Pandemic uncertainty weighs on buy-to-let investments

For those interested in investing in rental properties, it may not be a good idea to rush into the market. 

So says Samuel Seeff, chair of Seeff Property Group, which has the front-row seat in trends shaping this corner of the property market as one the biggest names in SA’s residential real estate agent industry. 

Speaking to Business Day, he said in view of the pandemic, “we are not yet at a point where we can accurately predict when this will end, [so] buying rental property is not a good idea”.

His comments confirm insights gleaned from public disclosures from listed property funds, which show that tenants struggled to keep up with rent payments after the pandemic-induced restrictions led to job losses or deep pay cuts. Some were forced to move in with family and friends, and those who could still afford to pay rent negotiated to pay lower rentals. 

Still, Seeff pointed out that with growing urbanisation, buy-to-let remains a sound investment, provided the investor has the cash to absorb potential losses from tenants whose income could be eroded by further socially distant work, entertainment and learning. 

Furthermore, the real estate mantra “location, location, location”, along with the type of property, could make a difference between a bad and a sound investment. 

“Not all property types and areas are suitable for rentals and if you want to earn favourable rental returns, you need to invest in areas where there is high demand for rentals and some competition among tenants, which will drive up rental rates.”

He was commenting on the back of the recently released PayProp Rental Index Q3 2021, which showed that on average, rentals increased by R10 between the third quarter of 2020 and the same period in 2021. According to this report, for four consecutive quarters SA national rental growth levels have remained below 1%. 

Despite a historic low interest rate run, which ended in November with the Reserve Bank’s monetary policy committee raising the repo rate by 25 basis points, rentals have not recorded substantial growth. 

While the low interest rate environment enabled many tenants to move from renting to buying, this created oversupply of rental properties in the market. 

According to TPN Credit Bureau data, tenants’ affordability will remain under pressure, and this will affect rental escalation and rental returns. 

Rental properties priced at R4,500 — R7,000 a month were popular with tenants by the second quarter of 2021. They accounted for 35% of all lease agreements. 

Interestingly, in properties priced below R3,000 a month, tenants cannot afford to pay rent (16.08%), with 15.72% of tenants making only a partial rental payment, according to TPN.

Grant Smee, MD of Only Realty, said certain areas have seen a decrease in achievable rental levels due to oversupply. 

“The primary drivers of oversupply have been properties returning to the long-term letting market from the short-term [Airbnb] market, continued development of high-density complexes and an influx of rental units due to property investors taking advantage of the historically low interest rates,” said Smee. 

The agency said increases in demand and rental levels during quarter-three 2020 to quarter-three 2021 were seen in security estates, for larger three- and four-bedroom homes, mainly in coastal areas outside economic hubs. 

Demand for rental properties has been increasing in security estates on the West Coast (Langebaan, Big Bay and Melkbos), in Paarl (specifically estates such as Val de Vie and Pearl Valley), Hartebeespoort, Mbombela, Emalahleni, and the KwaZulu-Natal North Coast and Ballito (Simbithi and Zimbali). 

“Semigration is driving this demand as more families and buyers are choosing lifestyle and security as the primary criteria for a new home,” said Smee, referring to the movement within the country from one province to another. 

Seeff agents report that for the most part, rental increases have remained low, with increases seen only in the more affordable middle-class areas. Here, properties priced R8,000-R15,000 a month have recorded slightly better rental increases. 

Higher priced properties have seen zero to very low increases below 5%, according to the agency. 

Seeff says the outlook for 2022 is not different from 2021.

“Given the recent interest rate hike and rising unemployment, rental rates, especially in the low- to middle-income areas, will remain under pressure and landlords will have to keep their holding pattern until we get the better of the pandemic and the economy starts moving up the growth curve again,” said Seeff. 

mhlangad@businesslive.co.za