Cautious optimism about rental growth

Cautious optimism about rental growth

MAIN IMAGE: Johette Smuts, PayProp head data analyst, Jacqui Savage, national rentals manager for Rawson Property Group and Bernadine Roos, sales manager for Ballito for Chas Everitt International.

After an extended period of slow growth in the South African rental market, indications are that the tide has turned for the better with PayProp’s Rental Index for Q1 2019 showing Q4 2018 as a clear turning point.

The elections may be over, but buyer confidence has remained low which isn’t surprising with the ruling party facing the daunting task of turning things around despite a struggling economy and with most state-owned enterprises in financial dire straits due to years of corruption and mismanagement. Add to that the continued insecurity around property rights while waiting for the Expropriation Bill to be finalised and it is clear there is still a long hard road ahead.

The upside of this, says Johette Smuts, PayProp’s head data analyst, is that even though people are not buying property, they still need somewhere to live which means they will probably have to rent thus increasing the demand for rental properties and pushing up prices.

FNB economist Siphamandla Mkhwanazi says in the latest FNB property report they’ve observed that 60% of homeowners selling due to financial constraints are opting to rent rather than buying a cheaper property.

Read: Rate cut in July could bolster buyer confidence

After years of trending downwards, rental growth statistics appear to have reached a turning point at the end of last year and are stabilising. In the last quarter of 2018, the rental growth rate came in at 4.1% (up from 3.3% in Q3) – though still low, at least it was the first uptick in the national rental growth rate in two years says Smuts.

In 2019’s first quarter the rental growth rate dipped to 3.7%, but Smuts says it still an improvement on Q3 of 2018 which means the trend is still moving upwards and she is hopeful for continued growth for the rest of the year.

Jacqui Savage, national rentals manager for the Rawson Property Group, says 2019 has already exceeded their expectations with May* turning out to the best month Rawson Rentals had seen since its inception.

There is also positive news about rental interest in KZN’s North Coast. Bernadine Roos, Chas Everitt International sales manager for Ballito, says the area is attracting phenomenal interest from tenants looking for homes to rent for between R6000pm and R18000pm. “And as expected, this trend has come to the attention of savvy buy-to-let investors who are currently investing in the types of properties that tenants prefer,” says Roos.

Rental homes make up about 43% of the total residential stock in the province and Ballito is the best performing town in the region in terms of rental returns. The most in-demand homes among tenants are those located in secure estates and ranging in size from one-bedroom cottages and apartments to four-bedroom family homes. They also find that pet-friendly properties are rarely vacant and have a low tenant turnover rate.

Ross Levin, managing director for Seeff Atlantic Seaboard, Waterfront and City Bowl, says their rentals market continues to deliver excellent results.

Rental market still sensitive

“Growth is slowly recovering, but the market is still extremely price sensitive,” Savage explains. “Even well-priced rentals are experiencing high vacancy rates, particularly above the R12 000 per month threshold. Overpriced properties, or those with unrealistic escalations, are losing tenants left, right and centre as consumers tighten their belts in these tough economic times.”

Tough times, and a relative abundance of rental properties on offer, means tenants are also more inclined to negotiate on rentals, seldom paying the sticker-price with no questions asked. This, Savage says, has extended the average tenant placement process to several weeks rather than a few days, as in previous years.

Savage says just like the property sales market, rental markets are cyclical with natural ups and downs, and the recent ‘down’ was neither completely unexpected nor without a valuable purpose. She goes on to explain that every market needs periods of growth and periods of price realignment to keep in sync with consumer affordability and demand. While landlords may not enjoy the slower growth of realignment periods, they do protect the value and sustainability of rental properties in the long run.

Finding the right tenant has also become key in an economy where more and more people are falling into debt says Savage. The importance of thoroughly vetting tenant applicants before placing them is underscored by PayProp’s statistics that almost 40% of tenancy applicants in Q1 were classified as either high risk or very high risk. “This again shows how important it is to vet tenants properly before placing them,” Smuts says.

Outlook for the rest of 2019

Despite the sensitive market and added complexities of the tougher economic climate, Savage they fully expect to see a continuation of this early growth trend as the year progresses, and landlords who are willing to adapt to the market will see solid returns in the months to come.”

“We are cautiously optimistic about continued recovery in the rental market after the signs we’ve seen over the last few months. After all, 2018 brought an end to the two-year downward trend in rental growth rates! To do their bit, every agent should focus on placing good tenants, which means knowing how to spot a high-risk tenant. In all this, affordability is usually the most important factor,” ends Smuts.

(*Original text sent by Rawson had ‘and June’, but the agency has since indicated only May should be mentioned. Ed.)

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