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South African rental property market a possible boom on the cards

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Recent housing market surveys from FNB suggest that an increasing number or South Africans are choosing to rent instead of buying and that there are fewer rental properties on the market.
FNB Property Sector strategist John Loos in a recent press release provided his take on whether we can expect a stronger rental market.
Recent StatsSA Consumer Price Index (CPI) data for residential rentals has shown that rate at which rental prices are increasing is actually slowing down. From a multi-year high inflation rate of 5,68% year-on-year in the September 2017 CPI survey, it decreased to 4,19% as at the June 2018 survey.
The mediocre rental inflation has been good news in terms of keeping inflation down and playing a role in keeping interest rates relatively low. However, this rental market “mediocrity” has not been wonderful news for landlords.
A look at South Africa’s economy over the last few years points to two reasons for the rental market not performing as well as some might have expected.
• Interest rates rose from early 2014 to early 2016, and rate hiking cycles normally mean a stronger rental market due to some aspirant home buyers postponing the buying decision. However, this rate hiking cycle was tame, with interest rates only increasing by two percentage points. At the end of the cycle, interest rates still remained relatively low and home buying was affected by much.
• Poor economic growth since around 2012 has been gradually applying pressure on tenants, limiting landlord ability to increase rentals.
Data shows that tenants are under pressure
The gradually increasing pressure on tenants can be seen in Tenant Profile Network (TPN) data regarding the percentage of tenants in good standing with their landlords regarding rental payments.
Tenants in good standing declined from a high of 85,95% of total tenants at the third quarter of 2014 to 82,64% as at the second quarter of 2018.
The data also shows that not all tenants in good standing are able to pay on time, with an increasing number paying late. The percentage of tenants paying on time has dwindled from 72,52% as at the third quarter of 2014 to 65,49% by the second quarter of 2018.
The lowest income groups are hardest hit by weak economic conditions, so the most noticeable decline in the percentage of tenants in good standing has taken place in the Below R3 000 per month rental category, where the percentage of tenants in good standing has dropped from 81,95% back in 2014 to 73,19%, and is now the poorest performing rental category.
The sweet spot for landlords remains the R7 000 to R12 000 per month category, with its percentage of tenants in good standing the highest at 87,34%, having shown no noticeable decline in recent years.
Where to from here for the rental market?
A significant increase in the numbers of aspirant rental tenants is expected to come about in the near term, along with a more constrained supply of rental stock. However, landlords will need to identify the strong tenant from the financially pressured ones as the economy continues to apply pressure on households in general.
When questioned on their expectation of home buying activity, in FNB’s Estate Agent Survey, a high percentage of agents pointed to Economic Stress and General Pessimism, with the poor economy and political and policy uncertainty contributing factors.
From a relative low of 18% of total survey respondents citing Economic Stress and General Pessimism as a key factor in the market in the first quarter of this year, this percentage has risen sharply to 77% of total respondents by the third quarter 2018 survey.
Simultaneously, the percentage of agents perceiving “Positive Consumer Sentiment” in their market has dropped from 56,7% in the first quarter of 2018 to 9% in the third quarter.
Such negative sentiment can have 4 major impacts
• It could very likely slow the rate of entry in to the home ownership market, which could imply a higher portion of aspirant 1st time buyers “hanging out” in the rental market for longer, boosting rental demand.
• It could also encourage a greater portion of home sellers not to buy another home, but to opt for the rental market.
• It could discourage buy-to-let buying, constraining rental home supply.
• It could encourage investment home owners to sell their rental properties in greater numbers, further constraining supply.
The evidence
The evidence hereto are that first time buying has been gradually stagnating, sellers aspiring to rent instead of buying again, the level of buy-to-let buying and selling off of investment properties.
Conclusion
There are some emerging signs that the rental market could be in for a mildly better run in the near term.
Demand may increase due to fewer 1st time buyers entering the market and a greater portion of sellers may choose to rent instead of buying again.
Supply may decrease as there are indications of declining levels of buy-to-let home buying.
Rising rental demand, and constrained supply of rental homes, could conceivably see rental inflation picking up mildly, outperforming lowly house price inflation in the next few years, and translating into gradually rising yields on residential properties.
But it remains tough to predict, and we certainly wouldn’t expect any rental market “boom”. Rather, a moderate and gradual strengthening at best. Important to remember is that levels of financial stress/pressure on households is rising, and a significant portion of the aspirant tenant population won’t necessarily be financially strong.