There is no doubt that the lockdown has left many South Africans reeling from a partial, temporary or even permanent loss of income, with affordability of rentals and lease agreements crucial as the country eases into Enhanced Level 3 of Lockdown.
During March 2020, when South Africa began its full Lockdown, just over 20% of tenants were in arrears, increasing to almost 24% in April. This is according to PayProp's rental Index for 2020.
Johette Smuts, head of data and analytics at PayProp SA says, “While we have already seen an increase in both the percentage of tenants in arrears and arrears as a percentage of rent in April, we expect May and June to be even worse. This position and the debt recovery process will be influenced by the pandemic, the lockdown levels and their duration."
Rentals may drop 10% over the next 12 months
With liquidity and stability of income expected to be the two most important drivers going forward, says Ben Shaw, CEO of residential property disruptor HouseME, advises landlords to accommodate tenants who are under pressure from the COVID-19 pandemic.
Shaw believes rentals for tenants will become cheaper and more appealing for the next few years. Based on HouseME data, an average rental rate for a bachelor in Cape Town is about R10 034, while it's far lower in Gauteng at about R6 494.
Comparatively a two-bedroom apartment will cost more to rent in Durban at about R12 878, while in Cape Town it costs about R12 350, with Johannesburg most affordable in this segment at about R8 750.
Cape Town remains the most expensive to rent a three-bedroom home, with an average rental of about R16 382, while in Johannesburg you'll pay an estimated R11 711.
Shaw says, "We are seeing an influx of fully-furnished holiday-let units now listing on the platform to find long-term tenants as they can no longer rely on the short-term market for income. This increased supply is likely to further push down the rental price, particularly in major cities (both the tourist and business centres), until tourism picks up again.
As a result, HouseME predicts an average rental reduction of 10% over the next 12 months.
Gauteng sees the lowest rental escalation
Michelle Dickens, Managing Director of TPN confirms their data indicates that rental rate escalations have been "trending lower for many years" - with Gauteng seeing the lowest escalation in rental rates, while the Western Cape's "property bubble" is well and truly over.
"Pre-lockdown, the National rental escalation is a mere 2.79%. Gauteng province the hardest hit at 2.33%. The Western Cape property bubble burst in 2018 affecting both the sales and the rental market, rental escalations drop from their peaks of 10% down to 3.46%," say Dickens.
A very similar picture for rental price bands exists, which have all trended downwards - with R3k to R7k the most affordable rental price range
TPN data shows the biggest market share, 53.8% of tenant rent in the R3,000 – R7,000 price range. Due to high demand for these affordable properties in 2018, landlords were treated to short term spike in rent escalations. The current reality is even this segment of the market has dropped down to 2.74%.
"There is no doubt that the lockdown has left many South Africans reeling from a partial, temporary or even permanent loss of income and many tenants will seek to downscale or even co-habitat till they get back on their feet.
Properties in the luxury market (R25,000 plus per month) have over the last couple years already lost their affordability and landlords have had to negotiate negative increases, coupled with a vacancy rate or 16.2%. Importantly these properties only make up 1.8% of the rental market share.
Properties in the R12,000 – R25,000 make up 7.6% market share, with pre-lockdown vacancy rates of 10.7% and downscaling tenants, landlords in the market demographic might have hard rental escalation negotiations ahead.
"But as upper income tenants downscale this will increase the demand for rentals in the affordable market, it is unlikely that this segment of the market will see an improvement in rental escalations, it is also equally unlikely that there will be negative escalations either."
Lockdown rental trends
HouseMe has also just completed its annual survey, with data showing:
- Only 40% of tenants consider their income secure for six months or more. About 20% are concerned about income security in the next six months, while about 25% of tenants have already had income negatively affected, either job loss or salary reduction.
- About 60% of tenants can only afford a fixed rental for the next 12 months, while the other 40% believe they will be forced to reduce their monthly rental by moving to a more affordable property.
- On average, landlords are anticipating rental prices will remain flat for the next 12 months, while tenants believe that they will only be able to afford a monthly rental 10% lower for the next 12 months. This misalignment of expectations is likely to cause tension between landlords, tenants and agents when it comes to property pricing.
- The survey also shows that ~35% of landlords could not afford to self-fund more than one month of vacancy, with half of those landlords indicating that they could not fund even a single month of vacancy.
Shaw notes, "Lockdown has forced rapid behavioural change towards technology, with many opting to complete processes online rather than face-to-face. Consequently, HouseME has seen a significant uptick in the adoption of its platform as landlords and tenants seek its tech-driven pricing tools, digital lease, and online payment system. We have seen a five-fold jump in units from portfolios that are considering moving over to a digital long-term letting platform like HouseME as compared to the first three months of the year.
"Before lockdown, the more risk-averse landlords would take up our risk mitigation products. In the last few weeks, however, almost all landlords our sales department has spoken to have expressed interested in taking up our Rental Guarantee (which pays out rent on time even if the tenant pays late, as well as up to two months’ rent – on top of the deposit – in the event that the tenant can’t pay rent at all).
"Many tenants are proving reluctant to attend physical viewings, and are basing their decisions increasingly on the visuals available to them on online property marketplaces. Professional photo’s and video walk-throughs are gaining popularity as property owners try to stand out from the increasingly fierce competition."
Print
