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Buy-to-let yields continue to slide

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There is little “excitement or exuberance” in the level of buy-to-let home buying, and even a possible decline in significance according to Q2 2016 FNB Estate Agent Survey.

As a percentage of total home buying, buy-to-let purchases are estimated by survey respondents to have moved lower, from 9.1% in the previous quarter, to 7.6% in Q2 2016.

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This estimate continues a lengthy period of single-digit percentage estimates for buy-to-let buying.

“The recent estimates of buy-to-let levels in South Africa remain moderate by comparison to last decade’s boom period, where they were estimated as high as around 25% of total home buying in 2004,” said John Loos, household and property sector strategist at FNB. “Admittedly, it is difficult to ascertain what would be a ‘normal’ percentage in weak economic times such as the current ones, because we do not have a survey history dating back to previous ‘super-cycle’ periods of economic weakness before last decade’s boom period.”

Buy-to-let activity is expected to continue slowing due to it being a non-essential purchase in a constrained economic time and amid rising interest rates.

Loos said that the big attraction of buy-to-let buying for many is the expected capital growth that can be achieved, but he said house price growth remained generally benign at present.

“For those more focused on the rental income stream, there has been some yield ‘compression’ since 2014 too, also reducing buy-to-let attractiveness mildly in recent years,” he said. “The StatsSA CPI for actual rentals has seen its inflation rate accelerate mildly since around 2012, but at 5.18% year-on-year this rental inflation has not yet overtaken average house price inflation. So, as at Q1 of this year we still estimated the average yield on residential property to be on its gradual declining trend.

“From a peak of 8.58% at the end of 2013, our revised national average gross yield has declined to 8.34% by Q1 2016.”

A lack of “exuberance” in this market is probably a positive for the rental market, constraining growth in supply of available homes for rental, added Loos.

“This, coupled with our expectation of some increase in demand for homes to rent, could contribute to some strengthening in the rental market in near term.

“In addition, an already-moderate pace of buy-to-let buying can limit the downside risks to the residential market when the economy is on a deteriorating path, because this form of residential demand can weaken more sharply when economic downturns occur.”


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