By: Joan Muller
 
WHILE millions of rand are still flowing to the buy-to-let residential market, despite lower yields, some developers are now luring investors with the incentive of a guaranteed rental income. Some are offering a gross rental income of up to 10% in the first year after transfer, double the average currently earned by most buy-to-let investors.

The Lincoln, a sectional title development recently launched at Melrose Arch guarantees unit owners 10% of the gross buying price for the first year after transfer.

The joint venture between the Melrose Arch Development Company and Kirchmann-Hurry Projects consists of 56 luxury one- and two-bed apartments priced from R2,5m to R5m. That translates into an average selling price of R22 000/sq m.

Andrew Kirchmann, director of Kirchmann-Hurry, says that while guaranteed rentals are a new concept in SA it's been successful in Australia.

Gateway Property Developments earlier this year offered investors a 9% rental income in the first year on the buying price of units in its Illovo Mews development north of Johannesburg. Developers of new apartment blocks at Durban's Point Waterfront are also offering similar deals.

Analysts agree that guaranteed income returns are an attractive incentive in the current market, where most investors are lucky to earn 5% on buy-to-let properties.

However, Neville Schaefer, CEO of property letting group Trafalgar, says that it's likely that the first year's income is already built into the property's price. He cautions that there's still a marked oversupply of rental properties in most cities ? particularly properties where asking rentals exceed R5 000/month. So chances are slim that current residential yields of around 5% will increase to such an extent in the next year or two that investors will be able to match a 9% or 10% return once the one-year guarantee lapses.

Schaefer also warns investors not to be lulled into a false sense of security. "Investors should ensure that they can meet any negative cash flow from the second year onwards if leases have to be renewed at lower rentals."

Pam Golding Property Group CEO Andrew Golding agrees that rental levels of 9% to 10% are not currently the norm. But Golding argues that in some cases, notably sought-after residential nodes such as Melrose Arch, investors are likely to see rental growth outpace the rest of the market.