Rent or buy? Complex web of factors involved
Decision usually not based purely on market conditions
Residential rentals in South Africa have nose-dived and tenants are sitting pretty, but the decision to rent or to buy is often driven by factors other than the market.
"Generally speaking, within South Africa, there is a strong culture of owning and the desire to own one's own home both from an investment as well as a lifestyle perspective, and so this continues to be the dominant trend," says Andrew Golding, CEO of the Pam Golding Property group.
"It's essentially a question of one's own financial situation and requirements rather than a case of one versus the other. If you can afford it, then it is certainly preferable to purchase your own home as this has always proved to be a sound medium- to long-term investment - and remains so.
"This is despite the fact that there may be some valleys as well as peaks in the capital growth of the property along the way, depending on economic trends, the desirability of the property and its location, and so on.
"Added to this, you would immediately be able to start enjoying all the lifestyle and other benefits of owning your own home, even if it really only starts to appreciate in value in six months to a year or more from an investment perspective."
Samuel Seeff, chairman of the Seeff Property Group, says buying property gives some degree of financial security. Except for the odd interest rate movement, bond repayments will remain at a fixed rate for the duration of a home loan and, over time, it will become cheaper, while rental rates will continue going up.
With interest rates historically still low, Carol Reynolds, Pam Golding Properties' area manager for Durban Coastal, says buying is first prize, and the sooner you get into the property market the better.
One option is to rent your family home but invest in a more affordable entry-level apartment which can be rented out as an investment to get your foot in the market. In this way, you will enjoy a monthly income stream as well as capital growth on your investment over the longer term.
"If you compare the costs of a rental property with monthly repayments on a loan, on average, rental returns are about 0.5% of the purchase price. So if you require a bond of greater than 50%, your bond instalments will be higher than the rent you would pay for the same property.
"My advice would be to secure a small investment and earn rental income from that, and perhaps rent a larger home as a dwelling," Reynolds says.
But Seeff sounds a warning about buy-to-let properties.
For landlords, rental properties hold many risks. It is not a passive investment, but one that requires involvement and careful management. It is a significant financial risk if you have the wrong tenants in place, so investing in a rental should always be done with care, especially if you are a novice investor, he says.
A rental property is not a passive investment, but one that requires involvement and careful managementSamuel Seef
Dexter Leite, the rental manager for Pam Golding Properties in the Western Cape metro region, says buying a property is a major, costly and long-term exercise with many factors involved.
"If you get a key element such as location wrong, it can be a difficult, expensive and time-consuming mistake to remedy - which is not the case with a rental property," he says.
Seeff says when you buy a property, you can only dispose of your asset if you can find a buyer willing to meet your price, and you are responsible for the security, maintenance and upkeep, although you can mitigate this by buying a sectional-title property.
From a tenant's perspective, there are various reasons you may choose to rent as opposed to buy, and they are not related only to affordability, Leite says.
"Many want the flexibility that renting offers. For returning expats or for South Africans moving cities, it can be beneficial to first rent for a term while they assess what their new requirements are, consider different suburbs where they may wish to settle and get a feel for commuting times.
"Renting a home is cheaper than buying as you don't have to tie up your capital in deposits, costs, transfer duties and bond repayments," he says.
"This capital can then be employed in other opportunities, such as business or other investment opportunities.
What's happening in the market
The improved mood in the country following the appointment of President Cyril Ramaphosa is yet to translate into meaningful economic growth, says Samuel Seeff, chairman of the Seeff Property Group.
The property market closely tracks the economy, and for a good property market you need a good economy, which is still lacking, he says.
While the expectation is that the property market will again pick up and some Johannesburg and Pretoria areas are beginning to see better sales conditions, overall the market remains favourable for buyers and rentals are under pressure.
Rental investments always carry the risk of being dependent on the economy in terms of the rental rates. So when consumers face financial difficulties they battle to pay high rental rates, something that is evident in a market such as Cape Town, where landlord rental expectations are often too high, Seeff says.
Imtiaz Adam, a Seeff agent in Cape Town's southern suburbs, says the sectional-title rental market has softened notably over the past few months and average rental rates have declined by up to 36%.
While many landlords have taken note of the market deterioration and have adjusted their rentals downwards to avoid rising vacancies, many are still unaware of the market shift.
"We are still finding landlords coming to us from other agencies hoping that we can find them a tenant willing to pay high rental rates. Unfortunately, tenants are facing financial pressure due to rising costs and the overall economic decline," Adam says.
