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”.

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