The South African property investment market has started to look a little less rosy recently. The rental income ratios have been steadily shrinking and the residential property boom seems to be settling down to less spectacular value increases. These factors suggest that the attractiveness of South African residential properties as investment vehicles may be declining.
Influence of new property investors
The proportion of property investors to owner occupants has been rising steadily over the past four years. But these investors own a smaller proportion of properties than four years ago. In other words, there are more investors participating in the property market, but the average property investor own less property than before this increase. This means that a number of new investors, who are buying their first investment properties, have entered the South African property market.
Investor activity plays an important role in the South African property market. Many first time investors (who buy to let) have entered the investment property market in the past few years, during the period of rapid property price increases. These property investments definitely played a role in the further escalation of property prices. But these "new" property investors could also play an even bigger role once price increases start to decline and fears begin to emerge that prices might start to fall.
The huge presence of investors in the South African property market, larger than ever before, gives more momentum to the property market. A wide perception, whether true or false, can therefore fuel a property price trend in either direction - upwards or downward.
Inexperienced investors are more likely than homeowners to sell their property as soon as they expect property values to fall. Investors who panic and sell off their rental assets to escape, or limit, capital losses would aggravate the decline in property prices.
Occupancy
The lack of occupancy is an ever-present danger in the property investment market. Combined with downward pressure on rentals, these factors are beginning to put a squeeze on the residential property market. Areas where property speculation became almost frenzied during the past few years will be particularly experiencing this squeeze.
The logic behind buying two and three bedroom residential property as rental investments are still valid, but investors should be prepared for the possibility of a lower than expected rental income, or extended vacancies. Apartments (flats) outside the main central business district areas, or in less popular neighbourhoods, further away from a central hub, are particularly vulnerable units at the moment.
South African Property Investment
Investors should take all the costs of investing into consideration, such as transfer duty, tenant requirements, rates, taxes, levies, commissions, repairs and maintenance. In any market it pays to do one's sums, but especially in a slower market, it is not so easy to "exit" a bad investment.
There are still good opportunities for property investments in South Africa. But investors may have to look a bit harder for good transactions than they are used to. And it would be wise to remember that you make your profit when you buy...
