South African Property Rental market update

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Rental volatility stable – Good tenant management key

The South African (SA) property rental market has had an interesting and surprising performance in 2016 so far. The question is, “what actually happened this year and how will this lead out into next year?” asks Paul Stevens CEO of Just Property (previously Just Letting) experts and leaders in the SA property management field by volume, history and track record.

Rental growth across the country has been mild with an average growth not far off inflation, somewhere just over 6%. This can be expected in an economy that we are in where income to debt ratios is at all time highs and tenants are battling to make rental payments.

According to Tenant Profile Network’s (TPN) latest quarterly Rental Monitor Report, landlords collectively breathed a sigh of relief as rental payment behaviour during the second quarter of 2016 recovered to 85.08% of tenants in good standing. Michelle Dickens CEO of TPN says that, ‘hopefully this indicates the shock drop to 82.17% in Quarter 1 (Q1) was merely a seasonal adjustment. Stability also returned to the market after two successive interest rate hikes in Q1 with no further rate hikes for Q2.”

The latest TPN Rental Monitor 67.46% of tenants were in the paid on time category, while 6.29% paid during the ‘grace period’ and 11.33% paid late – adding up to a combined 85.08% in good standing. The number of tenants in the grace period was slightly higher than usual, probably due to timing of the April / May public holidays rather than an outright deterioration of payment.

Stevens says their average rental achieved across Just Property’s rental book in countrywide is currently R6 550 with the Western Cape showing the highest growth in rentals of almost 10%. “One of the biggest contributors to this is I believe the “semigration” that is happening with not only people from Gauteng moving to the Western Cape but also people from the rest of the country,” says Stevens.  Most people moving there seek better lifestyle; schools, service delivery and better run municipalities.

According to John Loos of FNB, they have seen the Western Cape having a strong ‘net inward migration’ of repeat homebuyers and renters – something the other eight provinces don’t have.  This may have provided some additional support to the region’s housing and rental markets.” The stats are unconfirmed but unofficially almost 300 000 people have migrated to Cape Town in the last year.

According to Stevens, he says Gauteng is a very different picture. Historically it has always been the rental hub of SA and over the past few years we have seen a decline in rental growth. This is mainly due to the increased supply of rental units in the Gauteng area where demand has now started to drop off and vacancies are climbing.

Equally bad performing areas have been the North West Province and Mpumalanga where they have been affected negatively by the decline in the mining sector. KZN, Free State and the Eastern Cape have remained steady with average growth in rentals while there is still a steady demand for rental units with a limited supply.

Louw Liebenberg of PayProp mentions in their Annual Rental Index Report which is based on actual owner payments of over 70 000 residential units countrywide shows that, ‘tenant selection is the single biggest differentiator in the rental market. As tenants are under more pressure to service ever-increasing debt in a stagnating economy, finding and placing the right tenant in a property that they can afford will at least ensure landlords get cash flow from their properties.’

Although rental payments appear to have recovered, other credit repayments declined further – indicating a financially stressed consumer. Most significantly, short term credit nose-dived 8 percentage points to 60.22% of South Africans whose accounts were paid in ‘current’. Furthermore, secured credit dropped 2.7 percentage points to 66.85% in current status.

Stevens says that he sees that in the year ahead that our economy is going to remain on a very slow growth path and along with this rentals will remain with the same slow growth path. Areas of higher demand like the previously mentioned Western Cape will see a tendency of people moving to coastal towns that are showing growth and offering lifestyle choices for people to commute to Gauteng from George and even Port Elizabeth.

Investors looking for good yielding properties will have to continue to look hard for those cash flow gems that do exist but are not common. Buy-to-let owners are battling to push through inflation beating rental increases when new leases are up for renewal. Also affecting rental yields in the year to come will be further rate increases along with tenants rental defaults as they buckle under the pressure of inflation and being over extended in debt. Stevens says,’ investors should accept slightly lower rental increases and rentals should not be pushed too high which could force tenants into delinquency or push them elsewhere.’

According to the TPN Rental Monitor the “one size fits all” adage simply does not apply to the property market. Supply and demand vary in each town and city, coupled with good standing credit assessments of tenant applications – and consequently – the level of vacancies related to each town results in widely shifting rental prices and escalations.

Nationally, the average escalation rate of 2.89% indicates just how price-sensitive South African tenants are at the moment. The winter months brought higher utility usage and tenants are clearly becoming more conscious of their expenses and total rental account including utilities. Basic rental is just one component and in many cases, a more negotiable one where overall budgeting is concerned.

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