable to make any monthly payments.

On a national average basis, TPN’s average rental value moved into deflation by -0.75% in the 4th quarter of 2020, with the 2 large provincial rental markets, Gauteng and the Western Cape, being the drivers of the national average deflation. The rental deflation is explained by an increasing supply of rental space relative to demand, as shown in a rising national average vacancy estimate.

For the foreseeable future, passing annual inflation-beating rental increases on to tenants is not an option, as the financial situation of tenants has deteriorated during the Covid-19 pandemic. According to data and analytics firm PayProp, rentals fell by 0.3% in November 2020 to an average of R7,800 — the first drop recorded by the company since it started tracking rental industry trends in 2012. Over a longer period, the average rent increased from R7,844 in the fourth quarter of 2019 to R7,854 in the fourth quarter of 2020 — an increase of just R10 over the year.

PayProp reports that while many consumers struggled to pay rent during the pandemic and were pushed out of the rental market, others are leaving the rental market and moving into homeownership – the Reserve Bank’s interest rate cuts during 2020 have made homeownership more affordable as monthly bond repayments are up to 30% cheaper.

Many tenants are already struggling to keep up with their current rental payments and should interest rates start to increase, this will put some landlords in the unenviable position of having to subsidise the monthly bond repayments on their rental properties. Paying the shortfall on the mortgage out of your monthly salary is not a wise investment strategy.

Don’t neglect to discuss the tax implications and requirements of your buy-to-let investment with your tax adviser prior to kick-off, as you do not want to be blind-sided by SARS come tax-filing season. You also do not want to be paying more tax than you need to, and good record-keeping will go a long way in this regard.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.