Rental escalations again set to keep up with inflation.
The residential rental market has recovered from double-digit vacancy rates in 2021 to 8.26% in the first quarter of this year and there are indications that rental escalations will once again start keeping up with inflation.
This is good news for buy-to-let investors but will not be welcomed by financially distressed tenants.
Any increase in residential tenants in good standing should contribute to a further improvement in the residential rental investment market.
Tenants recovering from shock of pandemic
Credit bureau TPN said on Tuesday it was unable to provide any update on the rental payment behaviour of tenants.
However, its most recent report – for the second quarter of 2021 – said tenants in good standing took a significant tumble during the 2008/9 global financial crisis, eventually recovering 18 months later, with the Covid-19 pandemic producing a similar shock.
It said tenants in good standing dropped to 73.5% in the second quarter of 2020 and slowly improved quarter-on-quarter to 80.3% by the second quarter of 2021.
Tenants in good standing are those who have fully settled their rental, with no arrears balance, and includes tenants who have paid in full and on time (65.38%), paid in the grace period (4.58%) or paid late (10.38%). Delinquent tenants are those who only make a partial payment (12.57%) or have not paid any rent at all (7.08%).
TPN’s residential vacancy survey report for the first quarter of 2022 released this week said the sharp decline in vacancies points to improved confidence and a residential rental market that is starting to normalise.
“This is good news for landlords who have been battling consecutive quarters of de-escalation,” TPN said.
The rental housing market is also seeing continued growth in supply, particularly in Gauteng.
TPN reported that, based on the most recent General Household Survey results published by Statistics SA, the formal rental housing market in Gauteng increased from 40% in 2015 to 48% in 2020.
This means almost half of all Gauteng households are now rental properties.
In the Western Cape, the percentage of rental properties relative to the percentage of total households has remained stable at 38%, indicating an increase in owner occupied properties, it said.
TPN also reported that its market strength index is finally back in positive territory at 52.9 points, after an almost three-year period in negative territory.
The index is a measure of market supply and demand of residential rental property.
Market equilibrium is reached at 50 points, at which point demand and supply are on an equal footing and indicating the potential for reduced vacancy rates and rental escalations.
TPN said although demand for residential rental property has been waning since 2016, the pandemic and other economic shocks has resulted in a depressed Market Strength Index for 11 consecutive quarters from the second quarter of 2019 to the fourth quarter of 2021.
“The upward trend in the index’s demand strength is likely to assist landlords to recover from below inflation escalations that have negatively impacted returns in recent years.
“However, while the lower national vacancy has recovered from the double digit vacancy rates seen in 2021 – 13.31% in the first quarter of 2021 compared to 8.26% in the first quarter of 2022 – it has yet to return to the pre-pandemic level of 7.47% achieved in the first quarter of 2020,” it said.
Households under pressure
TPN admitted the recovery in this property sector is being slowed down by financially constrained households, which continues to be a challenge.
Stats SA’s recent Quarterly Labour Force Survey revealed that the country’s unemployment rate increased 35.3% in the fourth quarter of 2021, the highest level since 2008.
Consumers are now also facing a number of issues that are negatively impacting on their financial health, including interest rate hikes, increased electricity and municipal charges, and rising food prices and fuel prices, while their salaries and wages have remained virtually stagnant.
The government last week announced a temporary R1.50 per litre reduction in the general fuel levy for two months.
Finance Minister Enoch Godongwana emphasised that this reduction is in recognition of the increasing cost of living for all South Africans, as well as the need for government to do what it can within its limited resources to support the economic recovery.
The South African Airbnb accommodation market was negatively impacted by the Covid-19 pandemic lockdown restrictions.
TPN said tourist accommodation vacancies in the Western Cape and Gauteng are unsurprisingly higher than the residential vacancy rate in each province.
It said short term rentals and tourism kept residential vacancies in the Western Cape low prior to the Covid-19 pandemic but bans on international travellers to South Africa have slowed the recovery of the tourism accommodation sector.
Outlook for landlords
TPN added that after two years of strained escalations and rapidly increasing costs in the form of rates, taxes, maintenance and utilities, landlords will be looking to recover this through above inflation escalations.
“This is likely to result in prime, high demand areas achieving above average rental growth.
“However, other pockets of the residential rental market will continue to see high levels of vacancies due to high supply or a lack of demand that is linked to unusual economic stressors,” it said.