Some good news for South Africa’s rental property market

The Reserve Bank’s shock 75 basis point rate hike this week pushed the prime lending rate to 8.25%, which could see demand for residential rental property go up, says TPN Credit Bureau.

TPN Credit Bureau’s recent Residential Rental Monitor reported that although rising interest rates are not encouraging for consumers – particularly those with high levels of debt – it may be just what the rental market requires right now to improve demand.

Given that interest rates are expected to increase in the foreseeable future, landlords can be cautiously optimistic that demand for rentals may improve as consumers delay property purchase decisions, said TPN.

The latest monitor reported that rental properties had seen a recovery in the first quarter of 2022, with the vacancy rate recovering to 8.26% compared to 13.31% a year earlier.

“This is reflected in the strengthening of TPN’s Market Strength Index, which recovered to 52.8% in the first quarter of 2022.”

The Index is based on the perceptions and experiences of estate agents and landlords of the residential rental market, said TPN.

Increased demand for residential rental stock in the first quarter of the year resulted from low rental escalations, which was further supported by slightly improved employment figures, said the credit bureau.

It noted that unemployment figures are a key economic indicator when it comes to residential rental stock. The more people that are employed, the higher the demand for formal rental stock.

Vacancies are expected to decrease further to below 8% by the end of the second quarter as consumers continue to face financial pressure, TPN said.

In the first quarter of 2022, rental escalations were at 1.93%, and this is expected to increase as inflation forces landlords to try and remain in line with escalating costs.

New property investors are competing with higher house price inflation. As such, striking a balance between occupancy and achieving a decent yield is becoming harder to achieve, said TPN.

A reflection on the first quarter

TPN said that lower interest rates during the pandemic created a theoretical bubble as new buyers entered the market resulting in property inflation peaking at 5.1%.

“Even with improved rental escalations, rental property yields for sectional title properties remained flat at 10.1% while the yield on full title properties dropped from 7.1% to 7% in the first quarter of 2022.”

TPN reported that rental properties between the below ranges had the following vacancy levels in the first quarter of 2022:

  • Properties between R3,000 and R7,000 had the highest number of vacancies.
  • Properties between R7,000 and R12,000 had lowest number of vacancies.
  • Properties between R12,000 and R25,000 had middle-of-the-range vacancies.

TPN data showed that the number of residential tenants classified as squatting – so those who have not paid three consecutive months of rent – has seen a progressive increase in the last decade.

Although the trend is cause for concern for landlords, the total number of tenants classified as squatting remains small when compared to the number of tenants who do meet their rental obligations. In reality, less than five out of 1,000 tenants end up classified as ‘squatters’.

However, the pandemic has resulted in some tenants abusing the system to their advantage, creating fear and uncertainty in the property investment market.

Read: Reserve Bank shocks with 75 basis point rate hike

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Some good news for South Africa’s rental property market