Flats record strong rental growth

With an overall rental index increase of 8.01 percent for the year, residential rentals increased in every major city in the country, but dipped well below the standard 10 percent annual escalations of the past, according to the Trafalgar Residential Rental Index.

With an overall rental index increase of 8.01 percent for the year, residential rentals increased in every major city in the country, but dipped well below the standard 10 percent annual escalations of the past, according to the Trafalgar Residential Rental Index.

Johannesburg leads the pack with a 9.74 percent average annual increase up to January 2014, followed by Port Elizabeth at 8.63 percent in stark contrast to sister-city East London, which lagged with the lowest rental growth in the country at 5.78 percent.

The index is based on a comparison of the rentals for unfurnished two bedroom flats in Trafalgar’s residential letting portfolio, which comprises over 10 000 rental units countrywide.

“It would appear the days of standard 10 percent rental increases are now past with soaring utility increases imposing significant pressure on tenants and constraining affordable rental increases,” comments Andrew Schaefer, managing director of Trafalgar.

Schaefer says underlying national trends of urbanisation, particularly towards Gauteng, is driving very strong rental demand accompanied by very low vacancies and growing shortages of rental accommodation in many areas.

Strong rental demand across all major cities is renewing interest for buy-to-let purchases mostly around the R500 000 mark, and despite this, he warns that this is not a signal for gung-ho buy-to-let investment.

“Landlords are under increased risk with the majority of consumers resisting increases above the 8 percent mark - the exception being the corporate market where rentals in prime areas can still achieve prior norms of 10 percent.”

There is also a shortage of quality tenants with good credit ratings, coupled with concerns about screening tenant applications as credit amnesty commences this month.

He says there are already early warnings that over-extended tenants are battling to make their monthly payments in full and on time.

Rental Index for June 2013 and January 2014

Source: Trafalgar Properties

The upward trend in the interest rate cycle with two to three hikes anticipated this year, is expected to place buying a home out of the reach of a growing numbers of consumers, according to Schafer.

“The resultant growth in rental demand - plus the pressure imposed on landlords to increase rentals to cover bond payments - will undoubtedly push rentals up.

“However, increases will be softened by landlords' need to retain quality tenants, recognising the risks of a difficult economic climate, rising unemployment and steep increases in municipal service costs.”

According to recent calculations the component of total rental made up of services recoveries has rocketed from less than 25 percent 5 years ago to around 60 percent.

Schaefer says municipalities’ ongoing inefficiencies around billing accuracy is imposing a significant administrative burden on landlords and owners as well as cash flow shortages when actual meter readings and adjustments are processed.

Given this challenging business environment, Trafalgar is expecting growth in their rental insurance products to safeguard rental collections, to build momentum.

Now outside the January-February seasonal rental peak and with a waning uptake in student accommodation in nodes such as Cape Town’s Rondebosch and Johannesburg’s Braamfontein, the next critical rental demand period is expected in July.