Although the residential rental property market has remained resilient in recent quarters despite the financial stress consumers are under, the number of tenants in good standing deteriorated in the first quarter of 2023 in all provinces, according to TPN’s latest Residential Rental Monitor report.
Waldo Marcus, industry principal at TPN Credit Bureau, says the resilience has been driven by high interest rates which has dissuaded potential buyers. The expectation of further interest rate hikes will help to retain a healthy rental demand for residential property.
However, although rental growth continues to improve, Marcus says property investors need to keep a close eye on the financial health of consumers.
The Residential Monitor Report reveals that vacancies were at 6.19% in the first quarter of 2023. TPN’s Market Strength Index, which measures the perceived demand and availability of supply within the residential rental market, remains strong at 9.14 points above equilibrium, a figure last seen in 2017.
“Traditional market factors indicate that the residential rental market is buoyant with improved returns and lower vacancies,” he says. “Another interest rate hike before the end of the year is expected to further deter property purchases and retain healthy demand for residential rental property.”
However, TPN’s data reveals that tenants in good standing have declined slightly for three consecutive quarters as economic challenges continue to filter into households. This mirrors the result of the National Credit Regulator’s age analysis which indicates that almost all consumer credit types in good standing deteriorated slightly in the same time period. TPN’s Squat Index, defined as the number of tenants who on a monthly basis fall into a category of non-payment, has also seen an increase in the last two quarters.
Marcus points out that a decrease in credit good standing is typically a predictor of rental payment rates. “Although overall sentiment in the sector remains positive, property owners need to consider how a tenant’s late or no payment will impact them. Tenants classified as squatting pose a severe risk to the ability of landlords to collect and recover rental due.”
The residential market recovered faster than most property sectors post Covid-19 with reduced vacancy rates and steadily recovering rental escalations. The sector’s recovery was assisted by an aggressive interest rate hike cycle which dissuaded potential buyers from entering the property market.
FNB’s House Price Index, which peaked in the first quarter of 2021 to 5.1%, dropped to 2.3% in the first quarter of 2023 as a result of interest rate hikes and is expected to remain around this number for the balance of 2023.
Rental escalations have been recovering since mid-2021 as demand for residential rental property grew providing property owners with an opportunity to play catch-up with the consumer price index (CPI) which, at the end of March 2023, was 7.1%.
The TPN report found that tenants in the Western Cape are the most committed to paying their rental while tenants in KwaZulu-Natal have the highest number of squatting tenants, up from 4.67% in the fourth quarter of 2022 to 5.09% in the first quarter of 2023. Gauteng is only marginally behind in the number of squatting tenants at 4.58%.
When it comes to rental payment performance by the rental band, tenants paying R3,000 or less a month, the lowest rental band, continue to struggle to pay their rental with a continued deterioration of tenants in good standing. Tenants paying between R7,000 and R12,000 have been the best performing category of tenants since 2014 with the highest proportion of tenants in good standing of all rental bands, followed by tenants paying between R12,000 and R25,000 per month. The luxury market – defined as rental properties costing more than R25,000 per month – has the highest vacancy rate.
