Risk or reward: Investing in property for residential rental

Owning residential property for the purpose of letting is a popular addition to investment portfolios in South Africa since property almost always increases in value over time. Following the dramatic decrease in the repo rate over the course of 2020, home-owners and prospective buyers received bad news in November as the Monetary Policy Committee (MPC) hiked it by 25 basis points to 3.75%, increasing bond repayments and ultimately leading investors to reevaluate the investment risk and return. 

Then there’s rental income. The PayProp Rental Index for Q3 2021 reports that high levels of inflation, combined with low rental growth, have had a double-barrel impact on property investors in that rents is currently growing far slower than costs of ownership, leading to a reduction of rental income in real terms. 

But should this be a deterrence?

Johette Smuts, head of data analytics at PayProp, says that when it comes to the two income streams of property ownership – capital appreciation and rental income – it’s important to remember that growth is cyclical. “Just because investors or landlords aren’t experiencing the rental increases they are used to, this won’t necessarily be the case in years to come. “Rental property owners need to stay the course for the mid to long term, because the tide will turn eventually.”

Historically, there has been little to no correlation between rental growth rates and the repo rate, says Smuts. Tenant affordability is the greater concern, as it is affected by various elements including loss of income over the lockdown period, rising costs from increased transport costs and petrol price hikes. The rising cost of living paired with stagnant income increases pressure on the consumer, and this is unlikely to change in the short- to medium term.

She says that real estate is still an excellent investment commodity, but – as is the case with all other investments – investors should consider their options very carefully. “Choosing the right property is very important, and here factors such as location, purchase price, demand, yield, amenities, gearing, migration trends, and all of that will come into play.” 

However, choosing the right estate agent or property manager, who in turn is enabled by the right PropTech solution, is just as important to the landlord, failing which all the great property attributes may become quite meaningless very quickly.   

Ultimately, says Smuts, property is an asset class, and with all asset classes there are risks that accompany the rewards. Bad tenants, frequently late payments, a vacant property or damage to your property – these are all risks that can unduly affect property owners’ livelihood and return on investment. For most landlords, having someone in the property is better than it standing vacant, but that is still not ideal for their risk profile. A professional rental agent can help to smooth the process and protect the landlord’s investment.