Financial pressure squeezes rental increases

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Roy Cokayne

The financial pressure being experienced by households is dampening the rate of increase in flat rentals despite strong demand for rental flats and low vacancies.

The latest residential rental index released by Trafalgar last week showed that rentals increased overall by 8.01 percent last year, which was below the standard 10 percent annual rental escalation of the past.

Andrew Schaefer, the managing director of Trafalgar, said soaring utility increases were imposing significant pressure on tenants and constraining affordable rental increases.

“It would appear the days of standard 10 percent [annual] rental increases are now past.”

Schaefer said there were already early warnings that overextended tenants were battling to make their monthly payments in full and on time, and there was a shortage of quality tenants with good credit ratings, coupled with concerns about screening tenant applications as the credit amnesty started this month.

Credit bureau TPN warned last month that there was “a worrisome change in tenant payment behaviour for the first time in nearly three years” in the fourth quarter of last year.

Although the tenants in good standing only slipped one percentage point to 85 percent in the fourth quarter compared with the previous two quarters, the deterioration was reflected in the movement of tenants who “paid late” to the “partially paid” segment.

TPN said this highlighted a growing multitude of over-indebted consumers who were unable to make full and timeous payments on credit and monthly living expenses.

“The decline might be slight but nonetheless could be seen as an early warning sign of trouble ahead,” it said.

Schaefer said calculations indicated the component of total rental made up of services recoveries had rocketed from less than 25 percent five years ago to about 60 percent today.

“Landlords are under increased risk with the majority of consumers resisting increases above the 8 percent mark, the exception being the corporate market where rentals in prime areas can still achieve prior norms of 10 percent.”

Schaefer said the ongoing inefficiencies around billing accuracy by municipalities were imposing a significant administrative burden on landlords and owners as well as cash flow shortages when actual meter readings and adjustments were processed.

The upward trend in the interest rate cycle was expected to place buying a home out of the reach of a growing numbers of consumers.

“The resultant growth in rental demand, plus the pressure imposed on landlords to increase rentals to cover bond payments, will undoubtedly push rentals up.

“However, increases will be softened by landlords needing to retain quality tenants, recognising the risks of a difficult economic climate, rising unemployment and steep increases in municipal service costs.”

Schaefer said the underlying national trend of urbanisation, particularly towards Gauteng, was driving very strong rental demand accompanied by very low vacancies and growing shortages of rental accommodation in many areas.

He said this strong rental demand across all major cities was renewing interest in buy-to-let purchases mostly around the R500 000 mark but warned this was not a signal for “gung-ho buy-to-let investment”.

Residential rentals increased in every major city in the country in the past year.

Johannesburg led the pack with a 9.74 percent average annual increase up to January this year, followed by Port Elizabeth (8.63 percent), Cape Town (8.35 percent), inner city (8.14 percent), Durban (7.97 percent), Pretoria (7.90 percent) and East London (5.78 percent).

The index is based on a comparison of the rentals for unfurnished two-bedroom flats in Trafalgar’s letting portfolio, which comprises more than 10 000 units countrywide.


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