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What is a Reasonable Rental Increase?

Before a lease agreement comes to an end most tenants are given the option to renew their lease agreement for a further lease term – at an agreed rental increase – or to vacate at the end of their lease period, as stipulated in their rental agreement.

The annual increase is sometimes a cause of contention between landlords and tenants. On the one hand the landlord needs to adjust the rental amount annually as inflationary pressures drive up home ownership costs. On the other hand, the tenant may already be under significant financial strain as a result of poor economic growth and the ever-climbing cost of living.

The challenge is finding a rental increase that is both fair and reasonable, meeting the needs of both parties. Real estate industry leaders report an average annual increase in the range of between 6% and 8%, with 8% considered excellent.

According to the Rental Housing Act Unfair Practices Regulations, the tenant and landlord need to agree on a reasonable and inflation-related rental increase.

Both landlord and tenant need to bear in mind that the current economic climate plays a significant role in rental escalation. This means that landlords need to consider the Consumer Price Index (CPI)the prices of goods and services consumed by South Africans used to calculate an inflation rate for the whole economy, according to Stats SA – in order to determine a reasonable rental increase.

In other words, market factors need to be taken into account.

December 2017 saw the inflation rate inch up to 4.7%. High inflation could potentially affect a tenant’s affordability and a landlord’s profitability if the rental increase is not within reasonable limits.

Landlords who increase the rent to more than the current rate of inflation risk losing their existing (paying) tenant. Tenants who feel that their landlords have requested an unrealistic or unreasonable increase amount may well seek more affordable accommodation elsewhere. The problem being that quality tenants – those who pay in full and on time every month, adhere to rules and regulations as stipulated in the lease agreement, and tend the property responsibly – are becoming increasingly more difficult to find.

 

According to TPN’s Residential Rental Monitor in the third quarter of 2017 the percentage of tenants who paid in full and on time stood at 67.29% come year end. This percentage has dropped notably from its year-on-year high in 2014. TPN and guest writer John Loos, FNB’s Property Strategist, state that this “translates into quarterly declines in the percentage of tenants paying late or requiring a grace period from 5.67% in the 2nd quarter to 5.32% in the 3rd quarter, the percentage making a partial payment from 10.81% to 10.63%, and those that did not pay, from 6.37% to 5.9%.”

Overall, more and more tenants are finding it more and more difficult to pay their rent on time and in full, which makes losing a good-paying tenant all the more financially devastating.

As a safeguard to their investment, landlord’s will need to do their homework on the effects that changes to current general inflation and cost inflation, rising interest rates and increases in municipal rates and taxes have on their rental return. For example, new developments and improvements to the infrastructure within a complex/area often drive up the market value, which positively influence the rental amount. Likewise, poor house price growth – recently shown in FNB’s Estate Agent Survey – may result in stagnating rental prices despite the fact that household and ownership costs continue to climb.

Unfortunately rising inflationary costs and poor economic growth have contributed to a rise in household indebtedness and deteriorating consumer credit records. Many accredited real estate agencies, particularly those that work alongside registered credit bureaux, report that more than half of the rental applicants they perform credit checks on have impaired credit records. Many agencies report that the number of declined applications due to affordability issues and poor credit reports on a month-on-month basis has risen substantially.

With this in mind, landlords should consider the tenant’s conduct over the lease period as well as their payment behaviour when a decision is to be made on rental increase. It may be worth the landlord’s while (considering the cost of sourcing and screening new rental applicants) to reward exemplary tenant behaviour with a lower annual increase.

In conjunction to the tenant’s conduct and payment behaviour, the landlord’s escalation needs to take current market trends (for example, rental supply and demand in the area) into consideration.

To keep the relationship between the two parties amicable there needs to be a certain degree of respect and ethicality towards one another and the position both landlord and tenant find themselves in. An estate agent is often the mediator in such a situation, and provides sound advice on current trends within the rental market. Likewise, estate agents are familiar with area-specific factors affecting rental demand, rental increases and rental returns.

It is now more important than ever, given the current financial climate, to work alongside a reputable estate agency who are ethical, compliant, knowledgeable and committed to client-service.

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