While the national average rental growth rate has slowed down in recent years, the overall number of properties being purchased for buy-to-let agreements is remaining steady. In Cape Town specifically, this trend is still showing strong. However, it's worth looking into the details before you decide if it's time to invest.
Overall, the end of 2018 brought with it one big negative: in the Western Cape, investors saw poor growth in rental prices. This was not at all expected as the Western Cape has always been one of the biggest, best rental markets in the country. So, when its rental rates decline or remain stagnant, it brings down the national average substantially.
That's why, while the national average has declined recently--majorly due to the poor performance in the Western Cape--the growth in other provinces actually saw improvement and is continuing to see improvement year-over-year. For instance, the Free State is now topping the chart, doubling from 4% to 8% last year.
Of course, for investors in the Western Cape, all that really matters is the local market. The beginning of last year showed the lowest annual rental growth since 2012. It dropped from nearly 9% in Q1 2017 to just 6.97% a year later. This marks the biggest decline seen by any provinces, other than Limpopo. With that information in mind, you shouldn't turn your back on it just yet.
The Western Cape remains one of the strongest rental markets around. It still retains the title of holding the highest average rent out of all the provinces, which is why investors know it for being so lucrative. With last year's average coming in at an impressive R8 805 per month, the Western Cape continued to beat the national average of R7 359.
The appreciation of rental properties is also far ahead of other provinces, averaging 10% per annum. That beats the comparatively modest 3% seen in other provinces like Gauteng. That's why properties that hold buy-to-let are still going fast across the Cape Town area. But, with more extended families sharing homes and declined semigration, the supply and demand are beginning to reach a point of equilibrium.
With it gradually turning to be a "renter's market," landlords are seeing that tenants have a little more power to negotiate a good bargain. In turn, many investors are responding by backing away from the market. This isn't entirely surprising given the incredible rental growth that the Western Cape has been witnessing in the past few years. After all, any hot market has to reach a cooling point eventually.
That's why property owners are beginning to look to alternatives for maximizing their returns. This has led to a rise of Airbnbs and short-term rental properties in the area. Although investors are still learning and adapting to their unpredictable nature, the higher earning potential is an appealing option for some investors.
And, this is having a more broad impact on the market. With many properties now turning into high-priced, short-term options, tenants will gradually find themselves with fewer long-term rental options again, which will turn the climate back to favoring landlords, thus putting them in a better position to charge higher rates. In this sense, these short-term rentals aren't just a short-term solution for some investors, they are helping to re-balance the supply/demand shift that's currently happening.
In the next few years, it is expected that Cape Town residents will witness a period of normalization. This is a natural phase in the property cycle and marks an important step towards market sustainability. It's unrealistic to believe that these things will impact the mid or long-term value of investment property. However, it could impact your short-term returns if you are focused on long-term buy-to-let units.
LYST Property Consultants