A rental market under pressure
MAIN IMAGE: Johette Smuts, PayProp data analyst; Paul Stevens, CEO Just Property; Jacqui Savage, national rental manager Rawson Property Group; Dexter Leite, Western Cape rental manager Pam Golding Property group.
The after-effects of the Covid-19 lockdown has hit the rental market especially hard. Rental growth is at a historic low and vacancies are on the increase across the board. Is there a silver lining?
The latest PayProp Rental Index Q2 2020 paints a stark picture of a rental market under severe pressure. The sub-inflationary rental growth rate, at 2.1% year on year, is at it’s lowest point since September 2004. Many tenants are battling to clear up arrears in rental or have stopped paying leaving their landlords without rental income for months – they are also unable to evict defaulting tenants until the end of the State of Disaster unless a court order is obtained. Vacancy rates are on average on the increase due to oversupply in many areas.
There are small glimmers of hope as some areas are showing more resilience than others and short-term rental demand is beginning to show signs of demand which is expected to improve towards the summer holidays. However, recovery in the rental market is expected to be slow as it is directly linked to the state of the national economy and the creation of more jobs. Rental market experts therefore advise landlords to be realistic about rental income and to hold onto good tenants even if it means a lower rental increase.
Lowest rental growth in decades
As can be expected the lockdown had a dramatic effect on rental growth. The biggest change was visible in KwaZulu Natal, a year ago the 2nd most expensive province in which to rent. From a positive 3.3% year on year rental growth in Q1 the province dropped to a negative 1.6% year on year in Q2 which places KZN in fourth position. The Western Cape is still the most expensive province (average rent of R9 022 down from R9 025 in 2019) with Gauteng now second most expensive followed by the Northern Cape. The North West is the only province with an average rent below R6 000.
Rental growth year-on-year vs inflation.
Affordability: There are a number of factors that influence rental growth. According to PayProp’s data analyst Johette Smuts, affordability has been the main driving force behind the low growth rates seen during the pandemic. Many people have lost their jobs or saw a reduction in income and can’t afford higher rents or may have had to downscale.
Increase in rental arrears: During the lockdown period many people were unable to work and earn an income. As expected, there was therefore an increase in the percentage of tenants in arrears from March (19%) to May (26%). There is a slight improvement in June (25.6%). Smuts says this is an encouraging signal that that this figure is likely to improve or at least remain stable for the next few months.
Increase in size of rental arrears: Of great concern is the increase in the size of arrears relative to rent – from a 77% average in March to 105.8% in June. PayProp’s figures also show a worrying increase in the size of the group of tenants that were between 100% and 150% or more in arrears relative to their monthly rent. In May 43% of tenants in arrears fell in this category, but that increased to more than half of tenants (54.5%) in June. “This indicates that many tenants in arrears in May were further in arrears in June (and one could argue that tenants who had a low level of arrears paid up),” says Smuts and adds that hopefully, this metric will stabilise and decrease in months to come as people pay off their debts once they start earning a normal income again.
Increase in vacant rental properties: The TNP Vacancy Survey Q3 2020 show vacancies have increased in the third quarter to 11.39%, up from 9.13% in the “hard lockdown quarter” Q2 and 7.47% in Q1. No sector of the rental market was left unscathed with double digit vacancies across the board says TNP. The report found that properties at the lower end and the luxury markets were the hardest hit with vacancies while the affordable market (R4.500-R7000 and R7000 to R12000) showed the most resilience. Although there is still strong demand for lower-end rental properties, with only 63% of tenants in this range in good standing with their rent, the risk for defaulting tenants is higher.
Short-term lets flooded the rental market: Popular tourist destinations like the Atlantic Seaboard, Camps Bay and the CBD area of Cape Town have been especially hard hit by travel restrictions. Consequently, many owners of short-term rentals such as Airbnb’s have either opened them up to longer term rental, adding to an already overstocked market or have put their properties up for sale. Now that local travel is possible, there is an uptick in demand for short-term rental that is expected to improve towards December but until international travel is back on track full recovery is unlikely. “The rental market remains tight, rental prices are hugely reduced, a lot of tenants are downscaling to smaller, cheaper properties and we still have tenants asking for rental reductions,” says Vivien Adler, rental agent for Seeff Atlantic Seaboard.
Smuts expects both these factors – pandemic-related affordability and supply – will continue to influence rental growth rates for some time to come.
Student accommodation: In some areas, the addition of rental properties formerly used for student accommodation has added to the oversupply seen in the market, adds Dexter Leite, Western Cape rentals manager for Pam Golding Property group, With many students now continuing their studies online from home, the demand for student accommodation has waned and many of those vacant properties have now found their way onto the rental market.
Cheaper to buy than rent: Additionally, thanks to record-low interest rates for many tenants it has become cheaper to buy than to rent. Banks and mortgage brokers have seen a huge spike in home loan applications from first-time home buyers since June. Mortgage broker BetterBond reports 70% of their applications in August were from first-time home buyers, an 10% increase on last year. In Gauteng, Adrian Louw, sales manager for Seeff Centurion, says they are seeing more and more of their tenants opting not to renew their leases and to buy instead.
Of course, there are the exceptions. Paul Stevens, CEO of Just Property, points out that Port Elizabeth in the Eastern Cape has an oversupply of tenants and good quality rental stock is in high demand, and in Kathu in the Northern Cape they are in discussions with developers to meet the anticipated rental demand when a new mine opens in the area.
Looking for a silver lining
On a more positive note, Stevens points out that most of South Africa’s population (66%) are urban which is good news for the rental market. There are 39.5 million people living in cities and towns, many of them are unwilling or unable to buy property. “The reality that we are seeing is that the rental market is strong but that attention to detail is needed,” he says.
Advice to landlords:
Be realistic with rental rates: One of the areas that needs attention is realistic pricing of rental rates. Stevens says people are under financial pressure and many can’t pay rental they were previously able to afford. “Our advice to landlords is to look objectively at what is happening in their local market and to be honest about what rent they can and need to collect in the short to medium term,” he says. For instance, a lower rent over a shorter lease period may be favourable to a landlord who relies on rental income to cover bond repayments.
Take care of good tenants: The tenuous situation of tenants falling further into arrears with rental payments is another area. It is therefore most important to have a proper system in place for vigorous vetting of new tenants. Secondly, take care of good tenants, even if the annual rental increase has to be lowered in order to keep them. “A good tenant, who looks after your property, pays on time and communicates well with your managing agent is worth their weight in gold,” says Jacqui Savage, national rental manager for the Rawson Property Group.