WORDS: PHIL RHUIMTE :: SOURCES: STATISTA.COM, TPN and PAYPROP :: PHOTOS: MAX VAKHTBOVYCH, RODNAE PRODUCTIONS
The residential rental market remains resilient despite a slowing economic recovery and rising interest rates. The upcoming festive season presents opportunities for property owners to profit from short-term rental income
It’s only a few months post-pandemic and economic recovery is slow while interest rates continue to rise. However, the residential rental market is proving to be surprisingly resilient, with the latest data revealing that residential rental market tenants are paying their rentals despite the harsh economic constraints.
According to the TPN Residential Rental Market Monitor for the second quarter of 2022 and PayProp’s Rental Index for Q2 2022, landlords still stand to benefit from their rental properties despite South Africans facing economic challenges, which are being worsened by load-shedding and higher fuel prices. After the pandemic, South Africans prioritise quality of life, flexibility and cash flow, which has made renting property more preferable to home ownership as a way to bypass unforeseen costs such as potential repo rate increases and high rates and taxes. Moreover, house sharing among family and friends is increasing as people opt to share the cost of property rental.
Statista indicates about one-third of residential properties for rent in SA had a monthly rent ranging between R5,000 and R7,000 in the fourth quarter of 2021, with a national average rent of about R7,900. There has been a gradual positive growth since then, with PayProp’s Rental Index for Q2 2022 recording rental growth of 2.5%, 2.6% and 2.7% in April, May and June, respectively. “The upward trend seen since April 2021, though very gradual, remains encouraging. Quarterly year-on-year rental growth continues to climb, with a rate of 2.6% recorded during the second quarter of the year. Average rent increased by R193, reaching R7,971 in Q2 from R7,778 in the same quarter last year,” says PayProp. Though economic conditions may force some to search for cheaper accommodation, slowing down the growth in rental incomes, others will opt to keep renting accommodation than buying property for the same reason, which would bolster the residential rental market.
It’s also worth noting that for the first time in almost five years, in Q2 2022, all nine provinces recorded positive YoY rental growth. The TPN Residential Rental Market Monitor for the second quarter of 2022 reveals that consumers consider rental payments to be the second most crucial budget credit priority, second only to mortgage or bond repayments.
“The number of tenants in good standing with their monthly rental obligations improved from 80.78% in the first quarter to 82.22% in the second quarter. Tenants in the R7,000 to R12,000 and R12,000 to R25,000 rental brackets show a strong commitment to paying their rental on time, with 88% and 87%, respectively, in good standing. Though tenants paying between R3,000 and R7,000 — a rental bracket which makes up more than half the market — have not yet recovered to pre-pandemic levels, they continue to head in the right direction, increasing their good standing by 2% to 82.8%,” says TPN. In the rental bracket above R25,000, there was some deterioration in good standing to 77.38% due to the cyclical nature of tourism, particularly in the tourism regions, among other reasons. This trend is expected in the second quarter and usually improves in the next quarters.
The positive trends do not mean the risk of defaulting is eliminated, as tenants from lower income brackets remain at a higher risk of defaulting. Though income is not a parameter used in determining credit risk, PayProp concedes that these two factors are correlated. “It is interesting to note that credit scores deteriorated slightly or stayed the same from Q2 2021 to Q2 2022 across all brackets, except for rents higher than R15,000, where there was a 2-point improvement,” they say.
TPN Credit Bureau’s long-term data indicates that consumer strain is almost always shared with property owners, reflecting either in higher vacancies, lower returns or late payments. However, the data reveals that now, tenants still prioritise their rentals.
In terms of the short-term residential rental market — the next few months promise to present earning opportunities for property owners as international visitors are expected to drive demand. This allows homeowners to profit by listing their properties on short-term rental platforms like Airbnb and outperforming the long-term rental rate, says Max Urban, MD of short-term rental management company, Propr. “Unlike long-term leases, where the property typically degrades over the course of the rental period, short-term rentals mean that homeowners won’t have to spend time and money bringing the property back into a rentable condition once guests leave,” he says.
Short-term rentals also present the opportunity for owners to access and use their properties after the holiday season if they so wish, only renting them out periodically. However, this is no easy feat for those who are feeling the financial pinch and require additional income, as acquiring bookings requires some effort. Urban advises listing properties on as many platforms as possible to maximise exposure to potential guests. Moreover, renting a short-term property may require daily involvement from owners.
“There are a number of aspects to running an Airbnb that require hosts to be available 24 hours a day, seven days a week, and on any day of the year. Moreover, skills like accurate property pricing, revenue management, optimising listings on non-Airbnb platforms, as well as securing payment from these platforms are all essential for being a successful host,” says Urban. “However, most hosts are better off letting a reputable management company run their short-term rentals. If they are good, they will make up for their commission through higher earnings, time saved and well-maintained property.”
Urban believes this season is shaping up to be the best in seven years. “Rates and occupancies are eclipsing pre-pandemic levels, with forward bookings on the rise. October/November is the ideal time for hosts to start listing their properties so they can take full advantage of the season, especially with short-term rentals guaranteed to outperform the long-term rental rate over the next six months,” he says.
Despite the challenges and opportunities in both the long- and short-term rental markets, we’ve learnt with the pandemic that myriad reasons could change a negative outlook to a positive one and vice versa. Therefore, rental agents and management companies should monitor their portfolios and use the tools available to them to meticulously vet all tenants.