While there is some expectation that the property market will start recovering, the lag effect of the economic decline is only now being felt in the rental market. As a consequence, rental rates that tenants are able to pay have declined notably.
Adam cites an example of a furnished two-bedroom apartment in Claremont which was rented out for R15000 a month last year but can now only achieve R11,000 to R12,000 a month.
Even the lower end of the market is feeling the decline, he adds. In Plumstead, for example, a one-bedroom apartment could be rented out at R7,500 a month last year but will now only achieve R6,500 a month.
Smart landlords have reduced rentals considerably to accommodate the market shift and tenants. At the same time, rather than sitting with empty properties, they are still earning a return on their investment, he says.
Property commentator Erwin Rode, who heads Rode and Associates, a valuation, property research and town-planning firm, says: "If you have to finance the purchase of a house or flat through a mortgage bond, the expected returns when you buy to let, or notional returns when occupying it as an owner, are very low if not negative. This is known as negative gearing."
Rode says capital growth over the next few years is expected to be low because house prices are still very high in real terms, after deducting expected inflation, so there is lots of scope for prices to decline in real terms, especially in light of the poor prognosis for economic growth. Furthermore, it is inevitable that interest rates will have to rise soon.
When you can buy a house for cash, there is of course no negative gearing, in which case you could generally expect a total return in the high single digits. Total return is initial yield plus capital appreciation.
Thus, renting a house will be a smart choice for capital-poor households, provided they save the difference between their rent and what their instalment would have been if they had bought a similar house.
The only argument in favour of capital-poor households buying rather than letting during this phase of the property cycle is it forces them to save, even though the return on their saving is abysmal, Rode says.
Pros of renting
• It is cheaper to rent than to buy. If you require a bond of greater than 50% of the value of the property, your bond instalments will generally be higher than the rent you would pay for the same property;
• Renting is more flexible. It is quicker and easier to end your lease by either giving notice or waiting out the remainder of your lease term than it is to sell a property;
• The maintenance of the property, such as a burst geyser and repainting every five years, is generally the landlord's responsibility;
• As a tenant, you do not have to worry whether your investment has been a good one or whether the impact of surrounding developments, taxes and legislation on your property's value; and
• You do not have to tie up your capital in purchase costs, transfer duties and taxes and maintenance.
Pros of buying
• Even though the property market does go up and down, owning a property over the long term is generally a sound investment and a way to create wealth;
• By gearing a property - by taking out a home loan to buy it - you enjoy capital growth on money that is not your own as the value of your property rises;
• When you make additions or alterations to your property, you are investing in your own property and not somebody else's;
• You have the satisfaction of owning brick and mortar;
• As a homeowner, you are paying off your own asset, not that of somebody else; and
• You can make improvements to the property in the way you would like, to suit your lifestyle.
More properties for rent
There is a perception that the demand for rental for residential property around the country has dropped, but the latest TPN Vacancy Survey indicates it is the additional supply of rental properties on the market that is leading to this perception.
Michelle Dickens, the MD of TPN Credit Bureau, which focuses on the property sector, says the national market strength index has dipped only slightly from 59.5% in the last quarter of 2017 to 58.4% in the first quarter of 2018.
The more significant effect on the rental property market, she says, is the supply rating, which at 45% in the first quarter of 2018 was up from a base of 26% in the first quarter of 2016.
The supply trend has yet to plateau but if the drought continues it can be expected to put a damper on demand, Dickens adds.
Rental properties in the R12,000-plus per month segment experienced the highest vacancy rates of 12.3% for the past year, Dickens says.
Despite cooling down from a vacancy rate of 64.4% in the fourth quarter of 2017 to 61% in the first quarter of 2018, the rental property category of R3,000 per month and below has remained the strongest segment for the past three consecutive quarters.
In the market for rentals of less than R3,000 a month, the rental demand has been more volatile, which is to be expected for this market segment and which can be attributed to higher levels of financial constraints in this segment, particularly in the uncertain economic climate.
From a geographical perspective, Dickens says it is no surprise that the vacancy rate for the Western Cape remains the lowest at 3.6% in the first quarter of 2018 with the Eastern Cape and Gauteng moderately higher at 5.4% and 6%, respectively. These are significantly lower than the vacancy rates in KwaZulu-Natal, which experienced a vacancy rate of 8.9% over the first quarter.
In all, at a national level, the TPN Vacancy Survey indicates a rental market where demand still outweighs supply, driven predominantly by the strong market in the Western Cape.