As a result of increases in interest Rates and changes enforced by the New National Credit Act, many are predicting that the rental market is about to blossom for buy-to-let investors. The reasoning for these predictions is logical, increased interest rates combined with lower Bond qualifying amounts for property buyers will temporarily forced many people to rent. How true is this prediction?
As with everything in life, one can’t simply take a prediction at face value. There are many factors to consider before one can state, in this case, that increased interest rates and the NCA will usher in "glory days" for buy-to-let investors. This article looks at some of the consideration investors need to factor.
Most would agree that affordability as a result high prices, increased interest rates and the NCA, has put many property buyers out of the market. However, this does not necessarily mean that the foreseeable future holds in store great rental profits for every buy-to-let investor. Lets explore the reasons why.
1. Area - Each market and area has it’s own micro economy. In some areas, the rents will go up and more people will rent. However, other areas are saturated with rental units and demand is low. Especially areas where large developments have seen heavy buying by property investors whose only intention for buying was buy-to-let. In these areas, with or without the NCA, the current state of demand and supply will little space for rental increases as the vacancy rate is relatively high. While vacancy rates may decrease, market slack will take time to turn from a position over over supply to under supply. In simple words, it means that the properties will stay less vacant and the investor will make more money during the year because the property stays less empty. That does not directly translate in increase profits, in many cases it will only minimize they current losses in shortfalls, which may be a welcome relief to those with multiple cashflow negative properties. However, even this may not be totally true when factoring in that the new rates and taxes system is due to kick in next year for Gauteng. Cape Town will already have the new rates and taxes system runing for well over a year by the time Gauteng switches to the new system. This may improve prospects for property investors in Cape Town who bought at the right prices.
2. New Rates and Taxes – Investors will have to put up with higher expenses due to the new rates and taxes. Such expenses, will put some properties even be further away from breaking even. Even with more demand at hand and slight increase in rents, the taxes and rates can balance the profit or even create more losses.
3. Increase in Interest Rates – All of the above has also to be taken into consideration together with the latest increases in interest rates that already created more monthly expenses. Should the interest rate increase further and the new taxes and rates added to the monthly expense bill, the rentals will again further lag behind even with more demand.
4. Perceived Value – One factor, rarely discussed, is the perceived value. Imagine a Person with a salary of R10,000 that doesn’t want to buy a property right now because of high prices. Will they be willing to spend R5,000 on rental or more? Or will they just find cheaper rental or even move in with family or friends to save for their future purchase? This is a basic example where the rental prices will be caped by the perceived value of the area and other such factors such as affordability.
5. Rental Affordability – The rental affordability factor is also rarely talked about. No one wants to look at what a person can afford on a R3000 salary. There are many areas in South Africa, in the low-income areas, where properties are over crowded. To make space for food, clothes, travel and other necessities, low-income earners will share their rented property. If the rents increase, they may be forced to just share more. It may be common in some places to find a kitchen doubling as bedroom.
Taking into consideration the above it is fair to say that investors, who will be less fortunate and hardest hit, are the ones that bought in an over supplied rental area with large shortfalls. The NCA will have little to do with their fate. Even if demand increases, too many vacant units in a specific area will suppress rental values to the extent that such increases may not be enough to cover or cut losses following implimentation of the new taxes and rates system in Gauteng.
For investors who bought in areas with high demand, short supply and very little shortfall. In these cases, investors will be able to substantiate greater increase in rental prices. Most will, in the short-term, be able to cover increased taxes and rates without getting an overcrowded situation or tenants running away to cheaper places. Depending on their bond expenses, they may even start to profit from their rentals within a reasonably short period of time. The areas with such opportunity are the low cost areas. When the cost of property is low and the area is not matured, the taxes and rates will also be lower due to values. That said, one must consider that such areas are also generally home to lower income groups. This will place a damper on the extent to which rents may be increased and how quickly one may do so. Investors that invested in such areas and bought for a good price (not overvalued price), have a real opportunity to break even and make profits without creating new slums.
For the investors that bought properties before the tremendous boom in the market, they already know they have it safe. Maybe the increase in taxes and rates could slightly reduce their income, but by now, they are already running cash positive properties capable of withstanding current market fluctuations.
The NCA most certainly will contribute to the rental market by providing more rental clients to investors, but one should not jump to the conclusion that this will mean immediate profits and huge bounty, not even close. The rental market has lagged behind for so long that it is comming from a very low base. Increases in costs and indirect reduction in affordability, even with recent civil servant salary increases, will not be immediately translated into a bountiful rental market for investors. It will take more time and events to turn around the situation such that it is a positive rental market for investors that bought in a time of boom. If a R700,000 property is renting for a mere R3,000 per month, then in most cases, it will take FAR more than the NCA and the current increase in interest rates for the property to rent at R7,000 or more per month. This said, with time and patience, all markets turn positive. The question that investors with shortfalls should ask themselves is: How long are they willing to wait and when is the correct time to exit an investment?
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