Struggling to find the perfect tenants? Landlords urged to find rental sweet spot and be creative
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There is no doubt that the property investment market is tough at the moment. Even though the residential market has had a “reasonably nice” demand period, capital growth is not big, says FNB property economist John Loos.
The challenge, therefore, is for investors to buy at the right value in order to achieve returns – and even at below market value, if possible.
“Getting the price right is very important and is a big challenge at the moment as we are not in the boom years.
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“In boom periods, you could even buy a property at too high a value and a year or two or three later your capital gains were still 100% higher. But this time is just not it. “If you buy at the wrong value you may not make capital gains for many years, so you need to get the price right and understand the risks facing property at the moment.”
Know the risks
For buy-to-let investors, these include the fact tenants are under pressure, so landlords need to sign up good tenants, and then manage them well to keep them happy, Loos says. “Another big challenge is that of rising operating costs such as electricity and municipal rates.”
Since lockdown 2020, the residential rental market has dropped off and rental vacancies have increased steadily. Catherine de Villiers, rental consultant at Jawitz Properties, says the rental market is experiencing one of its most challenging times.
“Covid-19 was definitely a major catalyst as it had vast financial implications and created loss in people’s lives and livelihoods, resulting in many tenants struggling to pay their rents and becoming increasingly price sensitive.
“The low interest rates also created an environment for tenants to become homeowners, with a massive surge in first-time buyers entering the market.” These factors, as well as the many new sectional title developments coming on to the market, have resulted in an oversupply of rental properties. “There are also countless furnished properties standing empty due to the lack of holiday rentals and expats coming into the country due to Covid travel restrictions,” she says.
Know where the rental sweet spot is
TPN’s data for the first quarter of 2021 reveals that the worst-performing category of tenants from a payment perspective are those in the more affordable rental market. Michelle Dickens, chief executive of TPN, says two-thirds of tenants rent for less than R7 000 a month with one third of rents falling into the R4 500 to R7 000 a month range.
“Rents below R3 000 a month remain under pressure with only 65.73% of tenants in good standing. A concerning 17.76% of tenants in this category are unable to make any rental payment contributions. “The R7 000 to R12 000 rent a month category, on the other hand, showed growth of 23.3%, with 84.37% of tenants in good standing and only 4.86% who were unable to make any payment at all. This category clearly represents a sweet spot for landlords,” she says.
How to survive the market in the short term
Despite the state of the market and tenant affordability, De Villiers says there are still good calibre tenants looking for properties to rent. Landlords who adjust to the current conditions will more readily secure a tenant and avoid their properties standing vacant for months.
She offers the following tips to landlords:
• Adjust your rental expectations: With prospective tenants having lots of properties to choose from, take your agent’s advice as to a suitable rent that will entice lessees. A higher rent does not necessarily attract better quality tenants. Tenants are looking for value and that value is determined by the market. Credit vetting is key in any market but more especially in the current environment.
• Maintain your property to remain relevant: With tenants able to pick and choose, now is the time, especially if your property is empty, to modernise. We have found tenants are more attracted to neat, clean and well-maintained properties that are flooded with light.
• Be flexible: With 90% of enquirers asking for unfurnished premises, you will open yourself up to a much larger pool of potential tenants by being flexible about removing furnishings.
• Welcome four-legged friends: With so many competing properties, landlords who allow pets widen the scope of potential clientele. Tenants looking for pet-friendly accommodation are generally willing to agree to clauses stating that any damage caused by pets will need to be repaired by them.
• Focus on security: Security remains a key factor and properties that have security systems are highly desirable. Making sure your tenants feel safe and secure is a sign of a good landlord.
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Look ahead to spot opportunities
While South Africa has always been an alluring short-visit travel destination, Just Property chief executive Paul Stevens says the country now also appeals as an extended-stay destination to those who can remain for longer because they can work remotely.
“Property investors can tap into the potential offered by both short and long-stay accommodation demands from the international community.” He says hotels and entertainment venues, office buildings and retail properties have been severely impacted by Covid, and while recovery will happen, it will take time. Until then, embattled property owners must get creative.
“Affordable housing and industrial real estate, such as cold storage; warehouses and distribution and data centres, are two sectors in high demand. “Look for opportunities to turn a hotel in the heart of the city into an affordable housing project or at converting a retail building into a distribution centre or warehouse.”