Dwindling Property Investors Driving High Rental Rates

Louw Liebenberg, CEO of PayProp, the largest processor of rental payments for the residential letting industry, says that the last decade has seen limited rental stock formation with an average of only 9% of homes purchased intended to be investment properties. “This is limiting stock in the rental market, leading to artificially high rentals resulting from a mismatch between supply and demand,” says Liebenberg.ppOver the past year the PayProp Rental Index has recorded strong and steady growth in the national average rental value. The Rental Index recorded an average rental of R5,757 at the end of September 2013, this is 10.4% up from the R5,212 recorded the previous year. “We’ve scrutinised the cause and sustainability of this surge in growth over the last 12 months, as general economic data paints a picture of consumers being under immense pressure, and this increase is in contradiction,” says Liebenberg.

Liebenberg says that another indicator affected by such situations is the ratio of damage deposits held as a percentage of rentals invoiced. Typically, periods of stock shortages lead to an increase in this ratio, as landlords are able to command more security as part of the rental contract. This number has steadily increased since October 2012, to the point where average damage deposits relative to rentals are no less than 131%. “This puts a huge amount of pressure on tenants who are now required to produce an average of R13,000 up front, a sum made up of the first months rental and deposit.”

Provincial growth

In quarter 2 of this year, the highest average rentals were achieved in Limpopo, followed by Mpumalanga and KwaZulu Natal. In the latest quarter Mpumalanga has taken the lead, with Limpopo dropping to second and Gauteng moving up to third place. Interestingly, we have seen a phenomenal 19.94% growth in the Northern Cape, as predicted in previous indices. The momentum there is such that rentals in that province now exceed those of the Western Cape.

The Western Cape, Gauteng and KwaZulu Natal achieved growth rates of around 10% this quarter.

Yield for investors

As the country’s largest processor of residential letting transactions, PayProp has introduced a more accurate methodology to present net yields. ‘By looking at the actual payment data for property owners, we have a better indication of what property owners actually receive relative to the cost of acquiring and maintaining the property,’ says Liebenberg.

The revised numbers show a marginally declining gross yield of 6,79% and a last-quarter net yield of 5.21% – compared to yield numbers of 6.49% and 5.06% respectively when using the previous model.

Cost of ownership

‘Cost of ownership’ as a percentage is calculated as a percentage of rentals collected before the owners’ portion is paid out. While the trended average is 25%, there is a steady increase in the percentage of income the owner has to sacrifice to keep and maintain the property. Currently the average is 27%. Gauteng owners pay the most (31.3% of rent received), and owners in the North West the least at 23.6%.

Liebenberg says that the results of this Index might be the signal that buy-to-let investors have been waiting for. “Basic economics tell us that scarcity increases value – and going by the early signals we are seeing in the market, this may just be the ‘perfect storm’ that buy-to-let investors have held out for.”

The quarterly PayProp Rental Index is seen as a leading source of rental information using the actual transactional data of 55 000 active rental properties.

Click here for the full Payprop report 2013_q3

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