Buy-to-let investors expected to yield double-digit returns in 2017
Buy-to-let investors are among the only residential sector investors expected to yield better-than-inflation income this year. This is due to the national average gross residential yield hitting 9.06% in Q3 2016.
This is according to the FNB-TPN Residential Yield dataset, which is the combined result of TPN rental data, along with FNB’s house price data and its Automated Valuation Model (AVM).
“After the Q2 2016 increase in the average yield, we believed that it could be the beginning of a longer gradual rising trend in yields, given the many fundamentals pointed towards it,” said John Loos, FNB household sector strategist. “Interest rates had risen gradually from early-2014 to early-2016, and a multi-year economic growth slowdown since around 2012 had exerted downward pressure on home buying demand.
“By 2016, this had begun to exert some downward pressure on house price growth, and slower house price inflation that underperforms rental inflation is exactly what is needed in order to lift yields and make it a more attractive buy-to-let buying opportunity.”
This expectation for improved buy-to-let yields is evident in the fact that year-on-year house price growth slowed from 4.6% in Q3 2016 to 1.9% in Q4 2016.
“That Q3 average house price growth was very similar to the StatsSA estimate of 4.88% year-on-year inflation in average residential rental payments late in 2016,” said Loos. “However, the 1.9% house price growth of Q4 is noticeably weaker than that rental inflation estimate.
“The result is that when we compile our average house price-average rent ratio index from the two time series (almost the inverse of a yield calculation, but here we are not matching value and yield of each individual property), recent months have begun to show a decline in this ratio. This implies rental inflation noticeably outpacing weak house price inflation.”
TPN’s average rental escalation was 4.25% in Q3 2016.
“Looking into 2017, we expect that average house price inflation will by and large underperform rental inflation in another tough economic year,” said Loos. “We project house price growth for 2017 to average around 3%, down from 5% in 2016, in lagged response to the economic growth slowdown and interest rate hiking of recent years.
“The result is expected to be some gradual increase in the average gross yield for 2017, from an expected average of around 9.1% at the end of 2016 to nearer to 9.3% by the end of 2017.”