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Rentals in 2016: How did it turn out?

Steadily growing rents, slightly increased deposits and generally more prudent tenants made for a modestly positive picture of the rental market in 2016. This is according to Payprop’s Annual Review 2016. It makes for intriguing and informative reading!

Nationally, rents have been rising steadily, if unspectacularly. Towards the end of the year, however, this accelerated, and average rents in December passed the R7 000 mark for the first time (R7062.91, to be precise). Rentals in December were some 7% higher than they had been in December the previous year, a healthy state of affairs for owners.

Rents in the Western Cape end the year with the highest average in the country (R7 858), followed by Limpopo (R7 662), the Northern Cape (R7 572), KwaZulu-Natal (R7 160) and Gauteng (R7 159). The Western Cape has thus broken into top position, something that Payprop has been predicting for some time. Rental price growth in Limpopo has been rapid, but has historically been quite volatile, responding to the economic fortunes of the province – and also the limited stock of rental housing available.

Trailing behind these provinces are Mpumalanga (R6 771), and then at a considerable distance Free State (R5 328), Eastern Cape (R5 317) and North West (R4 586).

Meanwhile, rental owners are seeking sizeable and rising deposits as security against damage from them tenants. Across South Africa, the average deposit comes in at R10 242, or some 1.45 times the average monthly rental. This represents a very small increase on the equivalent ratio for the start of the year, 1.43.

Deposit growth and the average level of deposits required do, however, bear the imprint of the Western cape more than anything else. The average deposit required was R14 223, or 1.81 times the average rent. This is far in excess of the ratio in any other province – Limpopo comes in next at 1.50, while the Northern Cape commands only half that of the Western Cape, 0.90.

The report comments: ‘A combination of high growth rentals and deposit ratios usually signal an increase in demand for rental housing. Capetonians may well be in for even faster rental growth and more eye-watering damage deposit increases.’

Return on investment for owners was pleasing. Gross yield (rental income vs property value before expenses was 7.5% at year-end, having risen from 6.9% at the end of the first quarter of 2016.Net yields grow a little more slowly rising from some 4.8% to 5.3%.

Tenants’ debt showed a slight improvement. Monthly average debt repayment obligations at the beginning of the year totalled some R11 430, or 37% of disposable income. By year end, this had come down to R10 772, equivalent to 35%. Other research has shown that many households are still struggling with their credit (indeed, to commit over a third of one’s income to debt servicing is a huge burden), but the trend is positive.

Finally, Payprop has introduced an analysis of the provinces’ respective performance – what sort of returns can they produce for property owners, based on property price and rental growth, tenant credit profiles and so on. This formula helps to assign each of the provinces rental markets to one of four descriptors.

The Sweet Spot includes the Western Cape, KwaZulu-Natal and Northern Cape. High returns for low risk, these demonstrated a combination of good rental growth and returns on investment, coupled with a positive tenant credit profile (albeit with significant variation between the provinces).

The Workhorses – Free State and North West – offered low returns and low risk. Low rentals were the order of the day, although in the Free State rising property values could alter the picture.

The Casino Floor comprises Mpumalanga and Limpopo, and offers good returns for high risk. Somewhat unstable markets belie the positive impression created by a superficial glance: Limpopo, for example, has seen soaring rental increases. But low credit scores and their economies’ dependence on investments from elsewhere make operating here a gamble.

Finally, the Badlands – Gauteng and Eastern Cape – offer the toughest of both worlds, high risk and low returns. Indifferent rental growth and yields, as well as in property value growth and unexceptional credit profiles make these markets, as a whole, unappealing. Gauteng does, however, remain the country’s commercial hub, and an improvement in its tenants’ credit profile might push it out of the Badlands.

Despite all the positive press about rentals in the Western Cape, including factual (historical) evidence, we are finding that rental properties are moving a lot slower at the moment, i.e. taking longer to rent. This is the experience of our rental team throughout the Cape Peninsula. Whereas, six months ago we would be surprised for a property to be for rent on our book for longer than two weeks, now it’s not unusual for us to be advertising a property for rent for 2 months.

A tough, but not unrewarding year, then, despite the tough economic environment. And especially so for those of us in the Cape! All eyes now turn to 2017, and whether we can sustain it…