SLIGHT IMPROVEMENT IN THE RENTAL MARKET

Low interest rates, high vacancies, and consumers under financial pressure don't paint a pretty picture for the rental market. But Myles Wakefield, CEO of Wakefields Real Estate, feels there may be a slight silver lining to that sector.

Credit: TPN Rental Monitor - Residential sector Q3, 2020

This has not been a great year for most landlords. Numerous reasons, but on the flip side, says Myles Wakefield, CEO of Wakefields Real Estate, "The property market has been surprisingly buoyant for the past few months, and Wakefields branches throughout KZN are beginning to report stock shortages. For those landlords who're not enjoying good rentals, could the upside be that elusive capital growth?"

There are numerous drivers and dampeners around the rental market, many prompted by economic factors. The most recent research report by TPN Rental Monitor in the residential sector for Quarter 3 of 2020, puts the rental market under the spotlight, both nationally and provincially. Bluntly, KZN doesn't fare too well, and although the third quarter shows a slight improvement in tenant performance nationally and in KZN, it's not much to write home about. Nationally, from 73,5 percent of tenants being in good standing in Quarter 2, the percentage increased slightly to 74,57 percent in Quarter 3 (well below the pre-lockdown first quarter percentage of 81,5 percent).

It's agreed that a key element affecting tenancies, is the bond rate. It's extremely low, so a proportion of the traditional 'tenant market' is buying instead of renting. It makes financial sense to most that if your monthly home loan repayments are the same or similar to the amount you'd pay out on rent, you're going to buy. For many reasons, property ownership has always been the holy grail for South Africans, and for the entry level market, they've seized the opportunity for the security it provides. 

What are the criteria with which TPN assesses the situation? The two main ones are the percentage of those who default on rents, and the annual rental escalations.

TENANT PERFORMANCE

"Unsurprisingly," says TPN, "the weakest tenant performance is in the lowest rental value band. That 'less than R3 000 a month' segment is populated by the most financially fragile tenant population. The highest segment - R25 000 plus (which was performing almost as poorly as the R3 000 a month segment), has rebounded significantly in Quarter 3. But the middle R7 000 to R12000 a month segment remains the relative 'sweet spot' from a tenant performance point of view."

VACANCIES

 "The weakening rental inflation nationally is explained by an increasing supply of rental space relative to demand," says TPN.  In the first quarter of 2020, the estimated national vacancy rate was 7,47 percent - and it rose sharply to 11,39 percent in Quarter 3, 2020."

KZN showed a slight third quarter improvement, but - by major province - still has the highest estimated average vacancy rate - 13 percent.

RENTAL INFLATION

The national rental inflation decreased from 2,62 percent in the first quarter of 2020, to 0,65 percent in the third quarter of 2020 - the 13th consecutive quarter of slowing year on year inflation.

KZN has fared a little better, having reduced from around 4 percent rental escalation at the start of the year, to a third quarter figure of 3,01 percent.

TPN summed up the national situation. The average rental inflation continued to slow in the 3rd quarter, and is moving further into negative territory in 'real terms' - in other word, when adjusted for economy wide-inflation. Average rental deflation now appears likely in the near term.

Not a pretty picture, but as Wakefield suggests, "It's not as straightforward as it looks. If the low interest rate remains in place for a while - which it looks set to do - it changes the property landscape. None of us has a crystal ball, but stock shortages inevitably nudge up prices, and that, too, will have a knock-on effect on landlords and tenants."