state of the rental MARKET

LANDLORDS HAVE HAD A TOUGH TIME OVER THE LAST FEW YEARS, BUT

TO ITS PRE-COVID LEVEL OF GROWTH, WRITES GARETH BAILEY

We have had some serious challenges to overcome over the past few years. Besides its significant health implications, Covid interrupted logistics which led to supply side constraints which, in turn, drove up inflation. Fresh on the heels of Covid, Russia invaded Ukraine which, together with a weakening currency, has further stoked inflation. This has resulted in an aggressive global interest rate hiking cycle as governments try to dampen demand to get inflation under control.

The upshot for landlords has been higher financing costs where investors have geared their properties. Coupled with weakening rental demand, this has put profitability under pressure over the last few years. Whereas landlords may have become accustomed to 7% to 10% annual increases in popular areas pre-Covid, they have had to accept flat rental rates or small increases to maintain quality, consistent tenants over the past few years.

The good news is that, according to the latest PayProp Rental Index, the rental market has finally returned to its pre- pandemic level of growth over the last quarter of 2022 and this trend has continued into 2023 with average national growth of 3,9%, 4,6% and 4% respectively for January, February and March.

On the one hand, while rising prices and more expensive debt is putting continued pressure on tenant affordability, the rising interest rates are also pricing many would-be purchasers out of the market, which is increasing the demand for rental properties.

National rental growth has now accelerated for six consecutive quarters from first quarter of this year and an average rental of R8 801 versus R8 632 in the last quarter.

Western Cape has the highest average rent in South Africa at R9 872 up from R9 737 last quarter. However, average rental growth is the same as KwaZulu-Natal’s 5% year-onyear. The highest performing province has been the Northern Cape with rental growth of 10,2% over the past year.

From an arrears point-of- view, the picture nationally is slightly negative with the percentage of tenants in arrears rising from 18,1% to 18,3% compared to the previous quarter. This statistic is still well below pandemic levels and in line with the percentages recorded throughout 2022. While the proportion of tenants in arrears also rose slightly in KwaZulu-Natal, it was by less than 0,1%.

Tenant affordability is still seen as one of the biggest challenges for the residential sector this year. If tenants are continuously squeezed by inflation and the rising cost of servicing their debts, then they will not be able to tolerate increases in rent, and may need to consider moving to cheaper properties, as has already been reported in some provinces, according to the PayProp report.

The past quarter’s results uncover a mixed picture.

0,4% in the second quarter of 2021, to 2,6% in 2022 and this trend has continued upward to 4,2% in 2023. KwaZulu-Natal is one of the top three most expensive provinces in SA with an above-average 5% yearon-year rental growth in the

Tenant risk is up overall, but some metrics have improved despite weakening economic conditions. One measure of tenant credit health is National Loan Register (NLR) accounts, which monitors short-term loans from micro-lenders with very high interest rates and which are seen as bad debt. Surprisingly the biggest rise in NLR accounts has been in the R60 000 to R80 000 income bracket which suggests that even higher earners are feeling the pinch.

From a debt-to-income point of view, which measures the amount that tenants spend on servicing debt, the national ratio has dropped slightly from 46% in the first quarter of 2022 to 44,5% in the first quarter of 2023. Meanwhile, the rent-to-income ratio – which measures the percentage of income that tenants spend on rent – has increased slightly from 28,3% to 28,8%.

Overall, while it is great to see that rental growth has returned to pre-pandemic levels, macroeconomic factors still plague tenants and landlords need to think carefully before aggressively increasing rentals. The conventional wisdom that it is generally better to have a quality, consistent tenant than to prioritise rental growth still applies, as this can help prevent lost rental income

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Travel opens your eyes to new things.

“Look at this!” I yelled to my partner, waving the packet excitedly. “It’s two-minute noodles!”

“So?”

“So how do they manage to make the noodles so fast? We only have three-minute noodles!”

“Our noodles are two-minute too. Those noodles are just like our noodles.”

We were in Singapore for a month, renting an apartment in Chinatown near the Sri Mariamman Temple. Normally I avoid grocery shopping, but this was an adventure. Everything seemed new and exciting. I kept snatching mysterious products.

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“I’m starting to think you don’t do enough