Property360 - National Digital Magazine - 18 August 2023

CRACKS

APPEARING IN THE NORMALLY RESILIENT PROPERTY RENTAL MARKET PAGE 3

How to win the battle for quality tenants

What you put in is what you get out, so consider these tips to help guide you

MOST tenants are under considerable financial pressure because of high inflation and rising interest rates, coupled with load shedding and low economic growth, which is creating a higher risk of unemployment.

Consequently, the rental market is increasingly competitive, and the risk of rental defaults is rising. Therefore, landlords need to be wary of unilaterally implementing rental increases that might easily prompt tenants to leave or put new tenants off, says Andrew Schaefer, the managing director of property management company Trafalgar.

He says landlords should rather focus on attracting and retaining quality tenants by “doing whatever they can to increase the desirability of their rental properties and ensure that they provide good value for money”.

How can landlords make tenants feel that they are getting great value for their rent?

Schaefer gives several tips:

✦ Provide or improve features tenants value the most at the moment, such as installing a gas stove, so that load shedding does not necessarily interrupt meal preparation, or installing an inverter and battery system to power fridges, computers and other essential items during blackouts.

✦ In freehold properties, a solar power system or, at least, a solar geyser is a drawcard. Even in sectional title homes, it is possible to increase the appeal by providing eco-friendly items that are increasingly sought-after, such as LED light bulbs, water-efficient taps and showers and sustainable flooring.

✦ Good security is also a priority, so it is worth taking steps to improve the security and safety of the property, especially if it is not located in an access-controlled complex or estate. Secure locks, burglar guards and good outdoor lighting are essential, and landlords should consider adding electric fencing, security cameras and an alarm system if possible.

✦ Good maintenance and prompt repairs are vital to ensure that the grounds and exterior of the property always look well-maintained and inviting, and that the interior is clean, well-lit and visually appealing. “Tenants also really appreciate quick and positive responses to requests for essential repairs,” Schaefer says.

✦ Wrap the cost of certain amenities into the rent, such as high-speed internet, laundry facilities, secure parking and additional storage space, or even a certain amount of prepaid electricity.

✦ Maintain good communication and giving good customer service. “This creates a positive landlord-tenant relationship and a sense of satisfaction and loyalty that encourages tenants to stay put and renew their leases,” he says. “And it is always preferable to retain a quality client who looks after the property and pays the rent on time, even if you have to settle for a lower increase when renewing.”

✦ Offer lease flexibility and incentives, for example in some areas, landlords may find that shorter lease terms are attractive to certain tenants, such as those on six to eightmonth work contracts, and that they are prepared to pay a premium rental rate for this convenience. On the other hand, landlords may want to consider incentives for great long-term tenants who renew, such as a smaller rental increase, or an increase only once every two years.

But before making any changes, Schaefer says, landlords should engage a qualified and experienced rental agent to advise them about current rentals in the area and what “extras” tenants are looking for, and to ensure that all potential tenants are properly screened.

“Finding new tenants who are reliable is increasingly difficult because of the financial problems many people are experiencing, so it is really important to be sure that anyone who is moving into your rental property is not only creditworthy and employed, but also has a good rental payment record.”

Evictions: Best for landlords to play by the rules

WHILE it can be a lengthy process to evict tenants who fail to pay their rent, there are procedures in place to make sure that the tenant’s and landlord’s rights are protected.

Following the necessary steps is key to a hassle-free eviction process.

Adrian Goslett, the regional director and CEO of Re/Max of Southern Africa, explains that both the tenant and the landlord must play fair in respect to their rental agreement.

“It is crucial to abide by the contractual agreements and, if not, to then proceed with the required legal procedures stipulated in this regard. It is only when people deviate from this that issues start to occur,” he says.

Tenants are protected by two pieces of legislation:

✦ The Prevention of Illegal Eviction from Unlawful Occupation of Land Act, No. 19 of 1998 (PIE Act).

✦ The Rental Housing Act of 1999 (RH Act) as amended.

The PIE Act sets out the process for evicting tenants and the RH Act makes it

a criminal offence for a landlord to simply cut the supply of electricity or water, change the locks, confiscate tenants’ belongings or stop a tenant from having access to the property.

“It is vital to always play by the rules. While you might think you can get a nonpaying tenant out quicker if you change the locks or defer to other intimidation tactics, the truth is that this will most likely provide the tenant with ammunition to use against you in the court proceedings. This will only drag things out further and cause more unnecessary complications and delays,” says Goslett.

Although it might be forgivable for the odd late payment if it’s a bank or financial system-related problem, a landlord cannot be so lenient if their tenant gets into the habit of paying their rent late.

“Because the monthly payment date forms part of the rental agreement, which must also comply with the Consumer Protection Act, when a tenant doesn’t pay on time, they are technically in breach of contract. Legally, this means that a landlord should send the tenant a formal

letter explaining that they have 20 business days to make the payment, and if they don’t pay their rent in that time, their lease will be cancelled,” Goslett explains.

If the tenant fails to pay what is due in the stipulated timeframe, the landlord can legally terminate the lease and ask them to leave. If the tenant refuses, the landlord can then take out a court order to evict the tenant for breach of contract.

