What can we expect from the post-lockdown rental market

What can we expect from the post-lockdown rental market

MAIN IMAGE: Johette Smuts, general manager PayProp Capital; Gil Sperling, co-founder and CEO Flow; John Loos, property strategist FNB Commercial Property Finance

The extended lockdown has hit the rental market particularly hard with many tenants that faced a lowered income or even no income at all. Is it all doom and gloom with a long slow road to recovery lying ahead or are there also new opportunities that may unfold post-lockdown?

Let’s start with what we know, says Johette Smuts, general manager PayProp Capital. “The current lockdown, and the easing out of lockdown as we ease into lower levels of lockdown, will have a huge impact on many tenants’ income and their ability to pay rent. We’ve seen many tenants use deposits to pay their rent, or landlords granting payment holidays to tenants while they are unable to earn an income.”

Smuts adds that it is important to remember that in the case of a rental holiday, this rent still has to be paid in future, and damage deposits must be topped up. This means that, once these tenants start earning a full salary, any additional disposable income a tenant usually had will most likely be put towards deferred rent.

“This is an important factor that will decrease tenants’ ability to afford higher rents, be that for a larger property or due to an annual rent increase. Some of the other factors that put downward pressure on rental prices are lower growth in income due to the economic recession and expected slow recovery, which could last for years,” she explains.

Only a third of tenants can pay full rent in May survey shows

To assess the effect of the COVID-19 lockdown on tenants, proptech platform Flow sent a questionnaire to the over 80 000 tenants on their database. Just over 2 000 took part in the inaugural FlowFindings survey. Their findings showed the following:

  • 78% of tenants’ income was affected by COVID-19
  • Only 37% can afford to pay their rent in full
  • 22% can’t pay their rent at all
  • 55% of the respondents said they have already or intend to apply for financial assistance
  • 35% of renters were accommodated by their landlords with reduced or waived rent

“This is, of course, also a major risk to landlords, who are used to high risk tenants representing just a fraction of their portfolio,” says Flow co-founder and CEO Gil Sperling. “Landlords who are receiving partial payments are at risk of tenants stopping the payment of rent altogether as their savings are depleted and credit lines, maxed out. 49% of renters are certain that the negative monetary effects of the lockdown will last longer than 3 months. 42.72% of tenants are relying on their salaries to pay their rent, 30.09%, their savings and 21.6% are relying on loans”.

The lockdown forced most tenants to stay in their rental homes during the lockdown. Almost a third of the respondents in the Flow survey indicated that they are likely to move after lockdown – of this group 12.63% said it was because their lease was ending, but for about 65% of this group they would be moving because of affordability issues. “In a typical month, the rental market sees 5% of tenants moving. Due to lockdown restrictions, there’s been a huge spike in tenants staying in their current rental homes for much longer than usual – but we expect a far higher than average number of tenants moving, post-lockdown – which will cause a huge bottleneck,” says Sperling.

Expect low rental growth for next 12-18 months

Smuts adds that many short-term lets, like properties usually only listed on Airbnb, have returned to the long-term lettings market as owners suffered financial losses due to travel bans and are trying to earn income elsewhere, effectively flooding the rental market.

“If we consider the above, we can expect very low rental growth for at least the next 12 – 18 months, but possibly longer. It is also possible that the residential rental market will experience deflation, i.e. rents getting cheaper on average,” she says.

How low will the rental market go and long will it last?

FNB’s property strategist John Loos says this is a tough question to answer as it is near impossible to predict the “full magnitude of the current recession unfolding”. “Much is depending on how successfully the corona pandemic is contained both locally and globally, which will then determine how fast our economic life can return to being 100% normal,” he says.

Loos took as benchmark the impact and average of 3.5 years it took the rental payment performance to recover after the ‘mild recession’ of -1.5% GDP that followed the 2008/9 great financial crisis. The current recession is forecast to be even more severe with FNB predicting a -4.5% GDP contraction while certain other forecasters are even more pessimistic. “The rental market is highly sensitive to economic cycles and sharp shocks,” says Loos. Consequently, they expect the rental payment performance to show a significant deterioration that will take years to recover. Taking the 3.5 years post 2008/9 as an indication, FNB projects that the percentage for tenants in good standing will then have recovered to as high as 76%. Currently the average percentage for ‘tenants in good standing’ for 2020 is 67%.

