FNB-TPN RESIDENTIAL YIELDS
10 January 2017
John Loos, Household and Property Sector Strategist
Tel: (087) 328 0151
Cell:083 - 453 8096
E-mail: [email protected]
Website: http://blog.fnb.co.za/category/economics/
Michelle Dickens
Managing Director: TPN
Tel: 0861-876 000
Cell: 082-905 7099
Email: [email protected]
Website: http://www.tpn.co.za
THE FNB-TPN AVERAGE RESIDENTIAL YIELD

IS 2017 FINALLY THE YEAR WHEN WE START TO SEE RESIDENTIAL YIELDS RISE AGAIN, TAKING THE MARKET
GRADUALLY TOWARDS A MORE ATTRACTIVE BUY-TO-LET OPPORTUNITY?
In the 3rd Quarter of 2016, the revised FNB-TPN National Average Gross Residential Yield declined very
slightly from the previous quarter’s average, after having risen in the 2nd quarter.
The FNB-TPN Residential Yield dataset is the combined result of TPN rental data, along with FNB’s house
price data and its Automated Valuation Model (AVM). The approach has been to take all of the properties
for which TPN rental data exists, utilise the FNB AVM to estimate a current value on the property, and then
to calculate the Gross Initial Yield on all such properties.
The National Average Gross Yield declined slightly to 9.06% in the 3rd quarter of 2016, from a revised 2nd
quarter level of 9.11%. This comes after the 2nd quarter average had risen from 9.07% in the 1st quarter.
The Average Gross Yield had previously declined from a high of 9.22% back in the final quarter of 2013 to
9.07% by early-2016, driven lower by a period
National Average Gross Yield
of solid home buying performance up until not
10.0%
9.22%
9.5%
9.06%
9.0%
too long ago, which resulted in solid house
price inflation until the early stages of 2016.
8.5%
8.0%
After that 2nd quarter increase in the average
7.5%
7.0%
7.28%
yield, we had believed that it could be the
6.5%
6.0%
beginning of a longer gradual rising trend in
5.5%
5.0%
2006
2007
2008
2009
2010
2011
2012
2013
National Average Gross Yield
2014
2015
2016
yields, given that many of the fundamentals
pointed towards it. Interest rates had risen
gradually from early-2014 to early-2016, and a multi-year economic growth slowdown since around 2012
had exerted downward pressure on home buying demand. By 2016, this had begun to exert some
downward pressure on house price growth, and slower house price inflation that underperforms rental
inflation is exactly what is needed in order to lift yields and make it a more attractive buy-to-let buying
opportunity.
But our expectations of rising yields proved to be a little premature, the 3rd quarter of 2016 data suggests.
Nevertheless, we don’t believe that the 3rd quarter decline in the average yield is a cause to modify our
expectations, and remain of the expectation that 2017 will be a year in which yields could rise more
noticeably.
2
Our reasoning is in part due to the fact that,
FNB House Price Index Growth
according to the FNB House Price Index in the
40%
4th quarter of 2016, we began to see average
35%
30%
house price growth slow more noticeably.
25%
20%
From a year-on-year rise of 4.6% in the 3rd
16.7%
15%
quarter, average house price inflation slowed
10%
5%
1.9%
0%
-5% 2002
2004
2006
2008
2010
2012
2014
2016
significantly to 1.9% in the 4th quarter of 2016.
That 3rd quarter average house price growth
-10%
was very similar to the StatsSA estimate of
-15%
FNB Average House Price - year-on-year % change
4.88%
year-on-year
inflation
in
average
residential rental payments late in 2016.
Housing Rental Consumer Price
Sub-Indices - Inflation Rates
However, the 1.9% house price growth of the
4th quarter is noticeably weaker than that
8
%
rental inflation estimate.
4.88
4
0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
CPI - Actual housing rentals - y/y %
- Townhouses - y/y %
- Houses - y/y %
- Flats - y/y %
The result is that when we compile our
FNB Price/Income Ratio Index
(Jan 2008=100) - Using CPI Rentals
Average House Price-Average Rent Ratio
100
Index from the 2 time series (almost the
inverse of a yield calculation, but here we are
90
85.45
79.03
82.86
80
not matching value and yield of each individual
property), recent months have begun to show
70
a decline in this ratio. This implies rental
inflation noticeably outpacing weak house
60
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
price inflation.
Price/Rent Ratio Index (HPI/CPI) Jan 2008 = 100
TPN’s estimates of annual rental escalations,
National Average Rental Escalation
having previously gone through a slowing
10.00%
9.34%
9.00%
period from 2014 to 2015, have more recently
8.00%
shown some mild strengthening in 2016. From
7.00%
a low of 2.8% year-on-year as at the final
6.00%
quarter of 2015, the average rental escalation
5.00%
4.25%
4.00%
3.00%
by the 3rd quarter of 2016.
2.00%
1.00%
0.00%
2010Q1
had shown some moderate increase to 4.25%
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
3
In short, therefore, while we didn’t see a further rise in the Average Gross Yield on residential properties
in the 3rd quarter of 2016, the 4th quarter house price growth slowdown suggests that house price growth in
that quarter began to noticeably underperform various estimates for rentals, which point to rental inflation
perhaps nearer to 5%.
Looking into 2017, we expect that average house price inflation will by and large underperform
rental inflation in another tough economic year. We project house price growth for 2017 to average
around 3%, down from 5% in 2016, in lagged response to the economic growth slowdown and
interest rate hiking of recent years up to 2016.
The result is expected to be some gradual increase in the Average Gross Yield for 2017, “gradual”
being the operative word, from an expected average of around 9.1% at the end of 2016 to nearer to
9.3% by the end of 2017.
1. NOTES:
Data Sources: TPN and FNB
Yield Compilation Methodology:
After including a few “data cleaning filters”, the estimates of initial yields on residential properties have been
produced. Because rental variations appear to vary far greater from the mean than house prices do
(possibly due to the absence of professional valuer guidance in the rental market), we find it better to use
median yields than average yields for rental segments.
The national average yield is therefore a combination of mean and median. We start by compiling median
yields for property area value bands in the major rental regions, i.e. the 6 major metros and “the rest of SA”,
by area value bands. The value bands are:

Lower Income Rental Areas: Areas with average home value below R600,000

Lower-Middle Income Rental Areas: Areas with average home value between R600,000 and R900,000

Middle Income Rental Areas: Areas with average home value between R900,000 and R1,2million

Upper-Middle Income Rental Areas: Areas with average home value between R1.2m and R1.5m

High Income Rental Areas: Areas with average home value higher than R1.5m.
The median yields of the regional segments are then rolled up into regional and national weighted averages
based on weightings determined by the rental volumes in the segments and regions.
Disclaimer
The information in this publication is derived from sources which are regarded as accurate and reliable, is
of a general nature only, does not constitute advice and may not be applicable to all circumstances.
Detailed advice should be obtained in individual cases. No responsibility for any error, omission or loss
sustained by any person acting or refraining from acting as a result of this publication is accepted by
Firstrand Group Limited, TPN and / or the authors of the material.