Resilient rentals: Leasing introduces dynamic conditions to the residential market

In times of crisis, property ownership is often seen as one of the safest investment ventures, partly due to secured regular income from rentals. Over the past decade Colombia has built up a strong market for residential leasing and continues to see a number of dynamic factors that are increasing its potential.

CONTEXT: In the late 1990s, Colombia experienced a severe financial crisis brought on largely by a haphazard mortgage system and high interest rates. As a result, many people lost their homes and the means to purchase a new one, a situation that caused leasing to emerge as a viable short-term solution for housing problems. Despite improved preventative measures, the rental market continues to grow. According to the Colombian Chamber of Construction (Cámara Colombiana de la Construcción, CAMACOL), between 2008 and 2012 proportional figures of tenants increased nearly 3%, reaching 34.4% of the population. In the same period, the proportion of homes fully paid off and in the process of purchase fell slightly, from 51% to 48.1%. In Bogotá and Valle del Cauca, of which Cali is the capital, rental figures are actually higher than home ownership by three to four percentage points, reaching slightly more than 40% in each case.

SOLUTIONS: For Clemencia Parra, the president of real estate appraisal firm Unifianza, there is a clear correlation between the housing demand among low-income families and an increasingly dynamic rental market. “As the population grows and land becomes more expensive, government programmes have not been able to solve the housing problems and renting homes becomes not only an option but a necessity,” she told OBG. However, according to Parra the supply of rental properties for lower classes is much more limited than it is for the middle and higher social segments. In 2012 general stock for Social Interest Housing (Vivienda de Interés Social, VIS) increased 0.8%, while residential properties with values above $50,000 grew 8%, according to CAMACOL. Though new government programmes should increase VIS segment housing in 2013, Parra believes the market for rentals will remain healthy and sees many investment opportunities in low-income segments. Although the sound of “low-income” may deter many landlords, options for assuring monthly rent payment exist, such as the leasing guarantee offered by Unifianza and several other guarantor companies. Whereas this segment normally attracts investments from companies, individual investors tend to concentrate on properties with higher values, where the supply is sufficiently absorbing demand.

BUY-TO-LET: Around 15% of the rental market works through buy-to-let activities, predominantly in the middle to upper-income segments. “Buy-to-let investors are people looking for properties with high rotation rates, that are easy to rent and profitable. Many individual investors will buy several middle-range properties to disperse their levels of risk,” Parra told OBG.

The construction sector has also greatly benefitted from this trend as many entrepreneurs buy properties before they are constructed, which also prompts residential development projects. Whether used or new, Parra said rental yields range from 5% to 9%, reflecting moderate but steady levels of assurance for long-term investment. Along with the rise of property values, rental prices are also increasing. According to Jorge Enrique Gómez, the president of regional real estate association Lonja de Bogotá, monthly residential rent in Bogotá is currently set at around 0.5% the commercial value of the property, a percentage that has increased significantly from 0.1% just several years back. “Since many Colombians rent, the market has expanded extraordinarily over the last few years and heavy competition has caused prices to shoot up,” he told OBG.

TRANSITION: Lease purchase contracts were recently introduced into the residential rental market, which allows tenants to opt for eventual home ownership. While this option previously only applied to non-residential properties, its penetration into the housing market has not only diversified methods of obtaining a home, but also added certain safeguarding factors.