Alarming trend emerging for landlords in South Africa
While vacancy rates remain low, landlords are warned that the rental market is experiencing a rise in squatting tenants in 2024.
Despite historically low vacancy rates, which would typically be welcome news, the rising number of tenants failing to meet rental obligations presents serious financial and operational risks.
According to the TPN Squat Index, squatting rates have been climbing, rising from 3.48% in the fourth quarter of 2023 to 3.7% in the first quarter of 2024 and reaching 3.71% in the second quarter.
Under this index, a tenant is considered a squatter if they have not made any rental payments for three consecutive months but still occupy the property in the fourth month.
This trend is troubling for landlords and property investors because these tenants, who occupy rental properties without paying, compromise the anticipated cash flow.
Rental income is crucial for property owners to cover expenses like maintenance, mortgage payments, and management fees.
When tenants stop paying rent, landlords can quickly find themselves in financial difficulty as monthly expenses accumulate without corresponding revenue.
Additionally, the process of evicting squatters can be prolonged and costly, requiring landlords to follow specific legal procedures to ensure compliance with housing regulations and tenant rights.
Any delay in addressing squatting tenants further exacerbates the financial burden and lengthens the time the property remains non-profitable.
In the midst of rising squatter rates, the overall tenant pool has shown a modest improvement in payment behaviour.
Between the first and second quarters of 2024, the proportion of tenants in good standing increased slightly from 82.83% to 83%.
Yet, challenges remain, especially among lower-income tenants. In the segment paying less than R3,000 monthly, 15.12% of tenants failed to make any rental payments, while 14.47% made only partial payments.
For landlords, this group presents a double-edged sword: while more robust collection practices have helped retain paying tenants, this income bracket still has the highest share of non-paying tenants.
A reliable collection process can help manage some of these risks, but a considerable portion of tenants in this category continue to miss payments, heightening financial uncertainty.
Tenants in the R3,000 to R7,000 range have had more erratic payment behaviours.
In the second quarter of 2024, only 82.17% of these tenants were in good standing, a figure slightly below the national average.
This group also recorded a high proportion of late payments, with around 65% of tenants paying on time and in full.
Although landlords may still collect rent from these tenants, the delayed payments can cause cash flow challenges and complicate financial planning, especially if payment delays become frequent.
Meanwhile, a notable positive in 2024’s rental market has been the steady reduction in vacancy rates.
According to the TPN Residential Vacancy Survey for Q2 2024, the national vacancy rate averaged 5.57% in the first half of 2024, marking a 17.21% drop compared to the previous year.
This reduction is significant, as low vacancy rates generally mean high demand for rental properties and provide landlords with greater security in occupancy.
In fact, the first quarter of 2024 registered the lowest vacancy rate since the survey’s inception in 2016, a milestone that would typically signal stability and profitability for property investors.
However, the dual reality of low vacancy rates alongside rising squatting rates complicates this optimistic outlook.
While landlords benefit from a greater likelihood of keeping properties occupied, an increase in tenants defaulting on rent diminishes these gains.
Having tenants in place is only valuable if they fulfil their rental obligations.
Without reliable rental income, landlords may find themselves unable to benefit fully from the low vacancy rate trend.
As the TPN Squat Index shows, a growing proportion of tenants are opting to stay in properties without payment, creating a new kind of vacancy—one where landlords must bear the costs without the revenue.
Addressing this requires landlords to act promptly and carefully, ensuring that they follow legal procedures to avoid potential setbacks.
The increase in squatting adds complexity to a market already tested by fluctuating tenant payment behaviours.
For property owners, vigilance and effective management will be essential to navigating this challenging landscape, where low vacancy rates don’t necessarily translate into financial stability.
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