Lessons learnt from Cape rental market

Jun 14, 2018 | News

Although this is a harsh reality for landlords used to an average gross yield per annum of around 6% and now having to accept 4.5% to 5.5% yields, the situation isn’t hopeless.

Two years ago, when the Cape rental market was booming, warning bells started to ring warning that rental rates, especially in the upmarket southern suburbs were becoming unrealistic. Last year estate agencies began to see a drop in demand and from the beginning of this year, the rental market has been quiet. For the first time in years landlords are facing unlet properties. Leading local practitioners weigh in on the reasons behind the shift.

This is the first time in seven years that he has noticed a shift to an oversupplied and under-demand rental market, says Grant Rea, residential sales and letting specialist at the Remax Living office in the southern suburbs. He explains they noticed a significant shift occur from around October 2017 that saw landlords facing vacancies for the first time in years. Previously, the demand was always significant enough to ensure each property found a great tenant.

In the northern suburbs, Durbanville and Bellville, the demand for rental accommodation is still strong, but tenants want the best value for money. “Renters are fighting against higher rental prices. Anything over R10,000 becomes slightly trickier to find tenants for. But, the demand for rental properties in these areas is still higher than the supply. It’s just that renters are shopping around for properties in the same way they might shop for purchasing property. They are more clued up and are looking for the best price,” says Hannely Jooste, broker/manager for RE/MAX Property Associates (Brackenfell).

There are number of pins that helped to prick the Cape’s rental bubble in the southern suburbs.

Rea suggests the following reasons for the shift:
New developments – Developers took advantage of the incredible growth and built new housing developments on every available piece of property. As these buildings reach completion, most of the units go into the rental market. Rea forsees that this problem will persist for the next two years or so.
Fall of Airbnb hype – Airbnb reached its tipping point during 2017 when the number of units available to let in the City Bowl and Atlantic Seaboard reached beyond 10 000. As more units flooded onto the short-term letting market, owners had to price their units more competitively to compete. Eventually, many landlords became disgruntled and have returned to letting long term again, flooding the rental market as a result.
Semigration slowed – The ongoing drought with threats of Day Zero being imminent caused many to reconsider plans of relocating to the Mother City. Earning potential in Cape Town was also significantly lower by as much as 22% in certain sectors, as reported by CareerJunction’s salary review in the last quarter of 2017.
Over-inflated rent – Most rental agencies only qualifying tenants who earn at least three times the rental amount and ask at least two months rental as a deposit. This places huge pressure on tenants.

“Combine this with the fact that the growth in income has been disappointing in relation to living costs, and you understand why many tenants have simply decided to move away from more expensive areas and rent elsewhere,” concludes Rea.

Gail Cawood, letting manager with Knight Frank Properties lists the following:
the impact of the political uncertainty and state of the economy; rental prices escalating for the previous 3-4 years at an alarming rate and there being no longer affordability for these high rentals; young people staying longer at home with their parents and also sharing houses/flats; families looking for houses to share; an oversupply of apartments due to the surge of multiple developments of apartment blocks being built over the last two years e.g. Observatory, Claremont; tenants who took on an expensive apartment a couple of years back are leaving to move to cheaper apartments because more is now available on the market, and landlords, instead of sitting with an empty property, are dropping the rental to get some return on their investment.

Her advice to landlords is to keep their rental price realistic and to keep a good tenant if they already have one, for instance, don’t expect a big hike in rental price when renewing for a further year.

Herschel Jawitz, CEO of Jawitz Properties also says the best advice to home-owners and landlords is to hang on to good existing tenants even if you have to accept a less than market escalation in the rental.

“If your property is vacant, rather take on a tenant even at a lower rental than what you were prepared to accept until the rental market and rental escalations pick up again. The rental market is very similar to the sales market at the moment. Buyers and tenants alike are very price sensitive and shopping around for value. The competition is between owners as to which property offers the best value to value-driven tenants. Tenants are also factoring in the cost of moving and once again, based on costs, deciding to stay in their current property rather than move,” he explains.

Jawitz says the role of a good rental agent in this market is to continue to communicate to owners about the market and the realistic value of their rental property.

Although this is a harsh reality for landlords used to an average gross yield per annum of around 6% and now having to accept 4.5% to 5.5% yields, the situation isn’t hopeless. Rea suggests that landlords simply need to reassess the anticipated returns.

“Everything rents at the right price as everyone needs a home. There is no question that you will find tenants provided that the rental is competitive,” he advises.

He also suggests that landlords reconsider their marketing strategy. Rea mentioned that a search on one of SA’s largest property portals indicated a total of 4,000+ rentals available across the City Bowl and some of the more affordable Atlantic Seaboard suburbs. This excludes a significant number of landlords that are offering their spaces privately across social media platforms and on Community Facebook pages.

“Agents and landlords will need to do just a little more to expose their properties to a wider audience. This includes video marketing and exposure on social media platforms, as well as creative wording for ads that highlight the best features and consequent benefits for a potential tenant. You may want to entice tenants by including extras like Wi-Fi, utilities and services like cleaning,” Rea suggests.

“Property investors need not throw in the towel, this is by no means a reason to panic,” says Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa. “Cape Town is a resilient market and this shift is only a realignment that would inevitably follow the unprecedented growth the area has experienced in the last couple of years,” he concludes.

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IMAGE SOURCE: capetown-airport.co.za