Fewer rental flats are standing empty than during the 2020 low point but landlords shouldn’t bet on getting inflation-linked rental increases this year.
Buy-to-let investors will be disappointed if they were hoping to achieve the 4%-6% annual rental increases typically seen pre-pandemic when leases come up for renewal this year. A more likely scenario is that many residential tenants will rather move to a new property than pay more rent. That’s because there’s still an oversupply of rental flats, townhouses and clusters to choose from in most cities and towns across SA.
Property economists Rode’s latest quarterly report on the SA property market confirms that despite a steady improvement in SA’s flat vacancy rate over the past five quarters, it is still sky-high in historic terms. The percentage of rental flats standing empty across SA averaged 9.9% in the first quarter, down from a record peak of 13.1% in the fourth quarter of 2020. Still, that is nearly double the 5.3% average recorded from 2017-2019 (see graph).
Rode’s report editor Kobus Lamprecht ascribes the oversupply to a combination of factors. “Firs, there was a huge increase in new sectional title developments in 2018 that brought additional rental stock to the market. In 2019 a lacklustre economy and job losses hit tenant finances. And then came Covid and record low interest rates, which meant several existing and would-be tenants were lost to the rental market as they opted to buy instead.’
Lamprecht says SA’s high vacancy rate has placed significant pressure on rentals. He refers to latest Stats SA figures showing a drop of an average 0.2% in flat rentals across the country in the fourth quarter year on year. That’s down from 2.4% and 4.4% growth respectively in 2020 and 2019 and the first time that flat rentals have dipped into negative growth territory since 2009 following the global financial crisis.
Latest data reflects a market under pressure with rental growth clocking in at just below 1% in the fourth quarter
Encouragingly, though, the number of tenants in arrears has dropped noticeably — from a high of 25% in the second quarter of 2020 to 18.4% in the fourth quarter. That’s even lower than the pre-pandemic level of 19.4% seen in the first quarter of 2020. But the improvement in arrears may be short-lived as tenants are likely to run into more financial difficulties given higher fuel, electricity and food costs amid record high unemployment levels.
Lamprecht says: “To save costs, some younger tenants could be left with no choice but to stay with their parents, while some could share with friends. All this means is that it will take time to get back to pre-Covid vacancy rates of about 5%.’’
Rental processing firm PayProp’s latest data also reflects a market under pressure with rental growth clocking in at just below 1% in the fourth quarter. Albeit slightly up from the 0.2% recorded by PayProp’s rental growth index in the third quarter, these levels are still well below the inflation-linked 3%-4% achieved pre-pandemic.
Johette Smuts, head of data analytics at PayProp, says in Gauteng rentals actually declined by 2% in the fourth quarter — the third consecutive quarter of negative year-on-year growth and the lowest growth recorded in any province.
In contrast, the Western Cape’s rental market appears to be in a much stronger position with rentals rising by 1.7% over the same time. Smuts notes that the Western Cape also outperformed in terms of tenants paying their rent on time, with only 15.1% of all tenants in arrears — the lowest of all the provinces.
Unsurprisingly, the Western Cape is now the most expensive province in which to rent property, at an average R9,413 a month compared with SA’s average R7,906. In fact, Western Cape tenants have to fork out 75% more to rent a property than their counterparts in North West who are paying an average of only R5,382 a month — SA’s cheapest province.
While continuing pressure on rentals amid a lingering oversupply of rental properties may well be good news for tenants, the downside for investors is declining buy-to-let returns. Landlords are already feeling the pinch from rising running costs and rates as well as higher monthly bond repayments on the back of recent interest rate hikes and more to come.
Residential property was one of the worst performing subsectors of the SA real estate market last year. According to MSCI Real Estate’s annual SA property index, which was released in April, residential property delivered a total return (income and capital growth) of 4.7% in 2021 compared with industrial and retail sectors’ 7.5% and 6.5%. The residential sector nevertheless pipped the office market, which posted a measly 0.8% total return last year.
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