The South African Reserve Bank’s MPC (Monetary Policy Committee) announcement yesterday to hike the interest rate to 7.75% and the prime lending rate to 11.25% adds to a dim economic outlook. Despite this, for astute property investors, there are certainly pockets of excellence that will provide somewhat of a haven over the rocky periods in the foreseeable future. One of these is the buy-to-let market in the Western Cape.
According to Rupert Finnemore, EasyProperties CEO, an increase in net rental yields is appealing to investors in all regions, but in particular in the Western Cape, as the buy-to-live sector tends to cool.
“ EasyProperties investors are generally used to healthy rental yields and internal rates of return in the Western Cape, but the recent performance of the Four on O apartments in Cape Town's Sea Point is extremely encouraging.
From the transfer of the properties to EasyProperties in August 2022, the eight units grossed R83,406 in the short-term stay market. Since then, the average monthly income earned has increased by 226%. Most notably, January and February 2023 incomes peaked at R446 309 and R347 055, respectively.
While these figures are exceptionally impressive, it’s important to remember the cyclical nature of property returns as well as the increased demand of the holiday period." says Finnemore.
Several factors are driving the overall shift in the housing market to favour the rental sector. Not least of these is the South African Reserve Bank interest rate hike, which is expected to rise by a final 25 basis points in this cycle to 7.50% by the end of March, making it the highest level since 2016.
According to REMAX CEO, Adrian Goslet, clear indicators that this shift has begun include a marked improvement in rental vacancy rates, an increase in rental-related digital property searches, and a decline in buying searches.
According to Finnemore, there are also other factors that are driving the increase in rental property demand.
“In longer-stay rental markets, there is little doubt that the higher interest rates are impacting affordability thereby persuading potential homeowners to rent instead. In addition, a sharp decline in residential building plans passed indicates the cooling off of housing demand, however for rental property investors, the news is more positive when considering that a recent FNB survey shows that the flats and townhouses category looks set to remain the largest new building sector after increasing its share of the market from 26% in 2010 to 47% in 2022," says Finnemore.
Finnemore also notes that FNB's latest hotel market statistics which show that income remains short of pre-lockdown figures could also have a positive spin-off for short-stay rental markets.
"While hotels still recover from Covid-related headwinds as well as the recent impacts of fuel price increases, the short-term rental accommodation market, with its agility and lower overheads tend to benefit, says Finnemore.
For the past two decades, Cape Town’s property market has maintained steady capital appreciation growth of 5 to 10%, year on year.
“In tough rental markets, investors who can count on their capital growth are willing to compensate on lower rental yields, but in buy-to-let markets such as the one we are entering, higher rental yields have attracted more investors back to the market which offers support overall support to property prices in the longer term, even as buy-to-live transactions go through a cyclical cooling off period," says Finnemore.
According to Finnemore, it's clear that the Western Cape tourism market is doing well and that people are moving to the province, which is helping to make it an attractive place for property investors. Services and infrastructure are also better there than in other parts of the country. So, especially if you're looking at long- and short-stay rental markets, it might be a good idea to consider investing in this area.
He concluded by saying that another pocket of opportunity amidst otherwise challenging economic growth is the student housing market in all areas of South Africa.
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