Also read: Post lockdown rental market

New rental trends may emerge

It’s not all bad news. Smuts points out that the pandemic also brought on a more unique situation. “More and more companies have seen that employees can work from home, and that there are many benefits to this. This could mean that we could see a change in trends over time: some tenants will be looking for larger properties with space that can be converted to office space as more companies move toward having a remote workforce,” she says.

Smuts continues that there are also other factors that could increase the demand for rental property, like first-time homebuyers delaying their purchase due to financial losses suffered during Covid-19 who will now rent for longer. Gen Z, who are more prone to renting for longer than older generations, are also starting to enter the rental market.

In summary, she says “it is impossible to predict how these factors will ultimately play out and what the net effect will be on the rental market, but we expect to see low (and possibly negative) rental growth rates for at least the next 12-18 months”.

Showing 6 comments
  • Ian Badenhorst
    Reply

    Paying Rent a Problem:
    As much as we as Estate Agents regret the effects of the Covid 19 virus and the lockdown placed on all South African citizens. The effect has made a significant impact on the ability of many tenants being un-able to continue paying and affording their lifestyle, given that many have lost their income, and job, and face a bleak future which may last several years for the economy to recover.
    Those that cannot afford their own property and rely on rental options for their housing needs, is likely to grow in number even when affordability becomes an issue, as many will see the leniency of the Courts who will grow more inclined to support tenants and their plight to having a place to stay while being without a job and income to survive.

    The Courts have in some instances already given their views to this question and from a social point of view, order’s and judgments will most likely be set aside “sine die” and evictions will not take place until there is benefit of employment and affordability present in any Tenants contract. So any default on the payment of rentals if on the basis of not having any or not enough income is surely to drag rental property and interest to invest in property somewhat that of a put off..

    This questions the willingness of property investors wishing to continue with an investment property without assurance or protection on rental payments to cover the cost of purchase. Estate Agents will also face the possible income reduction out of rental management of lease agreements when rentals are not paid. This spells trouble to agents and their earnings.

    Another aspect within the property market is the payment of Levy, payable by owners of Sectional Title Schemes and many other forms of Community Schemes who rely on the levy income so as to be able to provide the services most needed for all the owners and residents within the community scheme.

    There is thus the possible further collapse of this select section of the property market, which has been the most active in providing lower cost residential housing to the growing housing market. Without stability within the property sector, how is any form of recovery within the depressed economy expected to become a reality. What is to be understood is that the economy is reliant of the obligation to pay for what you consume or take as a service or a benefit as part of a business transaction. Any default is seen as a damage in one area, which grows in other areas as affected and becomes damaged as well. All damaged suffered at the cause of Non payment, a culture that will be encouraged and grow in all aspects of the lifestyle after Lockdown should the Courts follow their hearts as opposed to their heads and not be influenced by Government interfere in independent contract between parties and that stipulated by legislation on property ownership of any kind. This will lead to the collapse of personal rights and the cornerstone of civil law.

  • Thembi
    Reply

    I had new business opened in Jan but now since lock down no income that means I can’t afford to pay rent. Landlord want his money. Please advise.
    Rady

  • Ntshembo Manganyi
    Reply

    For those that may have sound financial means to acquire property for investment purposes and can still smoothly sail in the next 12 to 24 months, it may be an ideal time for them now to take advantage of some desperate sale of properties that we are likely to see taking place in the very near future, as the effects of COVID-19 permeates the property markets.

  • Farouk Kajee
    Reply

    What happens when the landlord pays for electricity, water, refuse removal, sewer charges and rates and the tenant uses lockdown as an excuse and not pay rent.

    • Jacques
      Reply

      Easy, stop paying those cost. Municipality will then disconnect services. Without services they will move out.

  • Nosiphiwo Galada
    Reply

    I’m working as a freelancer at OR Tambo international Airport but since lockdown I don’t hv any income, I’m owing 2 months rent, I managed to pay in March so April n may..i didn’t get any thing, wat do I do pls

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