Residential rental market showing green shoots

THE RESIDENTIAL rental market is starting to bounce back after a difficult three years – not a high bounce, but some upward movement, nonetheless.

TPN Credit Bureau’s Residential Vacancy Survey for the first quarter of this year shows a “sharp decline” in vacancies, which points to improved confidence and the market starting to normalise.

“This is good news for landlords who have been battling consecutive quarters of de-escalation,” according to the report.

TPN’s Market Strength Index is also back in positive territory at 52.9 points after an almost three-year period in negative territory.

The report explains: “The index is a measure of market supply and demand of residential rental property. Market equilibrium is reached at 50 points, at which point demand and supply are on an equal footing, indicating the potential for reduced vacancy rates and rental escalations.”

In December, FNB commercial property economist John Loos predicted the interest rate increases would probably spark a turnaround for the rental market but, although the recovery would not be great, it would definitely be an improvement.

He said the rate decreases over the past couple of years had seen financially strong tenants buying their own homes while the remaining tenant population was hard-hit financially because of the effects of the pandemic lockdowns.

But, with rising interest rates, the opposite was predicted to happen.

“Those aspirant first-time buyers may just wait in the rental market a bit longer.”

Loos also expected to see some acceleration in rental inflation, although it too would not be large.

At the time, he said: “If rental inflation reaches 4% or 5% next year (2022), which is more or less in line with general inflation, then I would say it will probably do well. I do not expect to see a piping-hot rental market but a significant improvement from where it has been recently.”

The upward trend in the TPN’s Demand Strength Index is likely to assist landlords to recover from below-inflation escalations that have negatively impacted returns in recent years, it says.

“However, while the lower national vacancy rate has recovered from the double-digit vacancy rates seen in 2021 – 13.31% in the first quarter of 2021 compared to 8.26% in the first quarter of 2022 – it has yet to return to the pre-pandemic level of 7.47% achieved in the first quarter of 2020.”

From a provincial perspective, the vacancy rate is “mixed” with the continued growth in supply of rental housing in some provinces limiting a return to pre-pandemic vacancy levels.

The report states:

• In Gauteng, a surplus of additional rental housing stock is slowing the province’s vacancy rate recovery. According to Stats SA, the formal rental housing market increased in Gauteng from 40% to 48% in 2020.

The province is home to nearly half of all South Africa’s tenants.

Its slower rate of recovery is being exacerbated by a higher rate of office buildings being converted into rental housing accommodation as commercial real estate remains under pressure.

“On the up side, however, negative rental escalations that have been a trend in the province for the past five consecutive quarters are back in positive territory.”

• In the Western Cape, tenant demand continues its positive trajectory and is reverting to the historically low vacancy levels last seen in 2016 and 2017.

The percentage of rental properties relative to the percentage of total households is stable, indicating an increase in owner-occupied properties.

“Rental escalations have been under pressure in the Western Cape since 2019. It was one of only two provinces that experienced de-escalation for more than four consecutive quarters, from the third quarter of 2020 to the second quarter of 2021. Encouragingly, rental escalations are back in positive territory in 2022.”

• KwaZulu-Natal bucks the declining vacancy rate trend with a sharp increase in vacancies in the first quarter of this year to 13.26% from 9.34% in the last quarter of last year.

This is probably the result of the continued impact of the July civil unrest and riots which led to higher unemployment and the closure of some businesses.

“Prior to the pandemic, KZN had a lower vacancy rate compared to the national average.”

Loos predicted that flats and, to a lesser extent, town houses, would be most in demand by tenants this year.

“I don’t think free-standing houses will be in major demand. We are still in a financially constrained environment, so smaller is better as you save on the rates bill and maintenance costs, all of which are built into rental value.”

He said properties in the middle price segment of R7 000 to R12 000 a month – and possibly a little above that – would be most sought after.