Interest rate creates ideal climate for residential property investment
The recent interest rate cut announced earlier this month, as an attempt to curb economic decline as a result of COVID-19, has brought South Africa's cost of lending to the lowest level on record. South Africa's prime lending rate is now sitting at 7,25%.
Chris Renecle, MD of Renprop, says that in many instances this has led to the monthly rentals of residential property becoming more expensive than monthly bond repayments would be on the same property. "The last time a South African property market investor could recover their bond repayment on a 100% bond with the rental income was in the 1990s."
Renecle says that as most economists envisage that the interest rate will remain low over the next 18 months or so, it makes sense for those who have been sitting on the fence about property purchase or investment to take the leap. "From a residential property investment perspective, there has never been a better time to buy. Potential property buyers do however need to take into account that the bond repayments are only one financial aspect of a property purchase."
According to Renecle, in terms of investment, the direct purchase of residential property will always leave the investor with a defensible asset, as it will never see the reduction in value to the same magnitude as the listed sector.
"While there has been, and may well continue to be, a marginal reduction in residential property values, over the years the sector has always experienced growth. Added to this, there is, and will continue to be, a constant demand for residential rental properties. I don't foresee this scenario changing much despite the economic impact of COVID-19."
Renecle says that when it comes to weighing up the pros and cons of investing in residential property right now, the supply and demand ratio as well as inflation need to be taken into consideration. He explains that during Level 5 and Level 4 of South Africa's Lockdown, construction came to a halt. Many planned residential developments have also been put on hold. "This means that over the last two months, the supply of residential property units has decreased. And while there may well be a decrease in demand for residential property units due to the current economic climate, there will be a bigger decrease in the supply of residential units than in the demand," says Renecle. "This means that prices may well start to increase, and when this supply and demand disparity is coupled with the impact inflation will have on building costs going forward, residential property prices are set to escalate even further."