Residential rental index take a dip

Northern Cape is now the most expensive province in which to rent property

THE quarterly PayProp residential rental index has indicated a downward dip in the average residential rental rate in South Africa, which is just above R6 500 a month.

Long- term year- on- year growth in rentals, which has climbed tentatively since January, dropped this quarter from 7.56 percent in June to 7.28 percent in July, and ended on 5.18 percent in September.

PayProp chief executive Louw Liebenberg says, “Based on previous growth cycles we had been expecting the upturn to last until the end of 2015 at least, with growth rates to pick up in January to around 10 percent. However, as a result of the cessation in growth, this quarter has effectively marked the beginning of a downward dip in year-on-year growth.”

The Northern Cape is now the most expensive province in which to rent in the country, with average rentals of R7 219 a month this quarter.

“While the Northern Cape is the largest and currently still the fastest-growing province in terms of monthly rental values, we continue to have concerns about the sustainability of this growth,” says Liebenberg.

“The first red flag is the slowing down of the phenomenal year-on-year growth levels this province has enjoyed. Currently at a quartered average of 10.8 percent, this figure is at its lowest in 18 months. Over the three months of quarter three, growth fell from 10.9 percent in July to 10.5 percent in August, ending at 7.7 percent in September. We predict that with this trajectory, the Northern Cape might lose its leader position in the next quarter.”

Over time the PayProp Rental Index has pinpointed a migration of rentals from lower-priced bands to higher pricing. But while the index highlights impressive growth in the over R10 000 a month categories, it is important to keep in mind that 77.4 percent of all rentals are below R7 500.

Liebenberg says that on further examination, interesting dynamics come to the fore when considering growth in rentals above R15 000. “Although the index shows a decline in that band, it is still an impressive number – from 72 percent at its highest, down to the current quarterly average of 47 percent.

“According to the hypothesis we’ve developed over the years, a drop in this price category is a first indication of a possible downward cycle in a particular area,” says Liebenberg. “If we look at the movement in this category in Limpopo for example, we see that the impending downward trend in average rental values began with a reduction in the growth levels in high- end rentals.”

Tenants are being pushed to the limit, and over the past three quarters a concerning trend has emerged of tenant income declining while their debt repayment commitments are increasing. As a result, tenants are currently spending close to 37 percent of their income on repaying debt, as opposed to 32 percent at the beginning of this year.

Provincially, the data provides an even more interesting perspective. Limpopo, where there has been a decline in average rental increases, shows a corresponding increase in debt repayments relative to income. The same trends are apparent in Mpumalanga.

In Gauteng, the debt repayment percentage is of particular concern, as high-risk tenants have increased, from 41 percent to 44 percent. The Western Cape debt-to-income ratio has been fairly stable, and in step with the increased percentage of high-risk tenants in this province – from 32 percent to 36 percent over the past three quarters. KwaZulu- Natal shows a similar trend, with a stable debt repayment ratio and a high- risk percentage holding steady at 41 percent over the three quarters.

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