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Buy-to-let yields up, but profit margin still too wide

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First-time home buyers now make up 18% of the total home buying market, according to Q3 2016 FNB Estate Agent Survey. This is down on Q2 2016’s 21% and Q2 2014’s multi-year high of 28%.

“When aspirant first-time buyers hold off on their home purchase due to a less certain economic environment, many remain in the rental market for longer, thus driving stronger demand for rental property,” said John Loos, FNB household and property sector strategist, noting that this ultimately contributes to stronger rental inflation as well as slower house price inflation. “StatsSA rental data has shown a gradual acceleration in average rental inflation since 2012, from 4.26% in mid-2012 to 5.3% year-on-year by mid-2016.

“This is not a strong acceleration, but with average house price inflation having recently been slowing, the combination may be just sufficient to start the ball rolling in terms of a national average yield increase, and ultimately a more attractive buy-to-let opportunity.”

Loos quotes Q2 2016 TPN-FNB national average gross residential yield numbers which rose slightly for the first time since Q1 2014.

Tenants pay R6,500 per month on average

“The national average yield rose slightly to 8.62% in Q2 2016, from a revised Q1 level of 8.59%,” he said, noting that while it was too early to call, rising residential yields could be reflective of a slowing home buying market, which has translated into slowing house price growth. “We emphasise that the yields calculated in this report are gross yields, meaning that landlord operating costs associated with the property have not yet been included in the calculation to get to a net initial yield.

“Rode and Associates has in the past suggested that as a rule of thumb, one should subtract 1.5% from a gross yield to allow for home operating costs in order to get to a net yield. That would imply that the national average net yield could be as low as 7.1%, given the gross estimated yield of 8.62%. This level would not appear overly attractive, given recently low capital growth on housing, and the fact that a Prime Rate at 10.5% translates into an average mortgage lending rate near to 11%.”


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