Advice and Opinion

Rental returns to thrive despite the current economic slump

Residential properties that achieve good rental returns remain a very desirable investment option for South African portfolios in tough economic times.

This is according to Rob Stefanutto, Managing Director of Dogon Group Properties who says that one only has to look at Mazlow’s hierarchy of needs to see that in tough economic times people can do without a new car, or a holiday, or new clothes – yet people will always need shelter – it is a primary need – and so property rentals remain necessary.

“Due to the reality that less property may sell during tough economic times it makes the available long term rental market more attractive to a larger group of consumers who are unable to purchase at that time due to financial constraints. This means that there is pressure on the available rental stock, especially in the lower to mid range markets where the bulk of investors purchase for rental returns.”

Stefanutto acknowledges that whilst a recession is not a good time to take risks, for those who are in a position to purchase additional properties for rental income, it is a good investment – provided the investment is made on the correct type of property.

Property investment recommendations

When it comes to the type of property that is most recommended for investors, Stefanutto says that smaller properties in the mid-range markets are the most lucrative as they tend to have the largest pool of tenants seeking to rent when advertised for leases. “This means that you will always have demand for the rental property and should not then suffer from vacancies which hamper rental returns.”

Stefanutto goes on to say that Gauteng tends to have better yields than Cape Town but that Cape Town out-performs Gauteng on capital growth.

“It goes without saying that buyers should look to purchase in popular areas that are close to schools, transport and conveniences such as shopping centres and medical facilities. Whilst this does mean that the property may be more expensive than a counterpart that lacks access to such amenities, it also means demand from tenants will be higher.”

An example is the Southern Suburbs of Cape Town, which are becoming increasingly popular as people are drawn to amenities such as the location, access to good schooling, and close proximity to work. “Dogon’s sales office in this area experienced a 55% increase in sales figures compared to the previous year, showing the rising popularity of this area.”

Relocation further driving demand for rental properties in the Western Cape

According to Stefanutto, the demand for rental property in the Western Cape is further driven by high net worth individuals moving to the province in order to take advantage of the lifestyle offered – whilst the main bread winners move back and forth between the Cape and Gauteng for work. “This is an unusual addition to the rental model and has a dual effect as these commuters usually rent homes in the Western Cape prior to buying, whilst also renting smaller apartments in Gauteng to stay in during the week.”

Stefanutto advises that in Dogon’s experience the drought conditions have not yet had any perceptible effect on the value of Cape Town properties and has not yet slowed down demand in the city.

“Recessionary conditions mean that we are moving towards a buyers market and for those fortunate enough to be able to purchase additional property, now is a good time to do so, safe in the knowledge that properties which bring in rental returns will remain successful additions to anyone’s portfolio.”