A2_Issue02.

Rentals: how are tenants performing?

Getting the right tenant for a property is probably the single most important consideration for a rental property owner, and therefore for the agents that work on his or her behalf. Tenants are, after all, the income stream. They must be in a position to meet their commitments – something that in tough economic times can become a major risk. Fortunately, South African tenants are generally doing so; but some concerning dynamics are evident that the market needs to be aware of.

According to the recently published Rental Monitor from credit bureau TPN (covering the third quarter of 2016), South African tenants continue to attach a great deal of importance to their rental obligations, and were by large margins living up to them. TPN calculates that 84% of tenants are in good standing. In other words, well over eight in ten tenants were paying their rent. Indeed, this is significantly better than the proportion in good standing with their consumer credit, which sits at just under 60%.

However, this looks a little less positive when it is borne in mind that of the 84% in good standing, 67% were paying on time, while 6% were doing so during the grace period allowed by owners and 11% were paying late. Some 10% made partial payments and 6% did not pay. If one adds the one in ten who are paying their accounts late to the 16% who are failing to make their payments, it is apparent that a large proportion – as many as one in four tenants – are experiencing some form of difficulty in meeting their commitments.

Indeed, TPN notes that overall tenant credit profiles have slipped somewhat between late 2015 and October 2016. The proportion of tenants whose credit profiles were “excellent” or “good” declined from around 74% to 70%. This resulted in an expansion of the “average” category, with the proportion of those ranked “below average” or “poor” remaining fairly constant. So, while the overall state of tenants’ credit profiles is still very positive, stresses are evident.

Failure to meet obligations was most pronounced at the bottom and top ends of the market. Some 24% of tenants in properties charging up to R3 000 a month failed to pay, or made partial payments; while some 23% of those in properties charging more than R25 000 a month were in the same position. In addition, properties in the latter band had a vacancy rate of 23%.

These numbers make sense to us. Shaun Luyt, Manager of Rentals Operations at Harcourts Maynard Burgoyne, comments: “Tenants in the lower end of the market are often the most vulnerable to economic shocks, say, when a household goes from two-incomes to one-income as a result of retrenchment or a business closure. These are households that try hard to live within their means, but tough times drive the to the wall, and invariably they only default on rent as a last resort. At the upper end, we often see people who have over-extended themselves somewhat. They may have had a good run of career success that is now petering out. And we’re also seeing a lot of caution to commit to renting luxury properties.”

The Western Cape market remains a robust one. Tenants in the Western Cape, are by some margin the best credit prospects in the country Just shy of 90% (89.64% to be exact) are in good standing. Some 78% pay on time, one of only two provinces (the other being the Eastern Cape) to exceed 70% in this regard. Those requiring a grace period amount to 3.7%, the only province in which this proportion falls below 4%, while a modest 7.7% pay late – the Western Cape being the sole province in which the latter proportion is below 10%. Those making partial payments amounted to 7.4% and those failing to pay a mere 3%.

“As we’ve pointed out in this space before, we are fortunate in the Western Cape market to be servicing a well-heeled and financially stable clientele. This marks the provincial market as one with marvellous opportunities. This does not mean that no threats exist. Stressful economic times can cause trouble for even the most prudent owners and tenants. It is our job as agents to offer the best advice possible to make sure that this does not become the fate of our clients”, concludes Shaun Luyt.