What’s Happening in the Rental Market?

Residential property rentals are a growing part of our business at Harcourts Maynard Burgoyne – in the last few months our rental portfolio, and our rentals team has grown substantially and it’s important for us to stay abreast of the rentals market and to adapt our policies and procedures accordingly, which we do.

In this respect the latest PayProp Rental Index – Annual market Report 2015 – The state of the rental market in South Africa makes for interesting reading and is brimming with analysis of real tenant data.

This report, and in particular the provincial breakdowns give us as letting agents a vital market-first look into local affordability and provide us with a unique market view and strategic planning tool.

You can read through the report in full – it’s a retrospective of the performance of the residential letting marketing in 2015, but it’s aim is prospective as well as the data is also analysed to highlight key trends that it is believed will drive the market in 2016.

In light of the usefulness of the data and the conclusions, we thought it worthwhile sharing some of the most important conclusions and opinion here – particularly with respect to the Western Cape market in particular . . .

  • Rent Growth Rates . . .

The Western Cape has experienced lower rent increases over the last quarter of 2015 – in a year-on-year cmoparison – but still overs growth well above the norm, in comparison to other provinces, and has done so over a sustained period and from a position of strength, at or near the top of the rankings . . .

Provincial Rent Growth Rates - Source: PayProp

Provincial Rent Growth Rates – Source: PayProp

  • The driving force behind any rental market is its ability to generate returns for landlords . . .

In comparing average rental values to average property values, the resultant gross yield for SA rental properties in the fourth quarter of 2015 was 7.11%, a slight recovery from the previous quarter. Probably more importantly, the theoretical net yields also show an element of recovery.

Unfortunately this is one element where the Western Cape has bucked the trend, with the net rental yields reducing slightly . . .

Provincial net rental yields - Source: PayProp

Provincial net yields – Source: PayProp

How cash-strapped are tenants?

Rent forms a large portion of most tenants’ personal expenses, with the result that rent payment performance is highly indicative of the average tenant’s financial profile and prospects.

For example, Joe Average tenant in South Africa spends R1.61 on debt for every R1 they spend on rent, with the result that debt has long since beaten rental into second place of consumer spend. In fact, the average tenant spends roughly a third of their pre-tax earnings on servicing debt, with rent currently only averaging 1/5th of consumer spend.

South African Tenant Financial Analysis - Source: Compuscan, PayProp Capital

Tenant Financial Analysis – Source: Compuscan, PayProp Capital

Unfortunately, PayProp Capital’s trend data (income and expenditure over time) darkens the canvas further because tenants are spending progressively more of their income on debt . . .

Tenant debt and income - Source: Compuscan, PayProp Capital

Tenant debt and income – Source: Compuscan, PayProp Capital

The proverbial silver lining – at least in our local market – is that in the Western Cape, tenants earned more and spent less on servicing debt – translating to higher credit scores and fewer prospective tenants ranking amongst the country’s high- and very high-risk tenants.

  • What lies ahead for 2016?
    One of the most pertinent conclusions and predictions that is highlighted in the report is that tenant selection will be the single biggest differentiator in the rental market.

We at Harcourts Maynard Burgoyne have already prepared for this as we are continually monitoring the market and adapting our processes and procedures accordingly.

This month we have transitioned to using PayProp Capital’s Tenant Assessment Report as part of our tenant evaluation procedure. We didn’t leave it at that though – interpretation of the report is incredibly important, and our entire rental team of 15+ were given specialised training on interpreting these reports by Rika Jacobson, the Claims Manager at PayProp Capital.

Another concerning prediction in this report is the expectation that tenant payment profiles will worsen and more tenants will pay late, partially, or not at all compared to last year.

Fortunately we are also prepared for this . . . as much as we can . . . we have a strict arrears management procedure and a zero-tolerance policy for rent arrears.

Source: PayProp Rental Index – Annual market Report 2015 – The state of the rental market in South Africa

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Errors and omission excepted. (E&OE)

About the Author

Shaun is the Rentals Operations Manager for the Harcourts Maynard Burgoyne Group.