One of the predictions made in the latest edition of the Knight Frank Wealth Report is that by 2050 the world’s largest economy will be – did you guess it? – not China but India. By that time, says the review, the United States will have dropped to number three position, although its average per capita income will still rank it very high, close on the heels of Singapore and Norway. China will by 2050 be ranked the number two economy in the world.

Discussing this recently, Lanice Steward, Managing Director of Knight Frank’s South African associates, Anne Porter Properties, drew attention to the comments in the report by two Indian entrepreneurs, Raj Kundra and his wife Shilpa Shetty.

“Obviously if you are keen to invest in property where markets are growing fastest,” said Steward, “India must now definitely be one country on which you should keep a close watch. The two entrepreneurs mentioned in the Knight Frank Wealth Report have said it has to be recognised that India has as yet relatively few formal loan structures through which cash can be accessed. This, of course, insulates it to an extent from global economic fluctuations, but it also means that the foreigner trying to buy property here will probably need substantial resources and will have to cope with widely varying sets of development laws and criteria – as yet, India has not made it easy even for its own citizens to invest in property. Raj Kundra does, however, predict that India’s central city office and retail cities, including those in the second tier such as Nagpur and Ludhana, will probably be amongst the best property investments it is possible to make in the foreseeable future – and it could be added that as English is widely spoken throughout India and the British Common Law system still prevails in their law courts, business dealings tend here to be faster and less frustrating than in China and many other emerging countries.

Raj Kundra is also reported as saying that India’s rapidly growing new cities are already some of the world’s biggest retailers of luxury goods, including expensive motorcars. Sports sponsors such as himself, he adds, find that they are achieving excellent brand promotion and good returns on their investments in cricket and horse racing.

“The impression created by the Knight Frank Wealth Report,” said Steward, “is that India property, having lagged behind the rest of the world for many years, is now starting to take off, making this territory one which should be definitely considered by serious investors.”

Right now, says Lanice Steward, Managing Director of the Cape Peninsula estate agency, Anne Porter Knight Frank, APKF has some very satisfied buy-to-let investors, especially those who have targeted the residential sector. Many, she said, are now growing their portfolios. Low prices and low interest rates have enabled investors to achieve returns in excess of 6% per annum from the outset.

About 40% of the homes in APKF’s rental portfolio, says Sandy Walsh, who runs APKF’s rental division, are now owned by buy-to-let investors and this figure is increasing. In her opinion the most successful investors are those who have focused on and become familiar with one or two specific areas.

Tracing the background to the current situation, Steward commented that throughout the boom of 2005 to early 2009 potential homebuyers were able to get bonds fairly easily. This, she said, led to a softening of rentals. However, now that house buying has become a great deal more difficult, especially for those trying to stretch limited resources, more people are renting and rents are rising steadily. This makes buy-to-let properties a good proposition right now.

One difficulty, however, said Steward, is still regularly encountered: certain investors still have far too high expectations.

“Over the years our rental agents have learned to spot and to warn the keen new investor who comes to this field with unrealistic ideas,” she said. “Almost always they have done too little homework and have not consulted either the media or reputable agents to get sensible advice.”

Patience and a long term view, said Steward, are always essential in property investment.

“The great advantages of residential property, however, are that it is almost always easy to replace a tenant who leaves – very often without even a one month break – and in the long run not only will rents escalate annually but capital values will too.

“Here again, however , a word of caution is necessary: CPI values are not as yet rising, although we do predict increases in house values of 8% per annum by the end of 2012. Rents, on the other hand, are currently improving steadily. In the last year they have risen 6,6% (according to the reputable authority TPN) and this, I believe, could rise to 8% by early 2013.”

Walsh said that the best rental returns are still being achieved in the sub R1 million and R1,5 million market.

“Many people are attracted to the idea of buying a relatively expensive home to rent because they anticipate that tenants here will be more responsible and are likely to look after the property better. Regrettably this is not universally true. However, it is true that in general the higher the property’s value, the lower the rental return on it in relation to the initial outlay will be. Furthermore, in the current upper market, which still offers potential tenants quite a wide choice, potential tenants are very often able to negotiate rents downwards.”

With South Africans feeling the effects of on-going near-recessionary economic conditions, landlords, says Ian Teague of Gunston Attorneys, have to be more careful than ever before in their selection of tenants.

“Here at Gunston Attorneys,” he said “we have this year seen a discernible rise in the number of cases dealing with defaulting tenants and in the instances where the landlord has had to go ahead with an eviction.”

