When an estate agency, like Vineyard Estates, runs an active rental division, there will always, says Vineyard Estates’ CEO, Anton du Plessis, be a strong motivation to sell homes as buy-to-let investments. The question that he is frequently asked, he says, is, “Can you honestly recommend this type of property investment rather than one in commercial or industrial property?”
“That,” says du Plessis, “is a valid query because most informed investors know only too well that the returns on commercial and industrial property tend to be significantly higher than those in the residential sector. A good office or warehouse can attract rentals returns of 10% to 12%, even in these tough times. By contrast, homes, especially those in the R2 million plus bracket, today can probably only achieve initial rents at a 5% or 6% return and their annual increases are also likely to be limited to roughly that range for the time being.”
Nevertheless, says du Plessis, the residential option in his view remains a good one because the demand in the residential sector is currently so good that replacing a tenant when his lease expires or is cancelled is very seldom difficult.
By contrast, he says, when a commercial tenant leaves, in today’s market, the premises often remain unoccupied for anything from six to 18 months and when they are let they sometimes go at a discount on the previously achieved rental.
Right now, says du Plessis, even big listed property companies are running with anything from 15% to 20% vacancies on commercial and industrial units, whereas in the portfolio administered by Vineyard Estates most owners have been able to replace tenants in less than two months – especially when, as usually happens, they start looking for replacement tenants well before the lease ends.
“In the majority of cases we can give a seamless transition from the one tenant to the next. The higher the price however, the more difficult it is to find replacement tenants quickly.”
A further good reason for buying into residential rental property, says du Plessis, is that in the current market many of these premises are going at exceptionally good prices, which, he predicts, in five years time will be regarded as ‘bargain basement buys’.
“Strict lending policies from the banks have resulted in many buyers being unable to afford the sort of house they aspire to – so the next best step is to rent. It is possible to rent a R3 million house for around R15 000 per month, whereas and owner with a bond could well be paying over R30 000 monthly for the same house.”
The current rental scenario, said du Plessis, has led to a huge increase in demand in the R10 to R25 000 bracket, and there are now not enough properties to meet the demand.
“This will cause an increase in rentals, making buy-to-let opportunities in the right brackets far more attractive.
“Residential property,” said du Plessis, “was previously recommended because it gave a good capital gain on top of a rental return. That situation will return in due course.
“This is, I believe, the right time to buy provided you are not thinking of an immediate profit gain but rather in terms of a five to ten year investment.”
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