Leading national real estate indicators have revealed that the residential rental sector is weathering the worst of the economic storm. Based on the current trajectory, a further recovery is expected in 2022. However, tenants should continue to be under pressure.
That’s according to TPN Credit Bureau’s Residential Rental Monitor which noted that the sector began to show real signs of recovery in the fourth quarter of 2021.
Low inflation and the need to stimulate a fragile local economy during the pandemic have resulted in historically low prime interest rates. One consequence was the perception of cheap capital and artificial demand. This, combined with an increased number of troubled areas and the migration of human capital, has created an oversupply of goods in some regions and, conversely, stimulated demand in previously ignored places in South Africa. South. As historical trends have shown, this imbalance will need to be corrected over time.
The low number of property transfers that occurred in 2020 is no surprise. A bigger surprise is that 2021 saw an even lower number of ownership transfers.
Another worrying trend is the decline in cash real estate purchases, despite the fact that financial institutions are still granting real estate loans.
While the economy grew by 1.2% in real terms during the fourth quarter of 2021, this growth has not translated into job creation. Unemployment – the biggest challenge facing South Africa – reached a record high of 35.3% in the fourth quarter of 2021. However, while full-time employment has fallen, part-time employment increased by 16.5%. These trends are likely to have an impact on the residential rental market.
Encouragingly, TPN’s Residential Rental Monitor reveals that nationally, the number of tenants in good standing has continued to improve. Tenants in good standing are those whose accounts have been paid in full at the end of the month, including any arrears.
Improvement in the number of tenants in good standing
At the end of 2021, 81.4% of tenants nationwide were in good standing. On average, the percentage of tenants in good standing has improved since the harsh lockdown in the second quarter of 2020. However, some rental brackets are not yet on the road to recovery. The sub-R4,500 rental bracket, for example, continued to struggle to break through the reputable 80% mark. The number of tenants who rent in the less than R3,000 category struggle to make any type of rental payment, with the number of tenants who have made no payment remaining stubbornly high at just under 17%. In addition to the drop in rent collection, units below R3,000 were also vacant with a recorded vacancy rate of 14.42% in the fourth quarter of 2021. Tenants who did not pay in the rentals below R3,000 have increased steadily since 2014.
The best performing rental segment was the one renting from R7,000 to R12,000 per month with 87.29% in good standing. This rental bracket also had the lowest number of non-payments at just 4.2%.
Tenants paying monthly rent between R12,000 and R25,000 were the second best performers with 86.10% in good standing and only 4.71% falling into the unpaid category. This area of the rental market had the lowest vacancy rate of any rental bracket at just 10.23%.
Luxury property rentals above R25,000 per month had a good reputation of just under 80%. However, this category had the highest percentage of tenants who paid within a grace period at 5.81%.
Gauteng with the highest non-payment percentage
From a provincial perspective, Gauteng did not break the 80% reputable mark and struggled with the highest percentage of unpaid of any province. Combined with a high vacancy rate and low escalations, South Africa’s economic hub has continued to suffer the aftermath of the pandemic, a harsh lockdown and high unemployment. There are, however, areas that performed well in Q4 2021 in terms of capital growth as well as effective return, including Tshwane, Merafong City and Sandton.
The Western Cape is doing well and has the second highest number of tenants in good standing at 85.99%. The escalations are also back in positive territory and real estate prices in the province are healthy.
KwaZulu-Natal achieved the second highest average residential rent per square meter for the section title and the second highest average section title property value, just behind the Western Cape in the fourth quarter. However, the province’s average full title rent and average property value have both dropped to third place after the Western Cape and Gauteng.
Impact of the July 2021 riots
An indication of how badly the province has been hit following the July 2021 unrest is that KwaZulu-Natal had the third highest percentage of residential rental tenants paying zero rent of the nine provinces. The value of full title properties in Durban has dropped significantly over the past few years. A faster decline after the second quarter of 2021 was in all likelihood fueled by the July riots.
Although the Eastern Cape has yet to regain its reputable pre-pandemic levels, it has still maintained a good position above the national average.
The Free State’s good reputation was just above the national average at 83.3% at the end of 2021. While rental payments in Bloemfontein are the healthiest of major cities at 84.26%, Yields for full title properties are the lowest of major cities. The value of full title properties in the province has remained stable since 2017.
The North Cape is a star player with the best good reputation ratio in the country at 87.76%. The province has the lowest unpaid category in the country, at just 3.29%.
Tenants under continuous pressure
While all indications are that the real estate sector is going through the worst of the pandemic-induced crisis and showing signs of recovery, landlords should be aware that tenants will continue to come under pressure due to rising interest rates. , geopolitical events fanning the flames of inflation, persistently high unemployment and, most recently, the floods in KwaZulu-Natal all of which are impacting economic growth.
The rental market could see increased risk as more consumers rely on part-time income streams to meet the rising cost of living. It will become increasingly difficult to rely solely on employment status to determine tenant risk for the foreseeable future, as tenants need new and innovative ways to earn and supplement their income.
The key to successful real estate investments will be selecting the right location, finding the right tenant and ensuring they remain a quick payer while managing and minimizing costs as much as possible.
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