Buy-to-let part 2 … and the numbers look even worse.


It’s not what you don’t know that gets you into trouble. It’s when you think you know and then it ain’t so –Mark Twain, American humourist and satirist.

The reaction to my article on the investment merits of buy-to-let residential property in South Africa written two weeks ago was, as expected, immediate, passionate and divided.

There were no ifs and buts. You either believed in the merits of residential property or you didn’t. If you did, you would offer all the reasons why you believed it was a good investment strategy, and if you didn’t, the same principle applied.

Herewith the follow-up article as promised but first some context.

My property history

One Monyweb-reader, I think it was a Morris Pieterse, posed the question: Did I own any property? The implication was that I didn’t and therefore I don’t know what I am talking about.

That’s like asking Gary Player whether he has done his 1 000 sit-ups that morning or Jacques Kallis if he likes playing around with a cricket ball ….

I bought my first property as a 23-year old student at then RAU, using my bursary money instead to buy a small house in Westdene, two weeks after the outbreak of the Soweto riots in 1976. We literally could see the columns of smoke rising to the southwest of Johannesburg when we signed the offer the purchase.

The sellers were foreigners and rushing back to Scotland, accepting the first offer that came their way. My offer of R16 500 was accepted which was funded by means of a R2 500 deposit and R14 000 bond. Bond repayments were R121 a month!

Four years later I sold that house for R85 000 and moved on to my second house. So I know all about gearing, buying when everyone is selling and massive capital appreciation should one get it right.

Since then I have done the whole bang-shoot as far as property is concerned: bought at auctions, bought off-plan, flipped stands in Dainfern and at one stage owned more than ten rental properties, including commercial properties.

But don’t think for a minute I haven’t made mistakes – the most recent one was buying an undeveloped stand in the boom-times under heavy peer-pressure from a family member. The stand has since dropped by 50% in value—as has most undeveloped land in SA—and yet I have to pay off the bond and the levies every month.

If ever anyone tries to convince you to buy an undeveloped stand, just say NO! It must be one of the worst investments you will ever make.

The bulk of the little assets I own, therefore, came from ownership of property. I still own several properties which I rent out. I am happy with them as I‘ve owned them for a long time, but I am unlikely to be buying more. I am, however, currently buying a small office for my company.

The basis for my warning

It was based on my own experience with the declining net yields on residential property and that of many of my clients over the last number of years, that I warned potential investors in this sector, especially at retirement, to rather consider other alternatives.

My experience and many of the calculations I have been doing in recent years point to a decline in net yields which is not widely reported, or is difficult to calculate on a national basis, as one can do with listed property or direct commercial property investments.

My rough calculations showed net yields on of anything between 3% and 5% based on an estimate of current market value.

Moneyweb’s Ingé Lamprecht seemed to have confirmed these low yields in her report on the Payprop State of the Rental Industry Session which took place last week. Her article referred to net yields of about 5.1% nationwide, which, depending on the level of gearing (size of mortgage bond) could turn negative for people using large bonds to purchase property for rental purposes.

So not much more yield than money in a money market account, it seems, and with it all the hassles of tenants not paying or paying late and high costs when you decide to sell.

While rentals are rising at an average of about 7% per annum it is the sharp increase in rates, taxes and levies (up about 15% per annum) that is dragging the net yield on residential property lower. Furthermore, rentals are also being held back by lack of affordability as well as an increase in impaired credit records nationally.

The numbers

All told, any profits for buy-to-let investors will therefore have to come from capital appreciation and if John Loos from FNB is anywhere correct, this year could see home price inflation of only 6.4% and next year 4.9%.  That leaves hope and hope is not a great investment strategy.

In reaction to my previous column and also to try and work out more accurately the real yield on rented residential property in SA, I asked some very smart people at the quants-division of Stanlib to run me some numbers, based on a certain set of assumptions regarding residential property as an investment.

My intuition and limited experience told me that net yields were under pressure, but the numbers that came back from one very smart propeller-head at Stanlib, namely Richo Venter ( CFA), were even worse than I thought.

In fact, in the current market residential property is earning not more than 2.4% per annum when Return on Investment (ROI) is used. Hence my advice to people at retirement to consider listed property as a far better alternative to buying a rental property or two for investment purposes.

And before I get emails about gearing, if a bond of 50% is used in my example the ROE comes in at 9.4% annualised.

My example was quite a simple one: an assumed purchase price of R500  000 ten years ago with (a) no bond and (b) a bond of 50%. Further assumptions were for an initial rental yield of 10% increasing by 7% per annum and interest rate at prime over the period.

There are bound to be other propeller-heads who will, no doubt, come up with all kinds of statistical attacks on this methodology, but the calculation and the outcome is at least based on some kind of factual and logical analysis.

Further variables might include higher levels of gearing and or higher rental and escalations but I think my assumptions cover sufficient bases to be representative.

The outcome: average residential property investment over the last ten years, considering a host of real-life factors such as interest rates, rental income, costs and maintenance has been a very poor investment indeed, providing  an ROI of 27.8% or 2.4% annualised. When gearing was used it increased the return on equity (at gearing of 50%) increased to 9.4% per annum.

Compare this with the listed property sector on the JSE which has returned a whopping 1 044% or 26.2% per annum over the same period.

And, as I stressed in my previous column, listed property has 100% liquidity and no fees to sell all or a part of your investment, compared with huge delays and expenses in the form of estate agent commission to sell your residential property.

To end this column, a real-life story: In Dainfern were I have been living for many years, there is a man whom I shall call John B. An estate agent at the time, John B bought one of the best remaining stands in Dainfern with a stunning view on the Jukskei River. Ten years ago or so, when I was looking for a stand to build a house, I offered John R1m for his stand. He wanted R2m, a view based on the fact that it was the best stand left in Dainfern.

As the years went by I would, on the occasion of seeing John, offer him a little more for his stand.  Eventually it became something of a little joke between the two of us, him always wanting a little higher than the price I offered.

The last offer I made was for R2.5m but again John, thinking ala Mark Twain that he knew better, wanted R3m. Ten years went by and nothing happened with the stand, despite the payment of paying triple levies and rates and taxes.

A month ago I heard from John that he eventually sold the stand for the princely sum of R2.5m.

I checked with Keilen Ndlovu what R1m invested ten years ago in the Stanlib Property Income Fund with dividends reinvested would be worth today?

Approximately R13m or so……

As Mark Twain might have said when the dentist asked the patient: ”Does it hurt? Back came the reply : “Only when I cry”.

P.S. If anyone is interested in the quants work done by Rico Venter, I will gladly forward the spread-sheet calculations.

*Magnus Heystek is a director at Brenthurst Wealth and can be reached on for ideas and suggestions.

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