RENTALS ON THE RISE
After a mini-boom in the home-buying market, higher interest rates now look likely to buoy residential rentals, with Cape Town taking an early lead
It seems increasingly likely that buyto-let investors will be able to push through inflation-linked rental increases when leases come up for renewal this year. That will no doubt offer welcome respite to residential landlords, many of whom have had to slash rentals over the past two years to keep their tenants.
Unlike housing sales, which in the past 18 months experienced a mini-boom on the back of cheap mortgage finance and pandemic-related shifts in how people live and work, the rental market has been somewhat in the doldrums.
Most cities experienced a slump in rental demand from mid-2020 onwards. On the back of near-50-year-low interest rates, some tenants opted to buy instead of rent, while widespread job losses forced others to move in with family or friends. In addition, travel restrictions prompted owners of Airbnb apartments and other short-term holiday accommodation to place their units up as longterm lets, adding further stock to an already oversupplied market.
The upshot was that returns on buyto-let properties came under pressure.
But FNB commercial property sector strategist John Loos believes the residential rental market could take a turn for the better in 2022, given the expectation of further interest rate increases. FNB has forecast three more 25 basis point (BP) rate hikes this year. That’s on top of the 25BP increase announced in November. It will take SA’s prime lending rate from 7.25% to 8% by year-end.
Loos says higher interest rates are likely to curb the home-buying spree of the past 18 months. He notes that the rate cut-driven rush of first-time home-buying in particular left a “gaping hole” in the rental market. Now, fewer first-time buyers in the market should support a recovery in rental demand.
“A greater portion of tenants’ income may also now be restored following 2020’s lockdown-related income shock,” he says. “Therefore new household formation in the rental market may be ready to pick up some speed.”
A number of indicators suggest the rental market has already started to strengthen. Loos points to credit bureau TPN’s latest data, which shows the percentage of tenants in good standing has recovered markedly following the dip during the 2020 lockdown. In addition, the average national vacancy rate has possibly peaked and is beginning to move lower.
Loos says it seems the number of rental properties standing empty across SA is also down. “A decline in vacancies would provide some mild support for something of a rental inflation recovery, early hints of which we’ve already seen,” he says.
He predicts that the Western Cape market could outperform the other provinces this year, due to its ability to attract the skills and purchasing power of semigrants. Though the
province has been SA’s most sought-after semigration destination for many years, due to its outdoor lifestyle options and significant economic opportunities, Loos believes the region’s popularity is likely to gain further momentum this year.
“In 2021, the unrest and looting in KwaZuluNatal [KZN] and Gauteng may have further enhanced the relative appeal of living and doing business in the Western Cape, a province that largely escaped that event,” he says.
Unlike a number of other metros, Cape Town also “emerged from the recent local government elections with its ruling party having a clear majority, and [is] thus free of the uncertainty of coalition politics”.
Latest data from rental processing firm PayProp supports Loos’s view. On PayProp’s index, rentals in the Western Cape have already bounced back: they were up an average 1.8% and 2.5% year on year respectively in the second and third quarters of 2021. That follows three consecutive quarters of negative growth (see graph). It places Cape Town firmly in the lead as the most expensive province in which to rent a house or flat, with average monthly rentals clocking in at R9,266.
A similar recovery trend is emerging in KZN, albeit at a slightly slower pace. Rental growth in the province accelerated by an average 2% and 1.3% in the second and third quarters. That brings the average monthly rent in KZN to R8,232 — marginally cheaper than Gauteng’s R8,235.
However, there aren’t any signs yet of a recovery in Gauteng, where rentals dipped by 2.3% in the third quarter — the lowest quarterly growth in five years. In the first quarter of 2020, before Covid took hold in SA, the province recorded positive growth of 3.2%.
It must be said, though, that third-quarter rental growth in the Western Cape and KZN is still some way off the 7%-10% peaks seen in 2017/2018. And it’s unlikely it will return to those lofty highs any time soon.
Johette Smuts, head of data analytics at PayProp, doesn’t expect a marked recovery in households’ disposable income levels in the short term, which means affordability will remain an issue for tenants.
“If one adds to that a record-high unemployment rate and an economy that is slow to improve, rent increases are likely to remain subdued over the short and medium term,” she says.
Smuts does, however, refer to an encouraging decline in the number of tenants who are behind in their monthly rental payments. She notes that the loss of income suffered by many tenants when lockdowns were introduced at the end of March 2020 caused a sharp spike in arrears — close to 25% in the second quarter of 2020, up from 19.4% in the first (see graph). Fortunately, many of these tenants were able to return to work from June 2020, says Smuts. As a result, the percentage of tenants in arrears declined steadily, reaching 19.1% by the third quarter of 2021 — “lower than before the lockdown”, she says.
The most recent “Rode’s Report on the SA Property Market” confirms that the flat vacancy rate across SA has steadily dropped from its 13.1% peak in the fourth quarter of 2020 to 10.1% in the fourth quarter of 2021.
Cape Town again leads the pack, boasting the lowest average vacancy rate for sectionaltitle apartments of all the major cities, at 8.7%. That compares with Pretoria’s 9.5%, Joburg’s 12.5% and Durban’s hefty 18.8%.
Despite the improvement, however, vacancy rates are still well above the 5.3% average recorded from 2017 to 2019, says the report’s editor, Kobus Lamprecht.
The good news is that new flat completions declined by 50% in 2020, mostly due to the hard lockdown, he says. And though building activity recovered markedly last year, completions are still below the average levels recorded from 2017 to 2019, which will likely help contain sectionaltitle vacancy rates.
Meanwhile, estate agents say rental demand in the Mother City’s swanky Atlantic seaboard and southern suburbs has also bounced back from its 2020 lows.
Seeff Property Group chair Samuel Seeff says tenants in upper-income areas are typically paying R25,000-R45,000 a month, with a number of high-end homes recently achieving monthly rentals of up to R80,000.
Holiday rentals have also picked up “tremendously” from the lows of 2020. But as long as the pandemic lingers, it will remain a challenging time for Airbnb and holiday property lets, especially for those owners who rely on international tourism, he says.
It’s a view shared by Dogon Group Properties MD Alexa Horne, whose company concluded several big-ticket rental deals — R70,000-R130,000 a month on the Atlantic seaboard — towards the tail-end of 2021.
The group also secured a four-month rental for a whopping R240,000 a month in Upper Constantia over the festive season.
A decline in vacancies would provide some mild support for something of a rental inflation recovery, early hints of which we’ve already seen
John Loos