Major national real estate indicators have shown that the residential rental sector has weathered the worst of the economic storm. As things currently stand, a further recovery can be expected in the course of 2022. However, tenants are likely to remain under pressure.
That’s according to TPN Credit Bureau’s Residential Rental Monitor, which found the sector was showing real signs of renewal in the fourth quarter of 2021.
Low inflation and the need to boost a sluggish local economy during the pandemic have led to historically low policy rates. One of the consequences of this was the perception of cheap capital and artificial demand. This, combined with an increased number of distressed properties and the migration of human capital, has led to an oversupply of property in some areas and in complete contrast to an oversupply in previously neglected locations in South Africa. As historical trends have shown, this imbalance will need to be corrected in time.
The low number of property transfers in 2020 came as no surprise. A bigger surprise is that 2021 saw an even lower number of ownership transfers.
Another worrying trend has been the decline in cash home purchases, even though financial institutions are still making home loans.
challenge of unemployment
While the economy grew by 1.2% in real terms in the fourth quarter of 2021, this growth did not translate into job creation. Unemployment – South Africa’s biggest challenge – hit a record high of 35.3% in the fourth quarter of 2021. However, while full-time employment fell, part-time employment increased by 16.5%. These trends are likely to impact the rental housing market.
Encouragingly, TPN’s Residential Rental Monitor shows that the number of reputable renters nationwide has continued to improve. Proper tenants are those whose bills have been paid in full by the end of the month, including any arrears.
Number of tenants in good condition is improving
At the end of 2021, 81.4% of tenants nationwide were in good condition. On average, the percentage of tenants in good standing has improved since the harsh lockdown low of Q2 2020. However, some rental bandwidths are not yet on the road to recovery. The sub-R4,500 rental band, for example, continued to struggle to break through the 80% mark. The number of tenants renting in the under R3,000 category is struggling to make any form of rent payment, with the number of tenants who have not paid remaining stubbornly high at just under 17%. In addition to the lower rental income, units below R3,000 were also vacant in the fourth quarter of 2021, with a registered vacancy rate of 14.42%. Tenants who have not paid in the rent range of less than 3,000 Rand have been increasing steadily since 2014.
The best performing rental segment was those renting from R7,000 to R12,000 per month, with 87.29% in good standing. This rental band also delivered the lowest non-payment rate at just 4.2%.
Tenants paying between R12,000 and R25,000 monthly rent were the second best performers with 86.10% in good standing and just 4.71% falling into the unpaid category. This sector of the rental market had the lowest vacancy rate of all rental segments at just 10.23%.
Luxury property rentals over R25,000 per month had a good reputation of just under 80%. However, this category had the highest proportion of tenants paying a grace period at 5.81%.
Gauteng with the highest non-payment percentage
From a provincial perspective, Gauteng did not break the 80 percent credit line and struggled with the highest percentage of non-payers of any province. In combination with a high vacancy rate and low escalations, South Africa’s economic center continued to suffer from the aftermath of the pandemic, the tough lockdown and high unemployment. However, there are areas that have performed well in the fourth quarter of 2021 in terms of both capital growth and effective yield, including Tshwane, Merafong City and Sandton.
The Western Cape performs well and has the second highest number of good reputation tenants at 85.99%. Escalations are also back in positive territory and property prices in the province are healthy.
KwaZulu-Natal posted the second highest average subtitle residential rent per square meter and the second highest average subtitle home value in the fourth quarter, only after the Western Cape. However, the province’s median rent and median home value both fell to third place after Western Cape and Gauteng.
Impact of the July 2021 riots
An indication of how badly the province was hit by the July 2021 riots is that of all nine provinces, KwaZulu-Natal had the third-highest percentage of tenants not paying rent. Full title property values in Durban have fallen significantly in recent years. A faster decline after the second quarter of 2021 was in all likelihood fueled by the July riots.
While the Eastern Cape is yet to recover to its pre-pandemic standing, it has consistently maintained a reputation above the national average.
At the end of 2021, the good reputation of the Free State was just above the state average at 83.3%. While Bloemfontein rent payments are the healthiest of major cities at 84.26%, freehold returns are the lowest of major cities. Values of full title properties in the province have remained unchanged since 2017.
The Northern Cape is a star performer with the best asset ratio in the country at 87.76%. The province has the lowest non-payer category in the country at just 3.29%.
Tenants under constant pressure
While all the indications are that the real estate sector is through the worst of the crisis caused by the pandemic and showing signs of recovery, landlords need to be aware that renters will continue to be squeezed due to rising interest rates and geopolitical events that are blazing inflation , persistently high unemployment and, more recently, the KwaZulu-Natal floods, all hampering economic growth.
Risk in the rental market could increase as more consumers rely on part-time income to cope with rising living costs. It will become increasingly difficult to rely solely on employment status to determine tenant risk for the foreseeable future as tenants seek innovative new ways to earn and supplement their income.
The key to successful real estate investing will be choosing the right location, finding the right tenant and ensuring they remain on-time payers while managing and minimizing costs as much as possible.
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