Buy-to-let: landlords need to be far more scrupulous in vetting prospective tenants

The buy-to-let market essentially allows individuals to become micro-investors by purchasing assets that provide them with annuity income as well as capital growth over time. There are just more than 1,7m homes that are being rented by households in the "formal" residential letting market, according to Statistics SA’s revised General Household Survey October 2013.

Based on PayProp’s analysis of just over 2,5m transactions, the weighted average national rental at the end of the first quarter of 2014 was R5934 — up from R5 867 at the end of the fourth quarter 2013.

When one looks at the velocity of growth it is important to note the steady increase in rental growth percentages from the start of 2013. Growth rates eventually peaked in October 2012 at 10,8%, and have since steadied to 8,4% at the end of the 2014 first quarter.

Though the increases are encouraging for the general buy-to-let market, they are not based on a fundamental improvement in the underlying economy that is allowing tenants to pay increases well above current inflation levels. Our view is that there is a distinct possibility that this rapid increase is based on a mismatch between the demand and supply of rental properties and that this holds some cautionary advice for landlords.

When one looks at the proportion of buyers who are buying to let, as recorded by FNB, it is clear that though currently 9% of buyers are doing so, this is well below the 25% seen in the halcyon days of the early to mid-2000s. This in effect means that there has been limited stock formation in a market where demand for rental property is increasing.

When we first saw this trend our concern was that it was pushing up prices to beyond what consumers could afford and that one could expect to see the first cracks showing ...