The buy-to-let investment strategy has faced challenges across South Africa due to rising interest rates, economic shifts, and escalating property prices. Investors are increasingly under pressure to ensure that rental income can cover the higher costs of financing properties. However, despite these challenges, Cape Town and the broader Western Cape continue to offer promising opportunities for buy-to-let investors.
Cape Town’s vibrant urban centres, scenic coastal towns, and robust rental market—particularly driven by semigration from other provinces—have kept the region’s property market resilient. Semigration, where individuals relocate from provinces like Gauteng to the Western Cape in search of better lifestyles and security, has been a key factor in maintaining high demand for rental properties.
“As migration to the Western Cape intensifies, the demand for rental properties continues to grow, making the buy-to-let market in Cape Town an appealing option for savvy investors,” says Odette Maartens, Head of Rentals at DG Properties.
Why Buy-to-Let is Still Profitable in Cape Town
Rising Demand from Semigrants
The semigration trend has led to a booming rental market in Cape Town. Many semigrants, particularly from Gauteng, rent properties while they explore their new environment and evaluate long-term settlement options. This has created sustained rental demand in high-demand areas like the Southern Suburbs, and the Atlantic Seaboard.
According to StatsSA’s Household Survey, the number of households renting has increased from 17.7% in 2020 to 23.9%, highlighting a growing preference for renting as property prices rise. Furthermore, ooba Home Loans data shows that 32.9% of the Western Cape’s property demand stemmed from buy-to-let applications in June 2023, up from 21.5% in March 2020. This surge in demand is largely driven by the semigration trend, creating a shortage of properties.
“Semigrants often prefer to rent initially, making rental properties in these areas a lucrative option for investors,” explains Maartens.
Capital Growth in Key Areas
Cape Town continues to see property price growth, particularly in sought-after areas like Sea Point, and Claremont, offering investors attractive rental yields and long-term capital growth. Despite the Western Cape having the highest average purchase price for homes, buy-to-let investments are surging, as foreign investors compete for limited available properties. Rising house prices are also pushing more people into the rental market, increasing the potential for stable rental income.
According to the Vacancy Survey for the first quarter of 2024, vacancy rates in the Western Cape have dropped to their lowest levels since 2016, recording a mere 4.42%. This reflects the strong demand for rental properties, making the region a solid investment for landlords seeking both immediate returns and long-term appreciation.
Prime Locations for Buy-to-Let in Cape Town and the Western Cape
Investors looking to capitalise on Cape Town’s rental market should carefully consider the location. Here are some prime areas for buy-to-let investments:
- The Atlantic Seaboard: Areas like Sea Point, Green Point, and Mouille Point are highly sought after for their proximity to the ocean, vibrant lifestyle, and closeness to the business district. These areas attract both local and international tenants, particularly semigrants, creating strong rental demand. Although entry prices can be high, yields in these areas are particularly attractive.
- City Bowl: The City Bowl area, encompassing neighbourhoods like Gardens, Vredehoek, and Tamboerskloof, is immensely popular among young professionals and creative entrepreneurs. Its proximity to the central business district, along with easy access to major transport routes and a vibrant cultural and social scene, makes it a top choice for renters. The area’s scenic views of Table Mountain and the harbour, along with trendy cafés, restaurants, and entertainment hubs, consistently draw tenants looking for an urban lifestyle with a touch of nature. Rental demand remains strong, with solid yield potential due to its central location.
Southern Suburbs: Neighbourhoods like Claremont, Rondebosch, and Newlands are favoured by families and students for their proximity to top-tier schools and universities. The Southern Suburbs have remained in demand, particularly among semigrant families seeking quality education for their children. These areas offer both stable rental income and solid capital growth.
Key Considerations for Investors in Cape Town
While Cape Town’s buy-to-let market offers substantial opportunities, investors should consider several factors:
- Interest Rates: The repo rate remains at its 2023 level of 8.25%, with a prime lending rate of 11.5%. This stable environment makes financing more predictable for investors. There is further good news on the horizon: experts predict that interest rates may begin to drop by the end of 2024.
- Tenant Profiles: Semigrants are typically professionals or families looking for long-term leases. Selecting properties in secure, family-friendly neighbourhoods and performing thorough tenant vetting can help secure reliable rental income.
- Property Management: For investors managing multiple properties or those based outside the area, hiring a property management company can help with day-to-day operations such as tenant screening, maintenance, and rent collection, ensuring a competitive position in Cape Town’s rental market.
Potential Pitfalls for Buy-to-Let Investors
- Seasonal Vacancy Rates: Coastal towns continue to experience fluctuating rental demand, with higher occupancy during the holiday season and slower periods in the off-season. Investors should consider whether they prefer the higher returns of short-term holiday rentals or the stability of long-term tenants.
- Maintenance Costs: Properties near the coast require more maintenance due to exposure to sea air and weather conditions. Budgeting for higher maintenance costs is essential for investors, particularly those in premium areas like the Atlantic Seaboard.
- Affordability: Cape Town remains one of South Africa’s most expensive regions. Investors need to ensure that rental yields justify the higher initial investment and ongoing costs.
Conclusion
The semigration trend into the Western Cape continues to drive demand for rental properties, making Cape Town an attractive buy-to-let market. “For investors who are strategic about location and tenant needs, Cape Town and the Western Cape offer robust opportunities for rental yields and long-term capital growth,” concludes Maartens.
