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Don’t expect great capital growth for next few years

Tuesday, June 12, 2007

The deceleration in house price growth which started in the second half of 2005, is still gathering downward momentum. Buy-to-let investors should not expect great capital growth, nor significant income growth, over the next few years, cautions Erwin Rode, CEO of Rode & Associates property valuers and economists.

This downward house-price-growth trend is confirmed by the latest Absa House Price Index, which recorded nominal month-on-month house price growth of 0,8% in May, its lowest rate since early 2002. This has prompted ABSA to predict real house-price growth to average 7,8% in 2007.

The latter figure is roughly in line with Rode’s forecasts of 6,5% average house-price growth for 2007.

The capital-growth outlook for the next year or so is a bit rosier for lower-priced suburbs, although even this segment of the market will continue experiencing a deceleration in growth.

The residential income-return picture is also unlikely to improve much over the next few years. According to income-yield data published in the latest Rode’s Report, a standard-quality townhouse in Centurion, for example, is currently delivering a net income yield of 5%.

This is low compared to the forward income yields of listed funds, which are around the 6,5% mark. What’s more, listed funds’ income streams are expected to grow robustly in the coming years, which will provide for solid capital growth — even should the market rating stay at the current level.

Rode cites the recent launch of the 185ha Burgundy Estate development on the west facing slopes of the Tygerberg, bordering the De Grendel farm and wine estate, as an example of how the abundant supply of new homes is likely to continue putting pressure on residential-rental growth for several years to come. This one development alone will be bringing close to 6000 new residential units onto the Cape Town home market over the next five years.

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