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Potential for significant growth in SA’s rental property market

MAIN IMAGE: Makhosini Ndlovu, Product Head at FNB Commercial Property Finance; Johette Smuts from PayProp

Staff Writer

Continued upward pressure on inflation is creating what looks to be a protracted increasing interest rate cycle. Historically, such an increasing interest rate environment results in growing demand for residential rental properties as previous entry-level property buyers must rethink property ownership due to affordability concerns.

Makhosini Ndlovu, Product Head at FNB Commercial Property Finance, says this upward interest rate cycle is no different, and there is evidence of a recovery in demand for rental properties across South Africa.

“Rentals took a fairly severe hit as a result of the double whammy delivered by Covid-19,” Ndlovu explains, “as many landlords were required to hold rentals steady or even decrease them over the past two years due to tenant income pressures, and at the same time, a large number of people who would have been renters became first-time homeowners, taking advantage of the massive drop in interest rates as government worked to cushion the economic blow of the pandemic.”

However, Ndlovu says demand for rental properties recovered during the first half of 2022 as rising interest rates put property owners back in a favourable position. He predicts that demand for rentals will continue growing into 2023, particularly in the rent affordability ‘sweet spot’, which ranges between R6 000 and R12 000 per month, depending on the province,

Ndlovu is confident that this growth in demand will be equally evident in all parts of the country, thanks in large part to the shift towards work from home and hybrid work arrangements. “While the expectations of a full-scale work from home workplace culture that were evident during the lockdowns have not fully materialised, there has been a significant move towards remote working arrangements,” he explains, “and that has resulted in a more even spread of rental demand across the country – even in smaller towns that would never previously have been attractive to long-term tenants.”

Johette Smuts from PayProp says that in a tough economy, property professionals in the rental space are under immense pressure to ensure that their rental book remains healthy. Tenants countrywide face a trifecta of challenges between rising inflation, increasing interest rates and ongoing slow economic growth.

Smuts says that whilst market conditions are tough, many property professionals are adding value to their landlords and tenants and managing to navigate the pitfalls to the benefit of their agencies and clients. “Going back to the fundamentals will help professionals to maintain healthy and strong rental portfolios,” says Smuts.

Ndlovu says they have seen a significant spike in demand for rental properties outside of major centres, particularly in coastal towns. But he emphasises that demand is not only rising in these small towns that were historically just holiday destinations; there are also pockets of rising demand in the cities. And the good news is that younger tenants are primarily driving this.

“As the workforce becomes younger, it’s likely that a more vibrant and sustainable residential property market will continue to emerge, and much of that demand by younger tenants is for smaller, affordable properties that meet their lifestyle aspirations.”

Smuts warns that tenant expenses can be simplified into three ‘baskets’, namely debt repayments, rental payments and remaining disposable income covering everything from groceries to entertainment and school fees.

“With inflation at 7% and even more on items like private schooling, groceries and healthcare, rental payments are the only expense category under the tenant’s control. Tenants just do not have the ability to afford rental increases, so many are moving to smaller properties to avoid paying more rent or lower that expense,” she explained.

Ndlovu says that, currently, supply of rental stock is still largely sufficient to meet the gradually growing demand as the impact of increasing interest rates is still filtering through to consumer budgets, but that may change soon. They expect demand to gradually outstrip supply in the coming months, which presents a real opportunity for residential property investors and developers.

In fact, Ndlovu says that FNB Commercial Property is so bullish on rental stock that it recently became the first bank in the country to introduce a 15-year term loan which is helping to create new opportunities for growth in participation in the rental property sector.

“Our broad range of property funding solutions means it is relatively easy for someone who starts out using a retail home loan to finance a single buy-to-rent property to quickly expand their rental property portfolio and then seamlessly progress to become a property investor or developer.”

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