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Update on the rental market: The Western Cape in pole position

Recent data on the state of the rental property market should bring some early holiday cheer to landlords and investors in the Western Cape. Not only has the province enjoyed a consistently robust growth in rental prices, but its client base is well-heeled and in a strong financial position – encouraging indicators for its future prospects.

According to Payprop’s latest Rental Index (covering the third quarter of 2016, in other words, between July and September), rentals continued to climb nationally. The Index reports a year-on-year nationwide rental price growth of some 6.5% across South Africa for this quarter, with the average price at R6 738.42. The increase in this quarter is in line with the established trend for the year to date, at 6.4%.

The provincial-level picture is both nuanced and revealing. Rentals in the Northern Cape remained South Africa’s highest at R7 562, followed closely by the Western Cape at R7 529. Rentals in Limpopo and KwaZulu-Natal exceeded R7 000, while the other five provinces recorded rental averages of below R7 000. Rentals in Gauteng stood at R6 961, while at the bottom end of the scale, rentals in North West stood at R4 697.

While this does not match the predictions made in Payprop’s previous report – that the Western Cape would displace the Northern Cape in the third quarter – the general trajectory is unchanged. Rental price growth in the Western Cape was 9.32% in the third quarter, the highest in the country, continuing a long-standing trend of above-average growth. The Northern Cape, by contrast, has seen ever weaker increases over the past year. Rental price growth in this province, in other words, is running out of steam and its rental prices will likely be overtaken by the Western Cape in the near future.

The rise in rental prices in Limpopo is also to be watched with interest. Having seen year-on-year-growth of some 12.6% in the second quarter and an eyebrow-raising 18.9% in the third, its rentals now come in as the third highest in the country. This reflects a tight market for rental stock on the back of demand fuelled by industrial development. Average rentals stood at R7 382, and given time, rental prices in Limpopo may exceed those in both the Northern Cape and Western Cape.

Equally interesting is the report’s analysis of the Western Cape’s rental clientele. At R32 318, tenants in the province have the highest average income in South Africa. Their counterparts in Gauteng – the province whose developmental profile most closely resembles the Western Cape – average a noticeably smaller R30 910.

More importantly, tenants in the Western Cape are more liquid and less encumbered by debt. Western Cape tenants devote some 39% of their income to debt repayment. Only the Northern Cape registers a marginally lower level, at 38%, while all others’ are higher. The level in Gauteng is 42%, and in Limpopo and North West, it reaches 47%. Tenants in the Western Cape hold higher average credit scores than those in any other province. They also hold on average the lowest number of loan accounts and the second lowest number of store accounts in the country. By South African standards, tenants in the Western Cape are moderate users of credit and have by far the lowest incidence of debt delinquency. Some 32% of tenants in the province had experienced a major delinquency (a figure certainly high enough to raise serious concerns about the strained economic environment), which is comfortably the lowest in the country – the second lowest level was in the North West, at 37%. Some 40% of Gauteng tenants had gone through such a delinquency, while this was the case for a staggering 49% of those in Mpumalanga and North West.

All in all, only 31% of tenants in the Western Cape are regarded as high- or very-high risk. By contrast, some 37% of tenants in the North West, 41% in Gauteng and 52% of those in the Eastern Cape are so regarded. Indeed, TPN’s latest Rental Monitor (which deals with the second quarter of the year) makes a very similar observation: tenants in the Western Cape are noticeably more likely than those in other provinces to pay their rents on time, and to be in good standing regarding their accounts.

The Western Cape has, in other words, a client base that underwrites a strong, resilient and sustainable rental market. It is also, more than any other province, a high-value market, its properties more expensive than elsewhere, and it leads the country by a small margin in the proportion of rental properties priced in excess of R15 000 monthly.

This underwrites a stable and profitable rental market that is providing numerous excellent business opportunities.

Denis Quayle
Principal
Harcourts Maynard Burgoyne