Worst is over for rental market pressure

Worst is over for rental market pressure

MAIN IMAGE: Johette Smuts, head of data analytics at PayProp; Michelle Dickens, chief executive of credit bureau TPN

Danie Keet

A minimal growth in the rental market is an early indication of improving conditions in this sector of the property market. The national rental growth rate remained under pressure through the second quarter of 2021, but seems to have stabilised for the short-term, according to the latest PayProp Rental Index for Q2 2021.

Rental growth came in at 0.4% in Q2 – in line with the 0.5% growth recorded in Q1 2021.

The average national rent increased marginally from R7 746 in Q2 2020 to R7 778 in Q2 2021 – an increase of just R32 over the 12 months.

Johette Smuts, head of data analytics at PayProp, says the worst appears to be over for now, with the index showing a return to growth of 0.7% and 0.8% in May and June (after dipping below zero in April 2021).

Smuts says growth remains under pressure due to lower interest rates enabling renters to purchase properties, thereby decreasing the pool of available tenants and putting downward pressure on rent growth. In addition, continued building and development in many cities has contributed to an ongoing oversupply of rental properties, adding further sustained downward pressure on rental growth.

This runs counter to the inflation position, she points out.

“Inflation reached a 30-month high of 5.2% in May, driven largely by transportation costs, including petrol,” says Smuts. She says this rise in costs of other goods and services has put pressure on already-stretched consumers. “The aftermath of job losses due to lockdown continues to affect many consumers’ pockets, and affordability is still a major concern.”

Michelle Dickens chief executive of credit bureau TPN, is concerned about rental payments.

“The residential rental market’s recovery following the shock of the hard lockdown in the second quarter of 2020 appears to have flatlined, with the sector now characterised by diminishing demand, increased vacancies and lower rental escalations.

TPN’s data for the first quarter of 2021 indicates that the worst-performing category from a payment performance perspective are those in the more affordable rental market.

“Two-thirds of tenants rent for less than R7,000 per month, with one-third of rentals falling into the R4,500 to R7,000 per month price range. Rentals below R3,000 per month remain under pressure, with only 65.73% of tenants in good standing. A concerning 17.76% of tenants in this category cannot make any rental payment contributions,” Dickens said.

Arrears

According to Smuts after the initial shock of the first lockdown in 2020, arrears metrics showed consistent improvement throughout a difficult 12-plus months.

“The percentage of tenants in arrears spiked in Q2 2020, when almost one in four tenants were behind in payments. This was up from around one in five in Q1 of the same year. The dramatic increase in arrears in April 2020 was directly as a result of the announcement of the first lockdown,” says Smuts.

With the worst now behind us, tenants’ finances and arrears continue to improve. In Q2 2021, only 20% of tenants were in arrears, a number that is far closer to the 19.4% seen in Q1 2020, before the first lockdown was announced.

Statistics

The country’s most expensive province for tenants, the Western Cape, saw its first positive increase after four consecutive quarters of negative rental growth. The average rent increased by 1.8% to     R9 185 – up from R9 022 in Q2 2020.

Gauteng experienced a drop in rent for the second consecutive quarter with tenants paying on average 0.6% less per month, from R8 344 in Q2 2020 to R8 292 in Q2 2021.

In KwaZulu-Natal the average rent increased by 2% from 12 months before, with an average rent of R8 200 in Q2 2021. It was the second-highest growth experienced among the provinces, and KwaZulu-Natal is now the third most expensive province in which to rent – up from fourth last quarter.

In extremely positive news for Limpopo landlords and agents, the province turned the tide with an increase in rent after 14 consecutive quarters of negative growth. The average rent in the province increased by 0.8% to R7 017 over the 12 months to Q2 2021. The last time the province recorded positive growth figures, rent there averaged R7 741.

Smuts says she believes growth will remain muted for the remainder of the year. “Although we’re seeing stability in the numbers, we don’t see rental growth rebounding above 1% this year. This is largely since the variables affecting rental growth are unlikely to change in the short term – affordability being the main issue on the demand side, and rental stock on the supply side.”

However, Dickens stated that there is still a significant risk to landlords in the rental market.

“In the current environment, the growing rate of long-term delinquent tenants – those who make no rental payments for a minimum of 4 consecutive months – pose a growing risk for landlords.

“Our experience shows that although tenants don’t intentionally set out to be serial squatters, they can become delinquent if their circumstances unexpectedly change.

“The challenge for landlords in these circumstances is that mediation is usually not a viable solution which leaves them no option but to resort to legal action,” she said.

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