Residential vs Commercial Letting 2022 in SA

Have you considered entering the residential vs commercial letting market in South Africa? Are you wondering about the type of property to invest in and what the risks might be for the 2022 property market? South Africa shares many of the post- pandemic challenges experienced globally, including a slowing economy, interest rate increases, and a lack of sufficient energy.

According to the Financial Times (FT), interest rate rises are dampening house price growth in the United States and Europe, but there are reasons for optimism. The chief executive officer of a major South African residential real estate company stated that although it is difficult to predict what lies ahead, the South African property market is resilient. But what are the differences between residential vs commercial letting, is it worth investing in, and what are some potential risks?        

Residential vs Commercial Letting

Property, whether residential or commercial, has the advantage of being gearable, so you can fund the purchase with borrowed capital. Buying commercial property such as shopping centres, offices, grocery stores, factories, and industrial estates is more complicated than purchasing residential property but is traditionally a sound investment. You can also use a triple net lease, where the tenant not only pays rent and utilities, but also for security, insurance, maintenance and more on the property. 

Residential properties such as houses, flats and duplexes are a sound rental investment for the less experienced investor if you can get a dependable tenant. In residential letting, the owner is always responsible for the property insurance, taxes, basic security measures and most maintenance on the property, even if a property management company is appointed to manage the letting process.       

Return on investment for residential vs commercial leasing

According to the PayProp Rental Index Q2 2022 for residential property, quarterly year-on-year rental growth continues to climb, with a 2.6% rate during the second quarter. But increasing interest rates and high inflation levels will continue to put pressure on people’s finances and could force some to look for cheaper accommodation. Higher-income tenants might decide to keep renting due to higher interest rates and an inability to save, making investing in high-income rental property a very viable proposition. 

The economic climate is also putting pressure on commercial rental properties. The Rode State of the Property Market report for quarter 2 of 2022 indicates that the industrial property market is performing better than the retail or office market, with rental growth for 500m² space picking up to 5.4% year-on-year. 

Residential vs commercial letting risks

There are many rules and regulations governing commercial real estate, and they change for every type of property. So, to invest in commercial property, one must either have specialised knowledge or pay for such knowledge. Another risk for commercial letting is the cost of refurbishing the property to accommodate each new tenant’s specific needs.    

Being the landlord of a residential letting property can be time-consuming. In South Africa, it is difficult to evict a non-paying tenant if you don’t know the relevant legislation, including the Rental Housing Act 50 of 1999 and related amendments. But when you have a tenant that pays consistently, the investment will pay off. 

Jason Scholtz is the CEO of Envision Investments and a respected property and strategic investment thought leader in South Africa. Do you want to invest in property? Are you wondering about residential vs commercial letting? Contact us today.