And so the rental market changes
The extended lockdown has hit the rental market particularly hard with many tenants having earned less or even no income. Is it all doom and gloom?
Let’s start with what we know, says Johette Smuts, general manager, PayProp Capital.
“The current lockdown, and the easing out of lockdown, will have a huge impact on many tenants’ income and their ability to pay rent. We’ve seen many tenants use deposits to pay their rent, or landlords granting payment holidays while they’re unable to earn an income.”
It’s important to remember that, in the case of a rent holiday, this rent still must be paid in future, and damage deposits must be topped up. This means that, once a tenant starts earning a full salary again, any additional disposable income will most likely have to be put toward deferred rent.
“This is an important factor that will decrease tenants’ ability to afford higher rent, be it for a larger property or due to an annual rent increase. Some of the other factors that put downward pressure on rental prices are lower growth in income and expected slow recovery, which could last for years,” she says.
Only a third can pay full rent
To assess the effect of the lockdown on tenants, proptech platform
Flow did a survey among more than 2,000 tenants in May. Their findings showed the following:
• 79% of tenants’ income was affected by Covid-19
• 19.5% of the respondents say they have already or intend to apply for financial assistance
• 35% of renters were accommodated by their landlords with reduced or waived rent
“This is, of course, also a major risk to landlords, who are used to high risk tenants representing just a fraction of their portfolio,” says Flow co-founder and CEO Gil Sperling. “Landlords who are receiving partial payments are at risk of tenants stopping the payment of rent altogether as their savings become depleted and credit lines maxed out. 49% of renters believe the negative monetary effects of the lockdown will last longer than three months; 43% rely on their salaries to pay rent; 30% on their savings, and 21.5% on loans.”
Many will move
The lockdown forced most tenants to stay in their rental homes. Almost a third of the respondents in the Flow survey indicated that they’re likely to move after lockdown – of this group 12.5% said it was because their lease was ending, but about 65% of this group will be moving because of affordability issues.
“In a typical month, the rental market sees 5% of tenants moving. Due to lockdown restrictions, there’s been a spike in tenants staying in their current rental homes for much longer than usual – but we expect a far higher than average number of tenants to move after lockdown – which will cause a huge bottleneck,” says Sperling.
Low rental growth expected
Smuts adds that many short-term lets, like properties usually only listed on Airbnb, have returned to the longterm letting market as owners suffered financial losses due to travel bans and are trying to earn income elsewhere, effectively flooding the rental market.
“If we consider the above, we can expect very low rental growth for at least the next 12 to 18 months, but possibly longer. It’s also possible that the residential rental market will experience deflation, with rentals becoming cheaper on average,” she says.
How long will it last?
FNB property strategist John Loos says it’s near impossible to predict the full magnitude of the current recession unfolding. Much depends on how successfully the coronavirus pandemic is contained both locally and globally, which will then determine how fast the economy can return to normal.
“The rental market is highly sensitive to economic cycles and sharp shocks,” says Loos. Consequently, they expect rental payment performance to show a significant deterioration that will take years to recover. FNB projects that the percentage for tenants in good standing will have recovered to as high as 76% after 3,5 years.
New rental trends
“More and more companies have seen that employees can work from home, and that there are many benefits to this. Some tenants will be looking for larger properties with space that can be converted to office space,” Smuts says. Other factors may include first-time homebuyers delaying their purchase due to financial losses suffered who will now rent for longer, and members of Generation Z, who are more prone to renting for longer, also entering the rental market.