Rental market realities

Landlords likely to up hard-hit tenants’ rent, if they haven’t already

EVEN in tough times, residential tenants are paying their rent in full and on time. In fact, consumers consider rental payments to be the second-most important budget credit priority, second only to mortgage or bond repayments, says Waldo Marcus, the head of marketing and sales at TPN Credit Bureau.

The latest data from TPN shows that tenants are prioritising their rentals, even though TPN’s longterm data indicates that consumer strain is almost always shared with property owners, reflecting either in higher vacancies, lower returns or late payments.

However, before you breathe a sigh of relief, note the cost of rent will probably rise as landlords try to recover their increasing costs.

PayProp Rental Index recently revealed that quarterly year-on-year rental growth continues to climb, with the average rent increasing by 2.6% in the second quarter of 2022. PayProp’s Johette Smuts says the “continued financial demands faced by consumers as we move through 2022 could force those in the rental market to seek out cheaper accommodation options, which would prevent a complete rental market recovery”.

In this sort of market, you may see multigenerational homes in which either grandparents or children move back home or all live under one roof. You may also see downsizing, friends pooling resources to live in a commune, or even an alternative way of living, such as a mobile home.

For the second quarter of 2022, the TPN Residential Rental Market Monitor shows, however, that the number of tenants in good standing with their monthly rent obligations has improved from 80.78% in the first quarter to 82.22% in the second quarter.

Tenants in good standing are those who have paid their rent on time and in full.

This shows, says Marcus, that despite facing economic challenges, exacerbated by load shedding and high fuel prices, consumers regard paying their rent as a priority. This is good news for the residential rental market which is proving to be “surprisingly resilient”.

However, Jacqui Savage, the national rentals manager for the Rawson Property Group, believes the road ahead will not be “without a few bumps” for tenants.

“It’s definitely heartening to see the rental market gaining momentum after a long period of stagnation,” she says. “Vacancy levels are recovering nicely and demand looks set to grow.

“That said, rising costs are putting increasing pressure on landlords to escalate rentals, while consumer inflation is eating into tenant affordability at the same time.”

Marcus concurs. “The residential property market is mirroring the end of the low interest era and landlords are passing their higher costs on to tenants, which is making it increasingly more expensive to rent,” he says.

Chris Xotongo, the sales property practitioner at Just Property, Port Elizabeth, adds that the macro pressures of rising interest rates and the ever increasing cost of living as a result of inflation have resulted in many first-time home buyers feeling the pinch, and purchasing activity in this segment has waned.

“Those who might have been considering buying, are now opting or being forced to rent. Increased demand is good for the rental market,” says Xotongo.

The TPN report shows that tenants in the R7 000 to R12 000 and R12 000 to R25 000 rent brackets show a strong commitment to paying their rent on time, with 88% and 87%, respectively, in good standing. Although tenants paying R3 000 to R7 000 – a rent bracket which makes up more than half the market – have not recovered to pre-pandemic levels, they continue to head in the right direction, increasing their good standing by 2% to 82.8%.

Bucking the trend, however, is the bracket above R25 000, with a noticeable deterioration in good standing, to 77.38%.

The drop has precedent, however, and is partly attributable to the cyclical nature of tourism, particularly in the tourism regions.

“Although this bracket traditionally experiences a drop in the second quarter of the year, it tends to strengthen again in the third quarter,” says Marcus.

Higher interest rates have traditionally resulted in improved demand for rental property.

“However, the balance in a fragile economy is a fine line between demand shift and the ability of consumers to afford any type of formal rental accommodation,” Marcus adds.

The South African Reserve Bank’s recent repo rate hike to 6.25% is expected to slow residential property sales, although prices in certain areas are expected to continue to climb as homes in well-serviced areas remain attractive assets.

Employment figures typically correlate with the formal rental market, with improved employment figures, combined with higher interest rates, tending to drive demand for rental properties.

Statistics SA’s recently published Quarterly Employment Statistics, which measures employment, found that employment declined in the second quarter, losing 119 000 jobs.

The consumer price index eased during the pandemic which resulted in lower interest rates.

“This, combined with the work from-home trend, encouraged certain segments of the market to purchase property which, in turn, fuelled a property inflation blaze,” says Marcus.

From a provincial perspective, TPN has found:

• KwaZulu-Natal’s tenantsin-good-standing figure dropped to 80.16% while its vacancy rate remained high, at 9.91%. KZN has the highest rental escalations of all provinces, at just under 5%.

• Gauteng continues to struggle to achieve higher escalations, with rentals growing at just 1.69% year on year. The province has a low vacancy rate, at 6.67%, a figure which is expected to increase as supply is added. Only 80.62% of tenants are in good standing.

• The Western Cape saw steep rental increases of 4.17% in the second quarter but this has not impacted landlords’ ability to collect rent. The province’s good standing figure is at 86.61% while its vacancy rate remains stable.

• The Free State and North West are struggling to collect rent as a result of a high rate of unemployment in both provinces (40.3% and 49.2% respectively). Paul Stevens, the CEO of Just Property, advises landlords: “Beneath the national figures on tenant numbers lie significant variations from region to region, town to town, even street to street. As a landlord, you need to know your location, your tenants and, crucially, your likely returns.” | COMPILED BY VIVIAN WARBY