Buy-to-let investing in property, said Teague, is once again becoming popular, but Gunston Attorneys (and other legal firms) will testify that they regularly come across instances where the landlord has limited legal knowledge and has done far too little investigation into the rules governing property leasing. In addition, in these cases they almost certainly have also done too little checking of the potential tenant’s credit, previous leasing and employment records.

“It is perfectly understandable that people who have proved successful in other spheres should feel that they can handle a ‘simple’ lease arrangement on their own,” said Teague, “but the plain truth is that all our experience shows that they are likely to make serious, costly mistakes which can complicate matters, especially now that the Consumer Protection Act is operative and protective of consumers’ rights.”

In today’s circumstances, said Teague, many of the lease agreements drawn up by do-it-yourself landlords are unenforceable.

Teague warned that when things do go wrong and landlords find themselves with a defaulting tenant who simply cannot or will not pay – and is also possibly neglecting the maintenance of the property – eviction proceedings have to be initiated, even though they cause such emotional distress and result in further non-payment of rents. An eviction can, he said, take as little as three months but if it is contested may well take far longer and during this time it is highly unlikely that further rents will be collected.

“Attorneys,” said Teague, “are usually hesitant to start an eviction process. However, it has to be recognised that quite often this is the only course left open to a landlord and, in my experience, once a tenant starts defaulting, it very quickly becomes habitual (usually because he or she is suffering financially) and delays by the landlord in taking action can be very costly. Once defaults start, the writing is on the wall. All our experience shows that it is better to cut one’s losses with a poor tenant and start again.”

Asked if most of these difficulties cannot be avoided if a landlord appoints a competent rental agent, Teague said that the competency levels of rental agencies throughout the Greater Cape Town area vary widely – as does their ability to detect in advance tenant trouble and to handle difficult tenants.

“Although there are brilliant agents who manage to keep their default payments below 2% or 3% – and we have to commend them for this – there are many others who are now operating on 10% to 20% defaults where rents are either not paid or paid seriously late. It also has to be said that the relationships between the tenant, the landlord and the agent are important and in our experience the small one or two man teams giving a dedicated service to a specified area often achieve the best results.”

With buy-to-rent investment in residential property once again becoming popular, an influx of assertive, independent-minded entrepreneurs are, as in previous times, making their presence felt in the property world – and often, says Lanice Steward, MD of the Cape estate agency Anne Porter Knight Frank, they enter this new field brimming with confidence that they can go the DIY route, finding a managing tenant without the ‘extra’ or ‘unnecessary’ expense of employing a rental agent.

“I am not saying that such landlords will inevitably learn a lesson the hard way in these matters,” says Steward, “because experience shows that some do succeed all along the line.  Nevertheless, it is regrettably true that many, perhaps the majority, make fundamental mistakes which would never entrap a trained professional.

“Lesson No 1 to be learned by those without experience in this field,” says Steward, is never to waive the rental deposit.

“For one or other reason the tenant may try and persuade the landlord that there is no need for such a deposit.  However deposits are, in fact, authorized by the Rental Housing Act, which stipulates that they have to be put into an interest bearing bank account and that the interest has to accrue to the tenant.  Furthermore, the interest paid must not be less than the rate given by the same bank on savings accounts.

“If such a deposit is not paid by the tenant, the landlord has no fallback cash to be drawn on if and when the tenant damages the property or defaults on his rent – as can happen even with good tenants.”

However, adds Steward, the landlord must see the money as sacrosanct and must not fall into the temptation of using it for other purposes and then trying to calculate the interest that it would have earned.  This, she says, can lead to the landlord later finding he is unable to pay it back.

Common mistake No 2, says Steward, is to give the tenant access to the home before the deposit and one month’s rental are paid upfront.

“If a landlord-tenant relationships starts in this way,” she says, “the tenant may continue to try and take advantage of the landlord in all subsequent dealings.  Furthermore, on moving into the house he may start raising objections and give reasons for not paying rent.”

Mistake No 3, says Steward, is to be lax about the credit checks every reputable agent uses.

“It is in this aspect that so many DIY landlords fall down,” says Steward.  “Lacking the agents’ access to credit bureaux they rely on word of mouth recommendations and perhaps a telephone call to the employer.  They then sign on a tenant who may have several credit black marks against his or her name, which of course he has been very careful not to reveal.”

Mistake No 4 is to be casual about getting a reference from the tenant’s previous landlords – if he has had them.  Here, says Steward, it is important to get at least two references because landlords have been known to give a favourable reference simply to get rid of a tenant they dislike.

Mistake No 5 is to neglect to draw up an inspection manual when the tenant moves in and then to get the tenant to sign it.  Such check lists, says Steward, should be accompanied by photos of each room and of any defects.  These lists become very important when it comes to establishing the damage for which the tenant is responsible (i.e. ordinary wear and tear) in contrast to those defects which were already evident when he moved in.

