SA’S BUY-TO-LET SLUMP
Record-low interest rates, an oversupplied property market and a pandemic-induced financial squeeze on tenants leave many landlords with no choice but to cut rental prices this year
The good old days, when buy-to-let investors could push through 8%-10% rental increases on annual lease renewals, appear to be gone forever. In fact, many residential landlords have no choice but to drop rental prices on flats and townhouses this year, or risk losing their tenants.
Latest residential data confirms there is a marked oversupply of units to let in most cities. That has already placed pressure on rentals.
More worrying is that the situation could get worse, given reports of more South Africans using record-low interest rates to snap up investment properties. The three percentage point drop in interest rates last year has, after all, made property ownership significantly more affordable by effectively reducing monthly bond repayments by about 30%.
FNB last week reported a 46% increase in the number of second and third home purchases in the fourth quarter (year on year). Most of these purchases were priced below R2m and will be rented out, either long term or as shortterm Airbnb or holiday lets, according to the bank. That will bring more rental stock to a market that is already oversupplied in many areas.
Figures from credit bureau TPN, which tracks various rental performance metrics, shows that the number of buy-to-let properties standing empty across SA surged to a record 13.3% in the first quarter.
That’s up from 7.5% in the first quarter of 2020, just before Covid-19 hit SA. It’s the highest level on record since TPN started tracking vacancy figures five years ago.
TPN CEO Michelle Dickens ascribes rising vacancies to widespread job and income losses, as well as business closures, which have forced many tenants to move “back home” with their parents, or to share homes with friends.
This seems particularly prevalent in the more affordable market, up to R3,000 a month, where TPN’s vacancy figure is now a whopping 18%. The sweet spot for buy-to-rent investors is in the R7,000-R12,000 rental bracket, where vacancies are still below 10%.
“This tells a story of lethargic economic recovery out of the hard lockdown period, in which many tenants experienced a partial or full income loss, and many have still not fully recovered,” says Dickens.
And many students, who typically rent accommodation, are living at home again after switching to online learning. This has no doubt created stock surpluses in areas close to universities and other tertiary institutions.
Also indicative of the financial squeeze is that the percentage of tenants paying their rent in full and on time is still below pre-Covid levels. The percentage of tenants in good standing, as TPN refers to it, increased from a second-quarter low of 73.5% to 77.61% in the fourth quarter. But that’s still below the pre-lockdown level of 81.52% in the first quarter of 2020, according to Dickens. And, she says, it may take some time for the figure to edge back up to that level.
A steadily growing supply of properties to let — coupled with rising financial pressure on tenants — has already placed pressure on rentals.
According to rental processing firm PayProp, rentals fell by 0.3% in November to an average R7,800 — the first drop recorded by the company’s rental growth index since its inception in early 2012.
Rental growth for the fourth quarter as a whole barely stayed in positive territory at 0.2%. That’s down from 3.3% year on year and well below the average 6%-7% achieved between 2015 and 2017 (see graph).
Johette Smuts, head of data analytics at PayProp, agrees that loss of income and decreased affordability are the key factors that have impeded rental growth. “Tenants simply can’t afford higher rent. And with demand cooling for higher-priced properties, landlords had no choice but to curb their expectations when setting their asking prices,” she says.
Many short-term holiday lets were moved to the long-term rental market due to Covid-related lockdowns, which created a stock oversupply and put further pressure on rentals.
Smuts says many tenants also took advantage of low interest rates to buy their own homes, leaving more empty stock on the rental market.
She doesn’t expect rental growth to recover any time soon. “Affordability will remain an important consideration for prospective tenants in 2021, so rental growth is likely to stay muted.”
Two other factors are likely to place further pressure on buy-to-let returns over the next year or two: talk of large-scale conversions of empty offices into apartments; and an uptick in residential building activity.
Latest numbers from property economists Rode & Associates show that the number of building plans passed for houses, townhouses and flats were up 3.2% in the fourth quarter. That’s against a sharp drop of 38.2% in building plans passed for all shopping centres, offices and industrial buildings.