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Property Talk

Property Talk

Author: Andreas Wassenaar
Date: 2016-04-22
As an investor in a residential property what level of yield could you expect to get and what yield would be considered good or acceptable? An excellent source of residential yield data is the collaboration of Tenant Profile Network, a specialist tenant credit bureau, and First National Bank. The published TPN-FNB National Average Gross Residential Yield data indicates that as at the end of the 4th quarter of 2015 average national yields on residential properties were at 8.48%. In the 3rd quarter of 2007 a low of 6.46% was reached as property prices shot up at the very height of the residential property market boom. This would have been an excellent sell signal, and the smart investors would have considered selling part of their investment property portfolio in the second half of 2007. With the benefit of this recent history it therefore gives us a guideline that a rental yield of close to 6% would be considered low on average and a potential sell signal. As prices adjusted downwards from 2008 onwards, yields increased and a peak of 8.78% was reached by the 4th quarter of 2013. A gross yield of over 8% therefore seems to indicate a potential buy signal. Over the past two years we have experienced what they call yield compression as the residential market improved and more people decided to buy rather than rent. The rental yield has therefore gradually declined from 8,78% to 8,48% over this period. However as interest rates cycle upwards and the economic cycle moves downwards we would expect less buying activity and more demand for the existing rental stock, therefore placing upward pressure on rentals and yields. Rode and Associates have suggested a 1,5% as a rule of thumb if we want to calculate the difference between gross and net yields on residential properties. I have however found in many of our local gated communities that the cost structure is relatively high and that the immediate costs of Estate and Body Corporate Levies and Municipal Rates (before accounting for repairs and maintenance costs or financing costs) seem to consume more than 1,5 percentage points of the gross yield. Locally I would estimate that around 2,5% of the rental yield can be attributed to costs. A net yield of 6% is still too low to encourage a flood of investors to consider buying an investment property and this helps explain why the national proportion of total buyers buying to let remains relatively subdued at 9%. On the positive side the risk associated with tenants has steadily declined since 2008, with the percentage of residential tenants in good standing increasing from a low of 71% in early 2009 to 85% currently. Tenants within the R7,000 to R12,000 p.m. rental price bracket are the best performers with 88,4% of them being classified as being in good standing. This performance drops off dramatically for tenants in the R25,000 p.m. plus bracket, with only 77,5% of these tenants classified as being in good standing. Even the tenants paying below R3,000 p.m. (lower rental price bracket) have a higher percentage in good standing at 79,5%.

Considering the yields by major metropolitan region, we note that Gauteng has the highest gross average yield at 9.01%, followed by Tshwane at 8,9% and then Ekurhuleni and Ethekwini at 8,53%. Interestingly Cape Town yields are at the lower end at 8,03% due to the higher property prices on average. The Western Cape does however have the highest tenants in good standing at 88,7%, whereas KZN has the lowest of the five major provinces at 81,2%.

The national and regional benchmarks are useful to know when making decisions locally on a potential investment opportunity.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com