S.African economy struggling: Rentals collapsing – Buy-to-let market struggles as best tenants ‘leave’

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The residential rental market continues to struggle as it faces an “exodus” of more creditworthy tenants as the record-low interest rate environment spurred them to buy their first homes.

A clear spike in buying activity in the third quarter of 2020 from the FNB Property Barometer has since moderated as banks have all but serviced applications from low-risk customers.

Along with this underlying change in the market, households generally are under financial pressure. This has seen rental growth stall.

The latest PayProp Rental Index shows a deceleration in the first quarter to zero year-on-year growth in March, after an increase of 1% in January and 0.7% in February. On a quarterly basis, this is an “uptick” to 0.5% in Q1 from 0.2% in Q4. This comes after five consecutive quarters of slowing growth.

Factor in inflation of 3.1% for the first quarter, and it is clear that this is a tenant’s market.

In Gauteng, growth was 0.7% in the first quarter, while the other two large markets, the Western Cape and KwaZulu-Natal were in decline.

Average monthly rent (Q1) Year-on-year growth
Western Cape R9 142 -0.3%
Gauteng R8 390 0.7%
KwaZulu-Natal R8 177 -0.8%
Eastern Cape R6 202 3.2%
National R7 819 0.5%

The number of tenants in arrears has continued to improve since a 30% spike between Q1 and Q2 of 2020.

The reasons were obvious. Some were not earning any income, while others were either forced to take a reduction in salary or “were uncertain about their future cash flow”.

By the first quarter of this year, this had recovered to 20.3%. This is ‘only’ one percentage point worse than the 19.4% of tenants in arrears in the first quarter a year ago.

Tenants in arrears

The other metric tracked by PayProp for arrears is the average arrears percentage. For example, “an average arrears percentage of 80% therefore means that on average, a tenant in arrears owes 80% of one month’s rent”.

This peaked a quarter later (in Q3) at 104.6% and has improved more slowly to 93.2% in Q1.

PayProp makes the point that “for a tenant to lower their arrears percentage, they must pay their full rent each month, plus some money towards their outstanding balance – and in the current economic climate, this is not easy to do”.

“We are not at all surprised that this is still much higher than the 78.5% measured before lockdown. We expect this metric to improve further, albeit slowly”.

Source: PayProp Q1 Rental Index

On a longer-run basis, growth rates have been in decline since a peak at the start of 2017 (and before that 2013). PayProp says it “seems unlikely that we’ll see year-on-year growth rates approaching 10% like we did in 2013 anytime soon”.

However, “rental growth has been under pressure even before Covid-19, as a result of both slow economic growth putting pressure on tenants’ financials, and an uptick in residential developments in many urban areas increasing rental accommodation supply.

“The rental market has certainly changed – more businesses are moving online, offering tenants flexibility in where and how they work, and hence potentially stifling rental market activity,” says PayProp.

“All things considered, we might not see a repeat of past patterns in the years to come.”

We may, however, see a gradual tightening of rental supply.

In its April Property Barometer, FNB says that “as pressure in the rental market intensifies, we expect more stock to be released into the market for sale”.

“The combination of these factors is expected have a dampening effect on activity and, eventually, price growth in the coming months.”

Source: https://www.moneyweb.co.za/news/south-africa/buy-to-let-market-struggles-as-best-tenants-leave/

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