Mistake No 6 is to neglect to visit the tenant regularly to check on how he is caring for the property.  There should, says Steward, be at least three visits per annum, excluding the initial occupation visit and the end of lease checkup.  In some cases, she says, signs will crop up which indicate that the tenant is ‘on the skids’, e.g. having financial or partner problems.  When such signs become evident it may be necessary, she says, to visit far more often and then to take firm action to get the rental payment necessary and to ensure that the property is cared for.

“Anne Porter Knight Frank’s experience shows that if and when a tenant is having difficulties he may regard his landlord as the last person whom he feels he is obliged to pay.  That mindset, which is all too common, has to be dealt with very firmly.”

All in all, she stresses, (“and this is an objective opinion and not based on self-interest”) professional rental agents tend to fare better than DIY landlords when it comes to tenant management and it is, therefore, wise to employ them and forget the relatively small fees they charge.

“Considering the pitfalls ahead a good rental agent’s services are cheap at the price.

“As in so many other fields,” says Steward, “there is no substitute for experience and inexperienced landlords have been known to lose a great deal of money.”

A Constitutional Court judgement made in 2004 (in the case Mkontwana vs Nelson Mandela Municipality) has had serious widespread ramifications throughout the commercial property sector – and has placed further risk on the shoulders of landlords, says Jason Lee, the Rawson Property Group’s commercial property national head.

In the case mentioned, said Lee, the court held that the landlord was responsible for all municipality service debts run up by his tenant – and this principle is now adhered to countrywide.

This, said Lee, effectively makes a third party (the landlord) responsible for the debits of a main contracting player (the tenant) even though he (the landlord) did not incur the debt himself.

Lee said that in his view this whole situation needs reviewing, especially in the current scenario where tenants are increasingly finding it difficult to pay both their rentals and their utilities accounts.

“They know only too well,” he said, “that they can walk away from a lease when it expires without the municipality having any way of extracting payment from them. The pressure is now transferred to the landlord and, it has to be added, to the banks which are often financing the acquisition.”

The landlord’s predicament, said Lee, is made more difficult by his being debarred by law from cutting off services to a tenant. The municipality does have the right to do this in the case of electricity bills but only does so once the bill is at a substantial level, putting the landlord at huge risk. In the case of water supplies, they are by law prevented from ever cutting those off. Sewage services and rubbish removal will also remain in place no matter how much money is owed.

Just how seriously these utility bills can mount up, said Lee, is shown by the fact that he has recently seen two cases where sums of R200 000 to R500 000 had not been paid – and eventually had to be met by the owner who could not otherwise sell the building. (A rates clearance certificate is mandatory before a transfer is processed.)

What are the lessons that landlords can take to heart to avoid these situations?

Lee says that the old rule of checking and rechecking the tenant’s credit and previous leasing record is now even more important than before. Then, too, in today’s market the landlord simply has to get two or three months rental deposit paid prior to occupation as well as a three months utilities deposit.

“If this chases the tenant away (as it sometimes does) this exit may be something for which the landlord will later be grateful,” said Lee. “Securing big deposits gives peace of mind.”

Wherever possible, he added, the landlord should also install a prepaid electric meter – and insist on the tenant servicing it.

“Quite often,” said Lee, “it looks draconian or suspicious to impose these sorts of “conditions” upfront and a landlord may be tempted to ease up on them. To do so is fatal – history shows that a tenant who is given leeway time and again exploits the landlord. Be strict.”

Buy to rent property investors will often think that they can do as good a job as an experienced rental agent but, says Tony Clarke, managing director of Rawson Properties and Rawson Rentals, this is very seldom the case.

“Time and again,” says Clarke, “we have found that landlords going the DIY route run into difficulties with the Rental Tribunal because they are ignorant of the laws governing rental property transactions. They draw up contracts that are not compliant with legal principles.”

Landlords working without qualified agents, says Clarke, in his experience also often lack access to credit bureaux and are more easily duped into accepting an unreliable tenant than experienced agents. They also tend to be less adept at extracting payment from defaulters – and undergo considerable emotional turmoil in the process.

Tenants signing directly with a landlord will quite possibly find that the usual deposit they are obliged to pay at the start of the lease is not put into a trust account and earns no interest. There is, says Clarke, no law enforcing a private landlord to put deposits into a trust account as estate agents have to do – nor are such deposits protected by the Fidelity Fund insurance that estate agents are governed by. Some landlords have, therefore, says Clarke, been unable to pay back their deposits

when the tenant’s lease has expired and have sometimes resorted to using the next tenant’s money for this purpose.

