Semigration to Cape Town and expensive property prices have given rise to a rental craze as residents seek homes in many of the city’s sought-after areas.
Locals, semigrants, and foreigners are competing for the low supply of rental stock in the city, and savvy property investors are eyeing out the opportunities to cash in.
In contrast to the country’s biggest metro, Johannesburg, Cape Town has an under-supply of homes available to purchase, in part due to the rise of semigration; this, combined with the expensive house prices in the city has led to a huge spike in tenants, particularly in areas like the City Bowl, Atlantic Seaboard, and the Southern Suburbs.
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At just 1,55%, the city is therefore enjoying its lowest vacancy rates since 2016, according to the latest TPN Vacancy Survey.
Anecdotally, the rental market in Cape Town is experiencing unprecedented demand, says Rhys Dyer, chief executive of ooba Home Loans.
“Semigrants and foreigners alike are competing for the low amount of rental stock that is available, attracted by the city’s high levels of service delivery, pleasant climate, and relative safety.
“We’re seeing foreigners exercise their currency purchasing power by snapping up luxury rentals.”
In terms of the ‘going price’ of rentals in Cape Town, the Seeff Property Group estimates the average monthly rental of in-demand areas to be:
- R22,000 in the Southern Suburbs (Newlands, Claremont, Rondebosch
- R10,000 in Woodstock
- R25,000 to R35,000 in Constantia
- R10,000 to R20,000 in the City Bowl
In addition, Dyer says, Seeff estimates that rentals in the Atlantic Seaboard and City Bowl areas are currently yielding attractive returns around the 4% to 6% mark.
The popularity of the Mother City has resulted in the Western Cape seeing the highest volume of buy-to-let home loan applications. This is despite the province having the most expensive average property purchase price.
In fact, 32,9% of the province’s property demand stemmed from buy-to-let applications in June 2023 alone. This far exceeds the previous high of 21,5% in March 2020.
“The national uptick in investment properties – now at 10,9% of home loan applications received – is largely driven by this sought-after region, and marks the highest national percentage recorded since February 2009.”
The homebuyers investing in these types of properties are predominantly second-time homebuyers, he adds.
“Our statistics for June 2023 indicate that they earned an average gross monthly income of R156,190 and are aged 44 years.”
The average property price in the Western Cape was R1.78 million in June, while the average price of an investment property is R1.77 million.
Rental demand up, but landlords face risks
While, nationally, rental demand continues to rise as consumers struggle to navigate the prevailing cost-of-living crisis, and prospective homebuyers delay purchases, landlords also face various challenges. Ynnis Wilson, head of Jawitz Properties’ rental division says these include higher bond repayments due to rising interest rates, and the increase in property rates and taxes as a result of the updated valuation roll.
However, landlords should not be tempted to implement above-inflation rental escalations to cover the shortfall.
“With strong rental supply, particularly from developers that are struggling to sell units in new developments and can afford to undercut rental prices, landlords need to weigh the opportunity cost associated with having no tenant versus the cost of covering a shortfall.”
They must also consider the value that retaining a long-term reliable tenant offers in the current economic climate.
“Pushing for above-inflation rental escalations could force existing tenants to consider downscaling. There are also costs and risks associated with securing and vetting prospective new tenants, and there is no guarantee that landlords will secure a tenant at the higher rental rate in the current market.”
IOL Business