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How buy-to-let landlords are being squeezed

Below-inflation rent increases are only half the story …

The PayProp Rental Index for Q2 reveals that South Africa has “now seen 18 months – or six quarters – of subdued, mostly sub-inflationary rental growth.”

It says “while that is not the best news for landlords, at least it is not trending downward.” And it is quick to add, matter-of-factly, that “there are no signs it will increase soon either”.

Source: PayProp Rental Index Q2, 2019

The picture diverges greatly in various markets and in the different segments within those markets. In greater Johannesburg, one estate agent points out that the rental market remains robust in the sub-R1 million value range, with demand and yields for properties valued north of R2 million nearly non-existent. PayProp’s index shows that there has been deceleration in rental growth in Gauteng and the Western Cape this year.

 

Source: PayProp Rental Index Q2, 2019

While this broadly remains a ‘tenant’s market’, the rental income side of the equation only tells half the story. Flat economic growth and a property market that has been in decline in real terms since the 2007 peak means that residential property investors can’t even count on capital growth.

Worse, landlords are caught in a vice-like grip of below-inflation rent increases (if at all) and sharp increases in administered tariffs.

Source: Stats SA, Eskom (via GreenCape)

While much of the electricity price increases are able to be passed on directly to tenants (either through recovery or via a prepaid installation), there are certain charges that may not be. These include fixed monthly charges such as City Power’s network charge and capacity charge (which total R631.16) in Johannesburg, or Cape Town’s R163.32 Home User tariff charged to rates accounts. Even in a prepaid scenario, this cost is billed through to the owner and it is complicated to then recover from a tenant.

In a report last year, FNB Commercial Property Finance property sector strategist John Loos highlighted that “sharply rising electricity costs (along with municipal rates and other utilities tariffs) have long since been a housing-related affordability challenge.

“We use the consumer price index for electricity to compile an electricity/per capita income ratio index starting in 2008. It shows that electricity tariff increases applied to consumers have far outstripped per capita income growth, with this index increasing by a massive 82.71% from 2008 to date.

Source: FNB

“This provides a strong incentive for households to lower electricity consumption or to cut broader operating costs on the home to compensate for the sharp electricity cost increases, and one way of doing it is to purchase a smaller home with [fewer] ‘frills’ such as swimming pools, which can add to operating costs significantly,” says Loos in his report. “The other way is to cut electricity costs, either through more energy efficient homes of alternative energy sources.”

For landlords, increases in the price of electricity have impacted far less than increases in the prices of other municipal services. These include rates, water, sewerage and refuse removal, whether billed directly or indirectly through sectional title scheme levies.

Over a five-year period, annual increases of, say, 11% for these services mean an increase of 70%. This is not a made-up number! And this doesn’t take into account the revaluation of properties that various municipalities have undertaken in recent years.

These exercises have had significant impacts on the prices of these ‘services’, as most municipalities have shifted away from fixed charges to ones based on the value of the property.

With these price increases, it’s hard to find scenarios where rental yields have actually increased materially over the last five years. Again, various segments (especially entry-level properties) will show dramatically different results from, for example, a four-bedroom cluster in Johannesburg’s northern suburbs.

And with structurally higher property prices, a market like Cape Town (especially the City Bowl and Atlantic Seaboard) will have lower overall yields than one like Gauteng.

But the overall picture is this: house prices are effectively flat, rental income is marginally positive (or flat) but fixed expenses are sharply higher. Not a great situation at all.

Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

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Without being technical about above article, just this, municipal costs are killing landlords, I rent out 4 properties in Gauteng (West Rand) and could increase rental for last 3 years or will face vacancy, I pass basic municipal charges to tenant and these have rocketed sky high, add how SARS is scrutinizing now us “rich and wealthy” because you have more than one property, owning rental property in SA just doesn’t make sense to me anymore

Indeed Paull. AND then you also have SARS doing audits on individual’s rental properties (with increasing thoroughness or is it hostility…take your pick). Extra pain.

You run the risk of being ring-fenced by SARS (when certain conditions are met, Sect.20A) when you declare rental losses for 3 or more years (over any 5 yr period). I’ve seen numerous long questionnaires from SARS with over 20 questions (to try and see if the taxpayer is really serious as to why keeping a loss-making property on the books.)

By having multiple rental properties, some longer-held units will start to show taxable profit, while units with newer bonds still running into loss (but typically decreasing over time), and this complicates the profit-motivation further when dealing with SARS.

Somehow, SARS auditors ‘conveniently’ fail to understand the nature of owning residential rental property, which has a longterm profit motive (wherein the initial years of a homeloan, the bond interest is typically high, leading to losses, compared to the end of the bond-term, where interest is low, increasing profit potential.

But SARS want to (rather) hit you hard now, instead in later years…as if they’ve become impatient. Then one has to try and pull out Tax Court Case examples dealing with “reasonable expectation of arriving at a future profit”, to try and motivate (which is not guaranteed it may work).

