Buy-to-let has merits

Isaac Moledi

Isaac Moledi

The adage that if you buy expensively, you can sell expensively is being turned upside down in the buy-to-let real estate market.

Return on investment for the more up-market properties has slipped as the ratio between price and rental returns widens.

Present estimates are that returns in the "conventional" rental market have dropped from 10percent, realised at the height of the property boom, to between 4percent and 5percent.

Gerhard Kotze, chief executive of the ERA South Africa property group, says buy-to-let property investors are setting their sights on the lower end of the market, driving up demand in residential suburbs.

He says investors in this market have to contribute a greater proportion of bond servicing costs in a rental scenario.

Prudent investors are now looking down-market and have identified opportunities in areas that have been less fashionable in the past.

"In suburbs in the Cape Flats, such as Mitchells Plain and Khayelitsha, investment buying is on the increase," says Kotze.

"These are property stepping-stone areas, where a growing number of residents aspire to more expensive homes and are leveraging the increasing values of their properties to do so, while other residents are upgrading their existing properties to improve their standard of living.

"A buy-to-let investor who in the past might have bought one or two expensive up-market properties, is now acquiring perhaps several less expensive properties, making it possible to achieve higher returns for similar amounts of initial investment, while simultaneously spreading the risk.

"It's a trend in areas such as Sunnyside in Pretoria, Cosmo City in Johannesburg and Parklands in the Western Cape."

He says the major problem with this new trend is that banks tend to value homes in some areas at less than their market value.

Positive spin-offs include a surge in new, affordable, good quality properties and a general improvement in housing environments in previously neglected areas.