“This process can take up to six months, during which your tenant can stay in your property and will probably still not pay rent. Once the eviction is granted, the tenant is usually given at least another 14 days to find new accommodation before the eviction order is executed,” says Goslett.

The eviction process can be lengthy, so he suggests taking steps as soon as possible to prevent too great a loss of income.

“The longer you take to act on a late or missed payment, the longer it will be before you can legally evict a tenant who continues to miss payments.”

Demand for rental property remains strong but cracks are starting to appear

ALTHOUGH the residential rental property market has remained surprisingly resilient in recent quarters despite the financial stress consumers are under, the number of tenants in good standing deteriorated in the first quarter of 2023 in all provinces, according to TPN’s latest Residential Rental Monitor report.

The resilience has been driven by the high interest rate, which has dissuaded potential buyers, says Waldo Marcus, the industry principal at TPN Credit Bureau.

The expectation of further interest rate hikes will serve to retain a healthy demand for residential property.

However, although rental growth continues to improve, Marcus says property investors need to keep a close eye on the financial health of consumers and their ability to keep paying their rentals.

The Residential Monitor Report reveals that vacancies were at 6.19% in the first quarter of 2023. TPN’s Market Strength Index, which measures the perceived demand and availability of supply within the residential rental market, remains strong at 9.14 points above equilibrium, a figure last seen in 2017.

“Traditional market factors indicate that the residential rental market is buoyant, with improved returns and lower vacancies.

“A further interest rate hike before the end of the year is expected to further deter property purchases and retain healthy demand for residential rental property,” Marcus says.

However, TPN’s data reveals that tenants in good standing have declined slightly for three consecutive quarters as economic challenges continue to filter into households.

This mirrors the result of the National Credit Regulator’s age analysis which indicates that almost all consumer credit types in good standing deteriorated slightly in the same period.

TPN’s Squat Index, defined as the number of tenants who, monthly, fall into a category of non-payment, has also seen an increase in the past two quarters.

Marcus points out that a decrease in credit good standing is typically a predictor of rental payment rates.

“Although overall sentiment in the sector remains positive, property owners need to consider how a tenant’s late or no payment will impact them.

“Tenants classified as squatting pose a severe risk to the ability of landlords to collect and recover rental due. Landlords, therefore, need to act proactively and utilise the various legal tools available to them to collect the outstanding rental.”

He further advises that escalations should be considered cautiously, given that consumers are under extreme and everincreasing pressure.

“Landlords need to take advantage of the current market strength but bear in mind that there is an upward trend in the number of tenants classified as squatting. They, therefore, need to ensure that adequate tenant risk monitoring is

implemented to mitigate the risk of an increase in defaulting tenants.”

The residential market recovered faster than most property sectors post Covid-19, with reduced vacancy rates and steadily recovering rental escalations.

The sector’s recovery was assisted by an aggressive interest rate hike cycle which dissuaded potential buyers from entering the property market.

FNB’s House Price Index, which peaked in the first quarter of 2021 to 5.1%, dropped to 2.3% in the first quarter of 2023 as a result of interest rate hikes and is expected to remain around this number for the balance of 2023.

Rental escalations have been recovering since mid-2021 as demand for residential rental property grew, providing property owners with an opportunity to play catchup with the consumer price index which, at the end of March 2023, was 7.1%.

“A pause in the interest rate hiking cycle by the South African Reserve Bank in July 2023, for the first time since November 2021, would have provided some relief to a severely stretched consumer base,” says Marcus.

“We expect residential rentals to continue their gradual climb but to slow towards the end of 2023 as the balance between rental growth and vacancies becomes a finer balancing act.”

The TPN report found that tenants in the Western Cape were the most committed to paying their rent while those in KwaZuluNatal had the highest number of squatting

tenants, up from 4.67% in the fourth quarter of 2022 to 5.09% in the first quarter of 2023. Gauteng is only marginally behind in the number of squatting tenants, at 4.58%.

When it comes to rental payment performance by the rental band, tenants paying R3 000 or less a month – the lowest rental band – continue to struggle to pay their rental, with a continued deterioration of tenants in good standing.

Tenants paying between R7 000 and R12 000 have been the best-performing category of tenants since 2014, with the highest proportion of tenants in good standing of all rental bands, followed by tenants paying between R12 000 and R25 000 a month.

The luxury market – defined as rental properties costing more than R25 000 a month – has the highest vacancy rate.

Marcus explains that although a lower vacancy rate and higher escalations are a move in the right direction, ultimately, a successful property investment relies on the ability of tenants to pay their rent.

“Early signs indicating that consumer credit repayments are slipping, combined with lacklustre economic growth, cloud the positive outlook for the residential rental market for the rest of the year.

“The current economic landscape means that the risk of defaulting tenants is more likely, making proper background checks and vetting more important now than ever before. The right tenant in the right rental bracket is gold right now.”

As landlords take advantage of increased interest, they also need to keep in mind the increasing number of defaulters, and mitigate the risks

The rental property market is showing resilience as interest rate hikes deter potential homebuyers but more tenants are struggling to pay rent.

PICTURE ANDRES AYRTON / PEXELS

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ASKA PROPERTY GROUP

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