If and when the landlord going it alone runs into difficulties, legal action can become necessary and this, says Clarke, is almost always very expensive.

“All my experience shows that property investors tend to be happier and safer if they employ an experienced rental agent. The monthly fee here is very definitely worth paying to avoid those huge litigation costs and the psychological trauma that inexperienced landlords so often have to face.

Property scams that crop up in the USA, UK or Europe have a nasty habit of later appearing in South Africa, says Tony Clarke, managing director of Rawson Properties.

This being the case, he says, it is noteworthy that in the USA there has been quite widespread use of fraudulent rentals to take unsuspecting potential tenants for a ride.

“Typically,” says Clarke, “the crook will copy and paste details of a genuine rental advertisement into a private website, making himself the person to be referred to. If he needs extra details these can easily be obtained for a small fee from various bureaux. He then registers an email address in a name very similar to that of the owner. His advertisement will probably also make the offer more attractive because he will lower the rent.

“When replies come in he will claim he is acting on behalf of the owner who is temporarily away and has the key but the prospective tenant can “inspect the property from the street”. He will then be told that if he would like to secure it he can do so by paying a deposit to secure the property – this sum to be refunded if no deal is signed.”

Needless to say, says Clarke, the bogus agent and the deposit then disappear and are usually untraceable.

Clarke said that some years ago a scam of this kind was run in Durban on holiday apartment rentals – with the unsuspecting tenant being asked to pay the full two or three week costs upfront.

Rawson Rental agents, he said, will be advised to keep an eye open for such bogus operators – and tenants are advised never to pay in a deposit unless it is a registered estate agency trust account or is accompanied by a signed and witnessed lease document.

There is, says Jason Lee, Head of Rawson Properties’ fast growing Commercial franchise division, a perception amongst South African landlords that the Consumer Protection Act does not apply to commercial property leases.

“This new South African law makes it clear that if the consumer/tenant is a juristic person and if neither his assets or his annual turnover exceed R2 million, he is eligible for the same rights and privileges conferred by the act on an ordinary individual,” said Lee. “in the current recessionary times R2 million is a high turnover threshold for tenants with no assets and landlords may be surprised at how many of their tenants fall under the protection of the CPA.”

So – what can the landlord who signs on such a tenant do to protect himself from running foul of the many consumer friendly clauses in the new act?

“First, he must verify the tenant’s position in relation to the act, i.e. he must check his turnover and his assets – do not just take tenant’s word, verify the facts by asking for copies of the tenant’s financials,” said Lee.

Secondly, the landlord should employ a lawyer (preferably one who has on his team an expert in the new Act) to go through and reword his lease documents

“Alternatively, he could use the lease agreements drafted for Rawson Commercial brokers that deal specifically with the many issues raised.”

“Traditionally,” said Lee, “leases have contained highfalutin phrases and legal terms which are possibly difficult for the ordinary man with no legal background to understand. In terms of the new act these are no longer acceptable: today’s documents have to be in simple language. Furthermore, the Consumer Protection Act stipulates that the ‘supplier’ (in this case the landlord) must always go through the entire document with the ‘consumer’ (in this case the tenant) and get him to sign that he has understood the contract.”

In addition, said Lee, any clause placing an obligation on the tenant, e.g. the paying of service accounts, must be accompanied by a separate signatory box in which the tenant signs to indicate that he has understood this clause. Furthermore, any defects in the building, e.g. floor cracks, rising damp, leaks in the roof or unreliable electrics have to be listed prior to the lease being signed.

The Consumer Protection Tribunal, added Lee, has the power under the new act not only to demand compensation for any inconvenience experienced by the tenant as a result of failure to adhere to its procedures but might even go so far as to declare the entire contract null and void.

Lee also issued a warning on utilities (water, light, electricity and refuse removal) payments. These, he said, in most leases have to be paid by the tenant. However they still remain the responsibility of the landlord.

“Regrettably,” said Lee, “there have regularly been cases where service charges have not been paid to the relevant suppliers over a period of months or years. If and when the owner then tries to sell the property he finds that transfer is blocked because of these outstanding sums – of which he knew nothing – because the bills were sent to the premises and because the Council has no system in place for advising the landlord if and when the sums charged are not paid.”

Asked how Rawson Commercial Division franchisees cope with this situation, Lee said that they now insist on a separate, fairly large utilities deposit being paid upfront – along with the usual deposit to cover damages and possible unpaid rent.

In cases where a tenant consistently does not pay his rent and it is clear that the lease will have to be cancelled, said Lee, it is essential that the landlord at an early stage applies to the courts for a hypothec order over the goods on his premises.

