Rebound in Rental Growth

Since the start of the pandemic, landlords have struggled to find and retain quality, paying tenants. The national vacancy rate spiked as a result of pandemic-induced pay-cuts, retrenchments and stagnant salary growth. Financially vulnerable tenants took refuge with family and friends, leaving landlords without rental income for months on end and few viable rental applicants to replace the ones they had lost. Global economic decline and financially constrained households challenged the property sector, and the rental market, in particular, suffered.

Two years have passed and the Covid-19 restrictions (and other socio-political factors that dampened economic activity and reduced rental demand) have eased, enabling the rental market to rebound.

Positive Indicators in the Residential Rental Market:

Payment automation platform, PayProp, reported a year-on-year (YoY) rental growth of 1.8% in Q1 of their Rental Index for 2022, with March recording the strongest rental growth performance since March of 2019.

Likewise, Credit Bureau TPN (Tenant Profile Network) reports in their Q1 Vacancy Survey for 2022 that national vacancies have seen a sharp decline to single-digit figures (8.26%), only slightly higher than the pre-pandemic level of 7.47%. Gauteng’s vacancy rate decreased from 14.66% in Q4 of 2020 to 8.69% in Q1 of 2022. This suggests that many South African tenants are in a more stable position financially, enabling them to return to the residential rental market.

The PayProp indicators reveal that the percentage of tenants in arrears (as a percentage of the total number of tenants) has recovered – returning to a ‘normal’ range – and is currently lower than Q1 2020 (18.4% in Q1 of 2022 vs. 19.4% in Q1 for 2020). Gauteng recorded only 16% of tenants in arrears, lower than the national average and second only to the Western Cape – with the lowest tenant arrears figure in the country. The percentage of tenants who pay their monthly rental on time and in full is climbing.

According to the most recent General Household Survey results published by Stats SA, the rental housing market is also seeing continued growth in supply, with almost half of all Gauteng households as rental properties. Gauteng boasts nearly half of all tenants in South Africa, with 2.8 million households renting! While this is good news for Highveld landlords, the surplus of additional rental housing stock, as reported by Stats SA, creates competition for quality, paying tenants, and this could potentially exacerbate Gauteng’s slow vacancy rate recovery.

The TPN Market Strength Index, a measure of market supply and demand of residential rental property, is back in positive territory at 52.9 points, after 11 consecutive quarters below 50 points. Market equilibrium is achieved at 50 points. Anything below this indicates an oversupply of property, increased vacancy rates, and difficulty finding and placing paying tenants. A market Strength Index of over 50 points suggests that demand is strengthening. According to TPN: “The upward trend in Demand Strength is likely to assist landlords and property professionals to recover from below inflation escalations that have negatively impacted returns in recent years.” However, it’s important to note that while current rental demand is more promising, many households were particularly hard-hit by the Covid-19 pandemic and subsequent socioeconomic challenges (for example, the July unrest or the detrimental impact of extended electricity blackouts on businesses). In short, “tenants remain highly price-sensitive”.

Constrained Rental Growth Predicted

Johette Smuts, Head of Data Analytics at PayProp South Africa, warns that rising inflation and interest rates - galvanised by accelerating global inflation following the Russian invasion of Ukraine in February - could dampen economic recovery and in turn, constrain rental growth.

In Gauteng, the PayProp transactional data revealed that tenants spend almost a third of their net monthly income on rent and almost half (47.8%) on debt repayments. This leaves a little over 20% disposable income to spend on necessities like groceries and fuel – essentials that are becoming significantly more expensive. Overall, the percentage of tenants’ disposable monthly income has decreased year-on-year and is largely due to increased spending on debt repayments. If preventative (conservative) action is not taken immediately, South African tenants may find it increasingly difficult to keep up with their debt obligations in the months to come. As the percentage of their monthly income that goes towards debt repayments increases, the portion of their income allocated to rent may need to decrease.

For this reason, Smuts believes that higher interest rates could negatively impact tenant affordability because of its impact on consumers’ debt obligations. In conjunction, rising global inflation rates and soaring food and fuel prices (as a result of supply line disruption) are putting added pressure on consumers’ disposable income, threatening income and job security. According to Smuts, this could hinder further rental growth as tenants may have less ‘wiggle room’ after debt repayments and living expenses to absorb annual rental increases upon lease renewal, and may choose instead to move to a less expensive property.

This is supported by the South Africa’s central bank decision in May to raise the benchmark interest rate by 50-basis-points – the fourth consecutive hike and largest increase in more than six years – in an attempt to curb inflation. The central bank’s quarterly projection model indicates its key rate will hit 5.3% by year-end. Says Governor Lesetja Kganyago, “We’ve got a responsibility to cap inflation, because inflation is eating into the income of working people in South Africa.”

What does this mean for Landlords?

While the higher rental growth is promising, especially when compared with last year’s constrained rental performance, Smuts’ foresees that national and provincial rental markets are moving into an uncertain season. “Higher interest rates and inflation will put downward pressure on rental growth going forward. Tenant affordability will remain an issue, and a slowdown in the global economy could further impact their finances.”

In summary, landlords should avoid unreasonable rental increases that could cost them a quality, paying tenant and ensure they partner with a reputable property practitioner that applies strict screening criteria and prioritises sourcing and placing high-calibre rental applicants. Tenant affordability remains a top concern in the current economic climate, and may deteriorate in the coming months as global issues exacerbate inflationary pressures, and inflation "eats into the [disposable] income of working people in South Africa".