Residential property plays catch-up

Johannesburg - The performance gap between commercial and residential property has narrowed, with buy-to-let flats now spinning better profits than shopping centres, offices and factories.

The latest Sapoa/IPD South Africa property index released last week showed commercial real estate – including the retail, office and industrial sectors – delivered a total return of 13.3% last year, which comprises capital growth of 4.1% and an income yield of 8,9%.
 
Offices were the best performing commercial property sector in 2010, with a total return of 14%, followed by industrial buildings (13,6%) and retail (13,1%).

Although the total return for commercial property at 13.3% was well up on 2009’s 11-year low of 8.8%, residential property staged an equally impressive comeback last year.
 
Although SA doesn’t have a single index that tracks the total returns for residential property, taking data from both Absa Group [JSE:ASA] and First National Bank the total return for residential buy-to-let was 14.6% last year.

That’s based on a 6.8% average house price increase recorded by Absa last year, coupled with a 7.8% average gross income yield recorded by FNB’s residential rental index in 2010.
 
Residential property recorded stronger capital growth than all sectors of the commercial property market last year: 6.8% against 4.4% for shopping centres, 3.9% for offices and 3.2% for industrial buildings.

But commercial property beat the housing market on the income return front, with retail at 8.3%, offices at 9.7% and industrial buildings at 10%, which compares with 7.8% for residential buy-to-let.
 
Last year was the first time in a number of years that residential buy-to-let returns overtook commercial property.

In 2009 house prices dropped for the first time in almost 20 years (-0.3%, according to Absa), bringing the total return for residential property to around 7%.

At the same time, commercial property delivered an average 8.8% total return. Commercial property’s lead was also markedly higher in 2007 and 2008.
 
However, it’s uncertain whether residential property investments will continue to outperform their commercial counterparts this year.

Currently, property economists – such as Absa’s Jacques du Toit – expect house price growth to slow to around 1.5% for the year as a whole.

But the good news is residential rental yields are likely to rise over the next 12 months on the back of a strong acceleration in rental growth.
 
FNB property strategist John Loos says it appears demand for rental accommodation is starting to outstrip supply in certain areas.

That applies particularly to flats, an indication of more tenants downscaling to smaller, cheaper properties.

Flat rentals were already up an average 8.6% in fourth quarter 2010 year-on-year (from 6% in the third quarter).
 
Loos says the fact that fewer investors are now putting money into buy-to-let properties also means a limited amount of new rental stock should come on to the market over the next six to 12 months.

That should place further upward pressure on rentals, translating into higher income yields on residential property over the course of 2011.
 
Latest FNB figures show only 7% of all housing sales went to buy-to-let investors in fourth quarter 2010 – a far cry from the 25% average recorded by FNB during the boom years between 2004 and 2007.