SA’s rental market: Challenges and opportunities

Rental market vacancies improved to 12.4% from 13.8% in the second quarter of 2021, according to the TPN Rental Monitor Q2 2021.

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Nationally, tenants in good standing reached 80.34% in Q2, compared to 73.5% in the second quarter in 2020.

‘Good standing’ includes tenants who have paid their rent in full and on time (65.38%), paid in the grace period (4.58%), or paid but paid late (10.38%).

Michelle Dickens, CEO of TPN Credit Bureau says that a tenant’s account in good standing is fully settled with no arrears balance. “Delinquent tenants are those who make only a partial payment (12.57%), or those tenants who do not paid any rent at all (7.08%).”

Dickens points out that residential rentals remain a top priority payment for tenants. However, tenants’ ability to pay will remain under pressure.

“Notwithstanding that overall rental escalation is back to a positive 0.23% for the second quarter, increases in utilities and municipal charges exceeding the Consumer Price Index will continue to exacerbate the ability of tenants to pay rent and consequently drive yields down.”

According to Samuel Seeff, Chairman of the Seeff Property Group, landlords have had to adjust rental rates and put short-term stock into the rental market. This ensures taking a bit less now while protecting financial assets and minimising losses.

“We have seen that where landlords have been accommodating, good tenants have renewed their leases, and this is important, as you want good tenants to stay.”

Seeff says mitigating losses and managing landlord risks have become an essential strategy for buy-to-let property owners and investors. There is no replacement for working with a credible local agent who offers a track record and will provide the best advice.

Myles Wakefield, CEO of Wakefields Real Estate says the KwaZulu-Natal residential rental market has shown some improvement off the back of the weak 2020, but it’s still a tough market.

Wakefields points to several reasons for the weakening market, including the impact of Covid-19 and job losses, which resulted in the number of non-paying tenants escalating, although this is improving slightly. “Unemployment tended to affect tenants in the more affordable rentals, so this sector of the rental market experienced the highest impact.”

“Landlords either haven’t been able to get the rental escalations they’d like, or they’ve chosen to retain a good tenant by keeping rental increases to an absolute minimum.”

He says it is important to factor in the low interest rate. When repaying a bond is a similar financial commitment to paying rent, many people will naturally choose to buy. He adds that that has definitely played out in the past 18 months, particularly in the first-time homeowner market.

“For those buy-to-let investors, it’s about keeping the rental at that pitch-perfect level, which makes it affordable and attractive to would-be tenants.”

Rental prices

According to TPN, 70% of tenants rent for less than R7,000 per month, with the properties that are priced between R4,500 and R7,000 per month accounting for 35% of all lease agreements.

In properties priced below R3,000, 16.08% of tenants are not able to pay rent, whereas 15.72% of tenants only make partial payments.

During the second quarter of 2021, the sweet-spot segment with monthly rentals of between R7,000 and R12,000 performed well. Within this price bracket, 86.32% of tenants were in good standing, and nearly three out of four tenants paid on time.

Tenants’ market

Since it’s currently a tenants’ market, Dickens advises landlords with good tenants to hold onto them. With lots of rental stock to choose from, tenants are very picky and they consider price and security as important factors when choosing where to rent.

Landlords who add incentives such as zero deposit, or the first month rent-free, in particular tend to attract and retain tenants.

Rawson Property Group Nationals Rentals Manager, Jacqui Savage, concurs with Dickens, pointing out that tenants are shopping around for good deals.

“Tenants are negotiating current rental prices advertised and offering lower rentals. Landlords are finding themselves in a position where they either sit with an empty property or accept the lower rental offered. With the high vacancy rates currently being observed, properties are taking much longer to rent out – some up to two months.”

Savage says in the Western Cape, Brackenfell offers very competitive rental prices. Two- and three-bedroom homes have average rentals of between R7,000 and R12,000 per month, respectively, whereas in Kuilsriver they average between R7,000 and R8,900. Tenants like these properties, as they get bigger homes for reasonably low rentals.

Pockets of excellence

According to Seeff, the Western Cape remains one of the best property markets for buy-to-let investors. However, he says they are not advocating investing in the rental market right now because of the financial challenges on tenants, the risk of vacancies and the slump in tourist rentals.

Seeff Southern Suburbs agents, Marinda Bienz and Samantha Heuvel, are struggling to get rental stock, saying that there is an abundance of tenants looking for new homes, provided the price is right.

They say that the most popular rental bracket for apartments is R6,000 to R8,000 for one-bedroom, R8,500 to R11,500 for two bedrooms and R15,000 to R22,000 for three-bedroom apartments.

Bienz and Heuvel say that landlords should guard against opportunistic agents who promise high rentals to add stock into their books. This could be a risk to vacancy rates and potential financial losses.

Grant Smee, MD of Only Realty, says that in the mid-market they are seeing sustained demand for quality affordable properties, especially where landlords have adjusted their rental expectations.

TPN data shows that the Western Cape has been impacted by rising vacancy rates reaching 14.38%, and negative annual rental escalation (0.1%) in Q2 2021.

Additionally, Western Cape property prices historically outperform the rest of the country, and with rental prices unable to keep up, this has left landlords with 8.7% gross yield.

Despite rising vacancies, Smee says they are seeing sustained demand for rental properties. However, he believes that the highest vacancy rates will be in Cape Town CBD and the Atlantic Seaboards areas.

Only Realty’s experience is that there is demand between the R7,000 and R10,000 price brackets in most areas. In some suburbs, there is high demand for properties priced between R5,000 and R7,000.

Smee says sharing has become a common theme, with tenants looking to share rental and utilities in order to decrease their individual monthly expenditure.

Furthermore, Smee says that the best rental yields are seen in sectional title properties, even though returns have been eroded through the increasing costs of ownership in a sectional title scheme, specifically increasing levies.

In Gauteng for example, he says the East Rand, West Rand and Johannesburg North areas have always offered great yields and continue to do so.

He adds that Coastal investment areas to consider are Port Elizabeth, the Dolphin Coast, the Helderberg in the Western Cape, and the Northern Suburbs of Cape Town.

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Edited by Gudrun Kaiser

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