Tough times continue for the property rental market
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*This article first appeared in our Property360 digital magazine
Good tenants are still hard to find. In fact, it’s so difficult that many rental agents are even reducing their commission to have the best chance of luring those still in the market.
The battle with rental arrears is also high on the list of challenges, reveals PayProp’s 2021 State of the Rental Industry survey.
Johette Smuts, head of data analytics at PayProp, says the drop in availability of “good tenants” is linked to the fact that many South Africans are suffering financial strain due to the pandemic, while others have taken advantage of low-interest rates to purchase property.
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“Good tenants have found it easier to qualify for home loans than ever before and are consequently leaving their rented properties for owned properties.”
With the financial strain on tenants affecting their ability to pay rent, agents have had to be creative to keep cash flowing, find tenants and keep mandates, she says, “The survey results show that 93% of respondents agreed to some form of alternative payment arrangement with tenants, which also clarifies why 60% of respondents reported an increase in time spent on monthly administration...”
In addition, almost two-thirds of survey respondents confirmed that they had lowered their commission in order to retain a mandate, a move that could negatively affect their businesses over both the short and long term.
“Agents might struggle to justify raising their commission in the long term without the addition of services,” says Smuts. TPN’s latest Residential Rental Monitor, which analyses rent payment performance in Q4 2020, shows that tenants in Gauteng and KZN recorded an improvement in the payment of their rent but Gauteng still had the weakest tenant performance of the three major provinces.
Tenants in the Western Cape continued to outperform those in other provinces.
“However, all three provinces showed some improvement in the fourth quarter. From 80.25% of tenants being in good standing in the third quarter of last year, the Western Cape saw an increase to a record 82.41% in the fourth quarter,” says TPN chief executive Michelle Dickens.
KZN, by comparison, saw a slight increase from 73.55% to 76.26% over the same two quarters, while Gauteng’s “lowly” 71.85% Q3 level rose to 75.73% in Q4.
“This noticeable quarterly improvement elevates Gauteng off the ‘bottom of the log’, its tenant performance now the second weakest performing of the nine provinces, with the Free State now the weakest province.”
The Free State aside, some of the smaller provinces have seen their tenant payment performances hold up better through last year’s lockdown period. These include Limpopo, Mpumalanga, North West and the Northern Cape, while the Eastern Cape remains a “relatively good performer”, despite having weakened significantly.
Dickens says the top four performing tenant populations are the Northern Cape, with 84.02% of tenants in good standing, Mpumalanga with 82.95%, the Eastern Cape with 82.5% and the Western Cape at 82.41%.
Looking ahead, however, the PayProp survey shows 68% of agents are most worried about the ongoing effects of Covid-19 on their businesses. Others listed concerns about an oversupply of properties, as well as vacant properties and the ability to fill these with quality tenants.
She adds: “However, it’s encouraging to see that, even during one of the toughest years, only 15% of respondents considered selling their agency. In fact, just short of 80% responded that they see themselves working in the property industry in five years.”
Not only are rental agents relying on silver linings but property investors are also forging ahead. Dr Andrew Golding, chief executive of the Pam Golding Property group, says the economic hardships and challenges faced over the past year, and still, today, have prompted many people to seek ways to build wealth and grow investment portfolios that generate passive incomes.
“In South Africa, the seemingly ever-resilient residential property market has historically been one of the few investments that have acted as a hedge against previously rampant inflation. Property investment, as an asset class, tends to be less prone to extreme bouts of short-term volatility.”
He explains further: “Stocks and shares can meltdown overnight, due to global or local shocks to the economy, but property investments tend to be more resilient with the upturns and downturns spread out over time – as seen with an earlier-than-expected rebound post the hard lockdown – so it is an asset class better suited to those who are risk-averse.”
With rental returns under pressure though, he says the overall yield tends to be most significantly influenced by the capital growth of a property, which means that buying and selling at optimal times is key.
“Notably, properties best suited to capital growth may sometimes cost more and offer a lower yield while properties best suited to maximising yield may cost less and offer lower capital growth prospects. However, property is an asset class that is generally recognised as a safe bet, enabling the investor to enjoy the rewards of both rental returns in the short term and capital appreciation in the longer term.”
Purchasing property as a source of rental income is a great way to secure one’s future wealth, but as Adrian Goslett, chief executive of Re/Max of Southern Africa says, if poorly managed, a rental property could end up costing landlords much more than they bargained for.
The rental agreement “is crucial” to minimise the risk of costly capital outlays and unnecessary expenses incurred on a rental property as it outlines the responsibilities of both parties and explains the procedures for managing the property.