MAIN IMAGE: Paul Stevens, CEO of Just Property; Johette Smuts from PayProp
Staff Writer
In an inflationary environment with increasing interest rates, landlords are facing higher mortgage repayments. The spike in inflation means that the cost of maintaining properties has increased too.
At the same time, tenants’ affordability has also been negatively impacted by the increasingly high cost of living. With less disposable income, their appetite for rent increases has diminished.
The rental market is predicted to be under pressure through 2022. Yet, in May 2022, the Just Property network achieved its third highest letting turnover ever and the highest-ever number of properties under management. The brand is doing something right. With a keen focus on tenant vetting and rigorous property management, Just Property agents are attracting more business than ever.
Rental growth recovered
“Rental growth patterns tell the best news since Q3 2017”, says Paul Stevens, CEO of Just Property. The latest PayProp Rental Index reports that “in Q2 2022, all nine provinces recorded positive YoY rental growth. The last time this happened was almost five years ago, in Q3 2017.” The Q2 rental growth figures are as follows:
- Eastern Cape 4.4%
- Free State 1.9%
- Gauteng 0.3%
- KwaZulu-Natal 3.0%
- Limpopo 4.7%
- Mpumalanga 5.2%
- Northwest 3.9%
- Northern Cape 9.0%
- Western Cape 3.0%
Tenant health
“As a general rule of thumb, rent should not account for more than 30% of a tenant’s salary,” notes Stevens. “The latest PayProp Rental Index reports that, nationally, 33% of tenants rent for R5000 – R7500 per month and that their average income is R27 924. That’s well within the rule of thumb range, which is good news for landlords in this price bracket.”
But there is a proviso, Stevens adds. “Only 31.1% of tenants in this price bracket are deemed ‘minimum risk’. Strict tenant vetting and monthly management procedures are essential to ensure that new tenants are likely to pay their rent on time, every time. Just Property rental portfolio managers look at more than just a credit score; factors like account payment patterns, nature, and age of judgements are also considered when vetting tenants. Make sure your managing agent does the same.”
PayProp reports that, nationally, “fewer tenants are in arrears now than there were in Q1 2020, before the start of the pandemic” (Source: PayProp Rental Index 2022 Q2). This is good news for landlords, especially those who need on-time rent payments to cover mortgage commitments, says Stevens.
“The average percentage of Just Property tenants in arrears is consistently below the PayProp national average. Further, the average Just Property tenant in arrears owes a significantly lower percentage of one month’s rent than the PayProp national average (62.9% vs. the PayProp average of 80.8% of one month’s rent owed).
Advice
“People will always need a place to stay, and properties that are clean, well maintained, fairly managed, and priced correctly will always be in demand. With the right business partners, all these prerequisites can be achieved, and landlords can weather this storm. With continued discipline, they will be able to enjoy a greater return on investment in years to come,” says Stevens.
South Africans are currently battling high inflation and rising interest rates, not to mention increased load shedding exacerbating trading conditions in recent weeks.
But while it seems likely that this would lead to further economic pressure, and potentially also to defaulting tenants, Johette Smuts from PayProp says that any effect of the cost-of-living squeeze and other factors on tenant payment has been marginal.
However, Smuts says fewer tenants are in arrears now than in Q1 2020. In the most recent quarter, 18.5% of tenants were in debt to their landlords, compared to 18.4% in Q1 2022.
“While the quarterly uptick is small, it could still be indicative of rising financial pressure on tenants,” says Smuts. She says the onus is on landlords and property professionals to keep a close eye on tenant arrears within their portfolios and work with their tenants to find solutions together.
Smuts says that while tenants in the lower rental brackets spend proportionately less of their income on rent, they spend a much greater percentage than higher income cohorts on debt repayments. The opposite is true for tenants in the higher rent brackets. “This further illustrates the point that lower-income tenants are more likely to be affected by rising inflation and interest rates as the cost of servicing debt goes up,” says Smuts.
“It’s important for rental agents to understand specific tenants’ spending behaviours. Not all tenants’ expenditures will look the same as the averages in this Index. In the current economic climate where prices are rising rapidly and debt is becoming more expensive, a good agent should understand the potential effects of this on a tenant’s expenditure and in turn, their ability to pay rent,” says Smuts.
A professional rental agency should be geared to deliver the following:
- Correct pricing to attract quality tenants and avoid extended vacancy periods
- Stand-out marketing to drive immediate occupancy
- Strict vetting of tenants to mitigate risk
- Diligent property management to protect landlords’ assets and income
- Cloud-based systems to drive efficiencies and transparency
- Firm but fair dispute handling to move forward amicably
