Landlords need to be careful about increasing rents

Tenants will be under increasing financial pressure this year. Picture: Mart LMJ/Pexels

Tenants will be under increasing financial pressure this year. Picture: Mart LMJ/Pexels

Published Feb 3, 2023


Tenants are under financial pressure and landlords will have to be sensitive about the rents they charge if they do not want their properties to remain vacant.

Furthermore, this trend is expected to compound in future years as tenant income growth remains weak, unemployment levels remain, interest rates creep upwards, and inflation – particularly utility and municipal expenses – outpace rental escalations.

Price sensitive will therefore remain top of the agenda for landlords and property managers in 2023, says Payprop deputy chief executive Michelle Dickens, explaining that there is a “mismatch” between inflation and affordability, which is impacted by rent escalation.

“Inflation has fallen back from its high but is still soaring at 7.2%. However, landlords are being left behind. Rental escalation was a mere 3.1% in August 2022 and dropped lower to 2.6% in September 2022.

“Landlords are now feeling the pressure thanks to the combined effects of increasing interest rates and low rental escalation. Added to that, property expenses like levies and municipal charges continue to increase at higher-than-inflation rates.”

While most tenants are receiving below-inflation rent increases, she says each interest rate hike has put tenant affordability under increasing pressure as their debt obligations to credit providers increase.

“The increasing cost of other essentials has also taken a bite out of tenants’ ability to pay rent.”

All that is putting downward pressure on rents, adds Johette Smuts, head of data analytics at PayProp. The most recent PayProp State of the Rental Industry Survey found that 85% of agents reported “moving to a more affordable property” as one of tenants’ top three reasons for moving, an increase from 58% last year.

“Prior to the Covid pandemic, South African tenants’ debt-to-income ratio hovered between 42% and 48%. The low interest rate cycle of 2020 and 2021 helped bring this ratio down to 37%, giving tenants the chance to save on interest-related repayments.

“But as inflation started to rise in mid-2021, and interest rates did the same in November 2021, so too did the tenant debt-to-income ratio, which breached 48% by the beginning of 2022.”

This reinforces the overarching trend of affordability being the real driver behind the real estate market in 2023.

It is a bitter-sweet situation for landlords as, due to the interest rate increases, more aspiring buyers will remain in the rental market. Demand for rental properties will therefore be greater, says Nick Pearson, chief executive of Tyson Properties.

“The rental market will become more buoyant with more people choosing to rent rather than buy. This is in marked contrast to an increase in the number of first-time homeowners when interest rates were low as more people could afford to pay back home loans.

“We did see an impact last year when interest rates went up and this will definitely happen again this year.”

Paul Stevens, chief executive of Just Property, says there is increasing pressure on the real estate market from several directions, with both the rental and sales markets being impacted by rising interest rates, the cost of living and high levels of poor creditworthiness.

From a rental perspective, he says 50% of prospective tenants across the country are in some way credit impaired.

“This trend will continue through 2023, putting extended pressure on the rental market as the economy and consumers continue to be under pressure. Landlords will need to be realistic about the rentals they can charge, as rental inflation is expected to also be under pressure in the coming year.”

However, he says there are still “great” investment opportunities in property, although you need to be clever about your purchases.

“Seek out municipalities that operate well, collect taxes and invest in infrastructure; find those that rally local businesses and communities to help provide manpower and advisory services – these will be the places to invest in now so you can reap the rewards during good times and bad.”

Search for a home to rent at IOL Property.