Conversely, from a SARS’ viewpoint, there are some people clinging onto loss-making properties for years on end, raising suspicions from SARS as to why does the taxpayer not sell the loss-making unit, which just costs you negative cash-flow…

FUN!

This is old news. Magnus raised these issues years ago but was accused of being negative -most probably by the same commentators having BTL properties now. Too late now and the writing has been on the wall for a while now.

Rental income will do the same as global interest rates, continue a downward trend or little increases if at all, the increase in municipal services and taxes will continue upwards, because of incompetent staff and mismanagement. Landlords will keep losing income year after year.

Astonishing that that comment would gain traction.

Interest rates have and inverse effect on property (or asset) prices. Think Global Financial Crisis.

That comment is spot on. Declining interest rates support asset values in nominal terms but has a negative effect on yield. that is exactly what Hachmet said.

While it is fashionable to blame the ANC for this, Pretoria, Cape Town and Johannesburg are misruled by the DA. If anything, the DA is worse when it comes to gouging its ratepayers. South Africa’s 3 largest parties are clearly all of a socialist bent, viewing their subjects as mere milch cows, to be tapped dry at every opportunity.

Well said. When it comes to the arrogance and dismissiveness of the DA administrations, they compare well with SANRAL.

Completely agree.
The DA is appalling. Just look at their re-evaluation debacle.
2 of my properties in the sub R1 mil segment was over evaluated by more than R200K.
I appealed it and got some down on 1 but the other one, they just arrogantly denied my appeal.

No one will EVER come close to doing the amount of damage that the ANC has done to South Africa….not even the previous government caused so much suffering. True equality brought to you by the ANC.

Reasons from a similar source are driving the stock market returns as well. It would be impossible for the two to have zero correlation. An expected result.

DA is a disaster in Johannesburg, pouring millions in trying to revive the city centre while allowing squatters to occupy council land and destroy value in the the northern suburbs. Businesses are moving away and soon there will be more buildings to invade.

On top of this they are once again wasting taxpayer money on trying to be a telecom enterprise.

Added to this is over investment by property developers.

For me it made sense to sell property and pay off bonds on the better quality units.

Pity the greedy pillocks who “snapped up” overpriced properties in Cape Town hoping to make a quick buck.

Loyal DA supporters to the core, their party has them over the barrel with outrageous municipal rates increases, extra levies and surcharges, not to mention punitive ones…and they keep on voting DA because they believe the BS of the elections being “neck and neck”, despite this been shown to be a patent lie that these useful idiots swallow.

At least in Gauteng there’s AfriForum that fights for the overburdened and abused ratepayer. Cape Town has voted in the DA without any coalition partners such as the VF+, who would at least fight for the ratepayer.

SARS is coming after those who bought in cash on the quiet, as Kieswetter has stated that they will be augmenting their database with Deeds office data. So they can expect to see awkward questions popping up in their next e-filing session next year.

I’ve heard that the “AirBnB” entrepreneurs are desperately moving their rental stock onto the longterm rental market due to the Govt threat of clamping down on how many nights the properties can be let out for short term stays. So this just adds to to the buy-to-let disaster.

Dams 81% full Mr rfjock

Geez and imagine if aunt Patricia didnt put a stopper to the R6 billion desalination units tenders from being awarded to the blue eyed boys chommies…

The poor cpn DA followers would have been paying for white elephants in the rain..

I have sold all my rentals due to the implementation of the new tenant laws which makes it virtually impossible to get a non paying destructible tenant in time out of the rental before more damage is done. I will never, ever, ever buy to rent again.

I had a coked up tenant move every single piece of our furnished rental apartment out onto the front lawn. And that was one of the milder stories. I’m thinking of doing the same and saving myself from longer term headaches.

A South African news site uses American houses picture to share a story on South African house market.

Please…..you know.

My sincere apologies if I come off pedantry.

Would anything change if they had gone to get a local picture instead of quickly grabbing a stock image? What value does the location of the picture add?

Or, are you just showing off that you noticed which somehow reflects on your intelligence?

I agree, lazy by $web

Typical academical bull$#@tery to obfuscate a real point made

Just another nail in the coffin brought on by incompetent african officials(in ALL parties) who supposedly do things to help the poor but it’s all about vote gathering so they can stay in power and feed from the ever shrinking pig trough.
If the cabal really wanted to they could easily get Soweto and the likes to pay for electricity and other services.
25,000 skilled individuals (plus families) left SA last year , of these 1,000 to 2,000 were HNW Individuals

I left Cape Town with my family last year and emigrated overseas, renting out our CT apartment. Finding a tenant was TOUGH and both the income and asset will most likely be next to useless in the longer run with the expected Rand depreciation. I’m getting screwed on both ends of the scale. Lovely :/

Don’t agree that house prices are effectively flat.The banks might pretend that prices have gone up 5% per annum over the last 3 years but in the Fourways area asking prices are now 25% lower in nominal terms than 2016.

Hereshoping
This is such a good article it should be reposted with all the comments

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