No matter where your investment properties are located in South Africa, if one fails to perform a thorough background check as well as an affordability assessment on your tenant, well then you’re asking for trouble no matter where you invest in S.A. The CBD / inner city is no different, the exact same principle applies. It really is a pity that so many misinformed investors out there have been led to believe that you are less likely to receive your rent every month from a CBD / inner city tenant compared to that of a tenant in the middle to upper end ‘leafy suburbs’. After many years of investing in the CBD, we (as well as our clients) have found this to be quite the opposite.
Tenants earning steady income vs those that are self employed:
Your middle to upper end tenants are in fact more risky than your average inner city tenants, one of the many reasons is that most tenants in the middle to upper end market are small business owners. Due to the nature of small businesses, regular financial ups and downs are experienced due to the instability of small businesses in general (a staggering 95% of all small businesses fail within their first 5 yrs). In addition, your middle to upper end tenant’s business need only have one ‘bad’ month which could result in your rent being paid late (or not paid at all). This compared to inner city tenants who are typically earning a steady income as most are working for large corporate companies and government organizations. An inner city tenant’s salary/income is therefore far more secure than a self employed tenant.
Multiple rent contributors vs one single contributor
In addition to the above, in the middle to upper end market your entire rental payment is typically being paid by one single bread winner in the house hold, as opposed to CBD / inner city tenants who typically share their rental payment (for example 3 ways) on a monthly basis (eg. in the case of 3 young professionals sharing). This means that in order for the inner city tenants to deafult on the full rental payment, all of the contributing tenants would need to default on the exact same month, and chances of this happening are extremely slim. Whereas with the middle to upper end tenant it simply takes the only contributing individual to default and your entire rental (which is typically a far larger sum of money) is lost in full.
Higher rentals in the middle to upper end market can result in a bigger knock for the investor if your tenant defaults
The worst aspect about your middle to upper end tenant defaulting is that we aren’t talking about a mere R 3500 inner city rental which is being lost, we are talking about a rental payment of between R 8000 and R 35 000 which is being lost. Aside from the larger rental amount that you are losing out on, you are left with a far bigger bond installment to now pay out of your own pocket as typically the property was bought for at least 4 times the price of your average CBD / inner city flat.
CBD / inner city suburbs offer a far higher rental demand
Another beneficial factor about the inner city suburbs is that the rental demand is incredibly high due to these tenants wanting to be close to the work place. It is not uncommon for letting agencies in the inner city to source a good paying tenant within 48 hrs of advertising a particular flat. This compared to the middle to upper end market whereby you might be waiting anything up to 6 months to secure a qualified tenant. The reason for this lengthy tenant sourcing period in the middle to upper end market is that only a minority of the South African population can afford to live there, this leaves the lower end market (CBD / inner city) with an extremely high and vibrant demand for rental housing.
After considering the above aspects, which tenants sound more risky to you?
Other Factors Making The CBD Such a Lucrative Investment
With an estimated one million people commuting to work in the Johannesburg CBD each day, these inner city properties represent not just a gap in the property market, but rather a yawning chasm. And with the government pumping millions and millions of Rands every month into these Inner city areas to rejuvenate and uplift them on a monthly basis, well what more could an investor ask for.
The Inner City projects have been, and are continually extremely successful in servicing the demand for tenants and city living residents, and have shown tremendous capital growth. Areas are being cleaned up and buildings rehabilitated on a daily basis. In 2001 you could have purchased an Inner City apartment for as little as R25 000, these days it is difficult to find a flat in a well managed block for under R200 000.
Some of the biggest property investors in South Africa currently own huge volumes of property in these inner city areas and have experienced capital growth and rental returns like no other areas in South Africa. We (IMAGINE), as well as our clients have too been investing in the inner city for many years now and we have never looked back. If capital growth and extra-ordinary positive cash flow is what you’re after, you’ve come to the right place.