Residential rental yields are growing again – albeit marginally – as an uncertain economic environment and interest rate increases are forcing first-time buyers to rent for longer and delay their buying plans.
And rental yields are expected to continue to rise in the future as the economic fundamentals extend their suppression of buying.
John Loos, property strategist at FNB, says in the 2nd quarter of 2016 the TPN-FNB national average gross residential yield rose slightly for the first time since the first quarter of 2014. The national average yield rose slightly to 8,62% in the second quarter of 2016, from a revised first quarter level of 8,59%.
“Although it is early days, a rise in residential yields, after a prior few quarters of slowing rate of decline, appears to be reflective of a slowing home buying market, which has translated into slowing house-price growth. At the same time, StatsSA’s estimates of rental inflation show some recent mild acceleration.
“The combination should be expected to translate at some stage into rising yields, and it is possible that such a trend is in its early stages,” Loos says.
He points out that by late 2013 home-buying demand had reached what was arguably its strongest post-recession levels and year-on-year (y/y) price growth had reached 8,6%. At the time rental increases were languishing at around 5%.
“Now, after over 2 years of gradual interest-rate hiking by the SARB (Reserve Bank), and into the fifth year of broad economic growth stagnation, it may well be that the home-buying market has lost sufficient momentum for yields to begin to rise, and the 2nd quarter of 2016 saw such a very slightly rise from 8,59% to 8,62%.”
Loos notes that despite buy-to-let home buying remaining modest and this having a commensurable impact on the growth in available rental space and yields, the rental-demand fundamentals may have been strengthening lately. He ascribes this to first-time buying coming under increased pressure from a challenging economic environment.
“In the 3rd quarter 2016 FNB estate agent survey, estimated first-time buying slowed to 18% of total home buying, down from the prior quarter’s 21%, and now significantly below the 28% multiyear high reached in the second quarter of 2014.
“Looking to the near future, we would indeed expect a gradual further rise in residential yields. South Africa is well into its economic supercycle stagnation, which can be a more volatile and uncertain period sociopolitically too. This environment should typically bring about a less confident and more conservative household sector,” Loos concludes.