Picture: Richard Gray, CEO Harcourts South Africa; Paul Stevens, CEO Just Property
Looking at a rental market challenged with low rental growth and a scarcity of good tenants, it is key to advise carefully on choices made for buy-to-rent property.
The South African rental market has not been like this since the 2008 financial crisis. High levels of arrears, soaring vacancy rates and a low, even negative growth rate in some provinces like the Western Cape, reflect the financial stress facing thousands of tenants. According to the PayProp Rental Index, rental growth has plummeted for two consecutive quarters, with the rental growth rate hitting a new low in September measuring just 1% growth over the same month in 2019.
Head of Data and Analytics at PayProp, Johette Smuts says, “It’s not surprising to see low rental growth continuing and high levels of arrears being reported. We’re hoping that the worst is over, but it’s important to note that it’s going to take a considerable amount of time for the market to recover.”
Also read: Rental market in trouble
However, real estate is a long-term investment, even more so for investors who are looking to rent out their investment properties says Richard Gray, CEO of Harcourts South Africa. “It is therefore always important to understand that short-term economic cycles will continue to come and go but that real estate has proven to withstand even the most fluctuating periods,” he explains.
Know your area
Considering the grim outlook for the rental market, investors who are considering investing in buy-to-rent property might feel cautious. How should they proceed and what is the right type of rental accommodation to provide? According to Paul Stevens, CEO Just Property, there is no simple answer here as market conditions vary from town to town and even suburb to suburb. He recommends that property owners (and the agents representing them) do a micro-analysis to review their individual circumstances and specific short- and long-term goals.
High vacancies and arrears
According to PayProp the percentage of tenants in arrears in March peaked with a high of 26%. Smuts explains that the rental market has since seen a significant recovery as lockdown restrictions eased and people could return to work and start paying their rent again. By September only 22% of tenants were in arrears.
However, Smuts says with the large number of households that suffered financial loss this year, affordability will continue to be a factor in persistently low rental growth.
TPN statistics for Q3 reflect that vacancies and tenants in arrears are at all-time highs. “And with the after-effect that the TERS relief have recently come to an end I think we are still going to find rentals collections hard for at least the 1st quarter of 2021,” adds Stevens. An added challenge, that rental agents and landlords have been battling with for the past few years, is finding good tenants. PayProp statistics over the last five years reflect a slow continued drop in the percentage of tenants in good standing from 85.95% in 2014 Q3 to 81.52% by Q1 of 2020. A further dramatic drop followed the severe lockdown resulting in an average of 73.5% by Q2. “There is an abundance of tenant enquiries for property but tenants who actually qualify are becoming hard to find,” says Stevens.
Buy rather than rent
The low interest rate is another contributing factor to the scarcity of good tenants. There has been five interest rate cuts this year. Many current tenants are realising that in many cases the amount they are paying for their rental can very often be the same as what it would now cost them to buy a home with the current low interest rates. According to the latest Absa Homeowner Sentiment Index 77% of their respondents consider it an appropriate time to buy rather than rent – an 5% increase compared to Q4 2019.
For some time now the residential property market has been in a buyers’ market with property prices averaging exceptionally low growth rates. Since lockdown restrictions eased there has been a huge demand for property for sale, particularly in the sub R1,5 million price bracket where very often the properties come onto the market and sell within days of being listed. “This is starting to create an environment of stock shortages which we are already having in certain markets and I believe it will continue into all areas in 2021,” comments Stevens. He expects this continued trend could result in a swing into a sellers’ market in the second half of 2021 and with this an increase in property prices.
What about short-term rentals?
With the tourism industry struggling due to continued Covid-19 constraints on international travel, many short-term rentals previously listed on platforms like Airbnb, have been reallocated to the long-term rental market flooding it. However, a short-term rental market still exists says Stevens. “People are still travelling, for business and short-term leisure. A well-placed property (close to business centres, on the coast etc) can still bring in good short-term returns,” he advises. Gray adds that they are seeing a rise in the medium to long term rentals in the luxury market. “This is an interesting trend, and we believe liquidity in the upper income market and the COVID impact on travel has a direct influence on this activity,” he explains.
Be flexible to rental market needs
It is hard to predict when international travel will reopen fully as many European countries recently reimposed travel restrictions following a second wave of Covid infections. In the light of this, other rental options should be considered. Stevens suggests looking at flexibility in terms of the duration of rental contracts. “For example, lease terms do not have to be 12 months. In Port Elizabeth, for example, there is a local demand for 3-month rent terms for foreign business travellers on short-term assignment at VW, FAW and other vehicle manufacturers nearby,” he explains.
Stevens recommends that property owners shift their perspectives from what they want to what tenants in their area want or need and respond to that in the short-term. “What landlords do with their properties now can be changed in the future. Flexibility in your offering now will protect your investment in the long-term,” he says.
Landlords can consider the following:
– consider renting out the garage separately if the tenant does not need the space,
– shorten the rent term or switch from long-term to short-term rent for a while
– do not escalate the rent if a tenant is reliable (a good tenant is worth holding onto right now).
The arrears situation – navigate carefully
A struggling tourism industry leaves thousands formerly good tenants battling to pay rent and catch up with arrears. Dealing with tenants in arrears there is no such thing as ‘one size fits all’. Every situation should be individually decided based on the individual, their circumstances and track record says Gray. Also keep in mind the demand for property in the region.
Good, qualifying tenants are difficult to find but it is difficult, time-consuming and expansive to evict a squatting tenant adds Stevens. Managing the tenant default process diligently is critical, but do this with diplomacy and humanity, he says. He advises landlords (or the real estate professionals who represent them) to have an open dialogue with their tenants re their expenses and other financial commitments. Ask what can be cut back to make provision for the rent that needs to be paid? “Our experience shows that it is very difficult, almost impossible, for tenants to recover when they start falling into arrears – a little overdue this month quickly becomes a lot next month.”