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BUY TO RENT INVESTING OPPORTUNITIES STILL WIDESPREAD IN CAPE TOWN’S SOUTHERN SUBURBS, SAYS VINEYARD ESTATES CEO
Examined critically, right now buying to rent in Cape Town’s southern suburbs does not appear to be a great investment opportunity – but some experienced, shrewd buyers have been buying steadily for exactly that purpose.
Seeking to explain this, Anton du Plessis, CEO of Vineyard Estates, which is headquartered in Upper Claremont, said that during the boom years of 2003 to 2007 he had sold numerous expensive Upper Claremont, Upper Kenilworth, Bishopscourt, Upper Rondebosch and Newlands homes to buyers who at that time were getting up to 34% annual appreciation on their investment.
“Even then the rentals were never that high (often they gave returns of less than 6%) but with annual appreciation at such incredible levels that hardly mattered,” said du Plessis.
Now, however, he says, property owners are likely to achieve only 4 to 5% annual appreciation on anything they buy in the next 12 months – and achieve negligible capital growth. So why are they buying?
“On the face of it, it is not wise to buy at today’s market prices. However, if you are able to get a property at 10, 15 or 20% discount, obviously the whole outlook changes – and such properties have been available as a result of the largest bank property repossession programme ever seen in South Africa’s history. Buying at a discount, shrewd buyers are “building in”capital appreciation for when the market consolidates.”
These buyers, said du Plessis, expect to see the plethora of repossessed homes dry up by the end of 2012, after which they will either continue to get rentals at up to 10% return on their initial investment) or they will sell at a true market related price, plus two years escalation, achieving perhaps a 20 to 25% total return on their capital outlay over two years.
Just how difficult it can be for a buy-to-rent investor buying at normal prices in today’s market was shown by du Plessis, taking a R3 million home in Upper Claremont as an example.
“Buying this R3 million home,” he said, “would involve paying upfront R220 000 in transfer duties and bond costs, the size of the latter obviously depending on how big a bond is taken. (For the sake of this exercise a 100% bond is assumed.) Thereafter each month the buyer would have to find at least another R1 000 to cover the rates owing to the municipality and a further R1 000 minimum for maintenance and repairs. This last figure might sound high but bear in mind that a repaint every three years can cost at least R15 000 and there would almost certainly be other unforeseen expenses which would have to be met.
“If the home was in a security village, the levy might add a further R800 to the monthly outlay. On top of these figures, the buyer would still have to find R500 (or more) per month for insurance. In addition, most investors would require an agent to find and/or manage the tenant – this would absorb another R1 300 (at least) of the rental income.
These outlays, although varying from house to house and from owner to owner, might, said du Plessis, total R5 000 per month.
What would the owner be getting back in rental?
“Bear in mind that the more expensive the home, the lower the return in relation to the investment. Certain homes in the R20 million bracket are only achieving gross rentals of R50 000 per month, but on our R3 million example, one can assume a gross rental of around R15 000 per month which equates to less than 6% on the outlay (including transfer costs). This of course assumes that the buyer achieves an unbroken tenancy, with no gaps between leases whilst he tries to find another tenant.
“Summing up, therefore, at present buy to rent investors have to find bargains if they are to remain in this market.”
That, said du Plessis, may seem like bad news – but currently, there are really good deals to be had, especially at ±R8 million. Even better deals are available in the R10 to R20 million bracket and “spectacular” deals are now achievable on homes above R20 million.
“Shrewd buy-to-rent investors will, therefore, continue to be active in Cape Town and, you can take my word for it, they are achieving killings for which they – or their heirs – five, ten or fifteen years down the line will be extremely grateful.”
The Cape Town market, said du Plessis, has always performed above average for South Africa and fluctuated far less than properties further to the north.
“The very simple, easily understood reason for this,” he said, “is that space in the more desirable areas of the Cape Peninsula has been for years been in short supply and will become increasingly limited. You simply cannot bulldoze away a 50km mountain or cover it in houses, because most of it is a national park. This fact ensures that Cape Town will not only retain its values but also its enduring charm and attraction which impresses so many people from all round the world.”