Things are looking up for the Cape’s rental market

Nov 1, 2018 | Features

“Leases are being concluded and we are seeing pockets of strength where there is tenant demand”

The Cape rental market is picking up speed yet consumer budgets remain tight. Earlier this year landlords in the upmarket southern suburbs of Cape Town faced unlet properties, unheard of previously, but the feedback of late indicate that the rental market is recovering provided that pricing is kept at realistic levels.

The increase in demand for rental properties is confirmed by estate agencies operating in and around the Mother City. Natalie Muller, sales and rental manager for Seeff Atlantic Seaboard and City Bowl, says there has been a noticeable increase in the demand for rental properties including a number of corporate requests for properties for long lease periods. This is evident across the Atlantic Seaboard and City Bowl areas, she says.

Dexter Leite, Pam Golding Properties rental manager, says now that the dam levels are looking better and water restriction are being relaxed, they are also seeing an increase in the demand for rental properties in some areas. “Leases are being concluded and we are seeing pockets of strength where there is tenant demand, says Leite.

Consumer budget under pressure

The bounce back has come at a price though. Like a golden thread, agencies emphasize the importance of price counselling landlords to ensure they don’t price their rental properties out of the market. Imtiaz Adam, rentals agent with Seeff Southern Suburbs, says the rental market is busy but the consumer’s budget is under enormous pressure especially due to the extreme fuel price hikes of late.

Consequently, price counselling remains an important element of a rental agent’s day in the current market. For example, an agent recently listed three loft apartments in the Plumstead area for R7,000/month. Only one of these achieved this price, and the agent will be price counselling the other owners to reduce in line with market trends to around R6,500/month for a one-bed loft apartments. Adam says some landlords are adjusting their prices, but they especially urge landlords to be very considerate in instances where tenants are looking to renew their leases.

Muller says although they are seeing an increase in the number of leases being done, they also see a marked decrease in the values being achieved. “The rental market has come off a very high base having achieved annual increases of around 10% and the market is at this stage seeing prices adjusting downward and escalations in line with CPI/inflation rate,” explains Muller.

Cape has highest rent average

Still, according to Schalk van der Merwe, franchisee for the Rawson Properties Helderberg Group, the Western Cape still has the highest average rent of any province, sitting at R8 805 per month, well above the national average of R7 359. “Capital appreciation of rental properties is also healthy at an average of 10% per annum – light-years ahead of most other provinces, including Gauteng’s modest 3%”.

The latest property vacancy statistics confirm this. According to John Loos, FNB property sector strategist, the property vacancy rate for Cape Town is at 2.3% noticeably lower than that of Durban (4.7%) or Johannesburg (7.2%) the latter which have lately had a sharp vacancy increase.

Impact of wait-and-see buyer’s attitude

Nevertheless, the realities brought about by the tough economic climate can’t be ignored. Leite says they hear many buyers are holding off on making a purchase. This wait-and-see attitude has created a buyers’ market where sellers are encouraged to adhere to market-related prices if they want to sell their homes. People who have recently sold their homes may opt to rent, rather than buy again, at least for a while.

In some areas this has led to an oversupply of stock and a shortage of demand. Herschel Jawitz, CEO of Jawitz Properties explains: “The oversupply is as a result of a steady supply of new stock coming onto the market despite a weak economy and sellers opting to rent out their properties instead of selling in the current market. As a result, tenants are spoiled for choice and are shopping around for the best value in the market.

“The rental market is far more price sensitive than the sales market. In the current market, tenants are able to negotiate very competitive escalations – even below the current inflation rates – and are opting to stay where they are as opposed to incurring the added costs of moving.

Low levels of consumer confidence and weak economic growth remain the key stumbling blocks to the rental market. Cash-strapped and cautious consumers are not prepared to pay premium prices and know that they are in a strong position to negotiate very competitive rentals with lessors. Low escalations are also having an impact on residential yields and investor buying,” concludes Jawitz.

Jawitz says that activity in the rental market is picking up but he expects the current conditions to remain as they are into 2019.

Advice to landlords

Muller suggest agents give landlords the following advice:

  • Take good care of fully vetted tenants that meet your criteria and can afford the rent for the period of the lease. Be flexible in terms of their needs and offer a financial incentive if necessary. Times are tough and the chances are good that there will be a rise in the number of tenant defaults.
  • Consider signing longer with tenants who will take good care of your property and keep the rental rates the same or raise the rent only at a nominal rate in line with the prevailing CPI/inflation rate
  • Hire an agent to manage the lease period
  • Make sure you have fully audited ingoing and exiting inspections. This is useful for a justified claim against the deposit should the tenant damage the property.
  • Consider carefully the possible pros and cons of short-term rental to a number of guests (for example by listing the property on Airbnb) versus a long-term contract with a client who looks after your property. “We have seen time and again that a landlord with a good tenant who looks after the property and garden and cares for the home delivers better rental returns to the property than the rotation of a number of guests in the season in short-term rental properties” ends Muller.

In conclusion

Craig Hutchison, CEO of Engel & Völkers Southern Africa says that rentals will always be in high demand, especially in well located areas within the main metropolis. This is due to a number of factors, from the high entry cost of purchasing a new home for low income earners to a new trend of being flexible in moving around as life or job requirements change, especially amongst the new professional career starters in the middle-income bracket.

In conclusion, Van Schalkwyk expects the next couple of years to be a period of normalisation for Western Cape rentals. “This is a perfectly natural part of the property cycle and plays an important role in market sustainability. There is absolutely no reason to believe it will affect the mid- to long-term profitability of buy-to-let properties. With good management, Western Cape rentals still have a huge amount to offer investors.”

Related articles: Lessons learnt from Cape rental market

Email your comments or questions to editor@propertyprofessional.co.za.