It this is not done timeously, said Lee, certain tenants have been known to remove most of their goods from the rented premises once it is clear that legal action is about to be taken. In these situations the hypothec order does not cover goods taken from the premises and kept elsewhere. The landlord then can quite possibly find himself with a bankrupt tenant who apparently has few or minimal assets which can be attached and whom it is therefore probably pointless to sue.

Rawson Commercial Division franchisees, said Lee, tend to be adept at avoiding tenant problems because they are coached in how to go about in-depth credit checks and on the importance of contacting not just one but two, three or more of the tenant’s previous landlords (particularly if the tenant has moved around frequently).

“Certain small businesses have an unfortunate tendency to go belly-up in bad times,” said Lee, “Often this is because in the good times they have failed to build up their reserves. Landlords’ pre-lease checks should wherever possible go back ten or 15 years and if the business is a new one especial care should be taken to assess its viability and if possible guarantors should be put in place.”

Founded in August 2011, Rawson Commercial already has 18 franchises up and running nationally, many of which, said Lee, have proved surprisingly successful and are now market leaders.

If problems arise on rented properties – especially those in the residential sector – they frequently revolve around maintenance issues. This was said recently by Tony Clarke, Managing Director of Rawson Properties director in charge of Rawsons’ Rental franchise division.

“There is,” said Clarke, “a very real need to define clearly at the outset in lease agreements exactly what maintenance is the responsibility of the landlord and what should be done by the tenant.

“In most instances it is the landlord’s duty to see that regular maintenance keeps the unit attractive and habitable. However, unless otherwise stated, it is also widely accepted in rental agreements that the tenant has to keep the premises clean, look after the garden (and the pool if there is one) and carry out repairs on any damaged or spoilt sections of the building where he himself has been responsible for the problem.”

Asked for examples, Clarke said that if a tenant cracks an oven door, blocks a drain, breaks a window or fails to mow a lawn he can legitimately be warned that it is his duty to do so within a reasonable time span. The tenant can also be charged with resultant damages due to neglecting to carry out such maintenance.

Furthermore, said Clarke, if a tenant fails to report a problem to the landlord or his agent and the damage then escalates (as for example when a minor leak becomes a flood) the tenant can be held responsible for all the subsequent repairs costs to all items.

Similarly, if the landlord is advised but does not respond promptly in putting the damage right, he too can be held fully responsible for all subsequent damage to the tenant’s property (such as furniture). Bad tenants in sectional title schemes, said Clarke, these days are likely to find themselves fined by the body corporate for neglecting to put damages right or for poor maintenance. In some instances, he added, in order to avoid these fines being increased the landlord may pay them himself – but he is then entitled to sue the tenant for repayment plus interest if it was the tenant’s negligence that caused the problem.

“A good landlord or rental agent,” said Clarke, “will make sure that the tenant understands these conditions on signing the lease and will keep sufficient checks on him to step in fast if the condition of the unit begins deteriorating.

“Open communication and swift action on maintenance are the keys to satisfactory landlord-tenant relationships – and this is a lesson we at the Rawson Rentals division take great pains to inculcate with our Rental franchisees and agents.

Eviction of the tenant often the wisest course to follow.

Landlords in South Africa, as in many countries in which poverty is still the lot of a large proportion of the population, may from time-to-time find themselves facing the awkward situation of tenants allowing too many people to move into their unit on medium or long-term arrangements.

Discussing this recently, Tony Clarke, Managing Director of Rawson Properties, said that although almost all local governments have strict rules governing the maximum number of people that a unit can hold, these are frequently broken.

“Obviously,” said Clarke, “such rules are difficult to apply to one-off short term occupancies, as for example when friends from upcountry come to stay for a few days or even a week or two. What is, however, totally illegal is for tenants to accept excessive numbers over lengthy periods and then, as is often done, to charge rents in return for the space occupied.”

This practice, he said, is particularly prevalent on the fringes of major cities such as Durban, Johannesburg and Cape Town. Because taking in too many people is such a serious problem, the lease agreements at the outset must specify exactly the number of occupants allowed in the unit – and the tenant should sign his acceptance of this all-important condition.

If a tenant is then subsequently caught accommodating too many people, after warnings have been given, and if matters are not put right, it is often necessary to resort to the drastic, time-consuming and expensive business of eviction.

This, said Clarke, is, however, the wise course to follow because not only will having too many tenants in a unit almost inevitably result in the premises deteriorating but, if an when municipal officials prosecute for overcrowding -as they are increasingly inclined to do these days – it will be the landlord, not the tenant, who finds himself in the firing line facing the charges.