The recent interest rate increase – and predicted hikes next year – should spark a turnaround for the rental market.
It will not be a great recovery but definitely an improvement on the current position. The rate decreases over the past couple of years have seen financially strong tenants buy their own homes while the remaining tenant population has been hard-hit financially thanks to the effects of the pandemic lockdowns.
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But next year, with the rate expected to rise, “the opposite should happen”, says FNB commercial property economist John Loos.
Rental Market Wrap
Summing up the past two years for the rental market, he says its performance was weak, starting from 2020 and going into the early part of this year, with a 13.3% estimated national vacancy rate in Q1 and 13% in Q2, according to the TPN Rental Monitor.
The rental inflation rate also dipped into deflation last year, and by the second quarter of this year, had gone into inflation to the tune of 0.2%. Loos attributes this to last year’s employment knock as a result of the lockdown, which saw many retail and restaurant industry workers lose their jobs.
“Restaurants closed and a lot of retail businesses closed down entirely. These sectors were hit heavily, and a lot of the employees are rental tenants... This hard knock for the rental market also slowed household formations.”
This means tenants typically end their leases and move back home; elderly people cancel leases and move in with their children and a portion of young working people, who are still living at home but planned to move into their own rental home, might delay their move.
“So, the number of new households typically declines in big recessions,” he says.
“At the same time, after the big interest rate cuts, a portion of aspirant buyers who were hanging out in the rental market would have moved into homeownership as first-time buyers in early 2020.” This means, over the past two years, the country has seen a “very strong” home-buying market and a “very weak” rental market. But this is starting to normalise.
Rental outlook for next year
Going into the new year, Loos expects a noticeable improvement in the rental market due to interest rates starting to rise. The increase would have the opposite effect that the cuts had on first-time home buyers, with many holding off on buying until they see what happens with the interest rates.
“The hike was only 25bps so it is not significant, and rates are still low, but I do think it introduces a bit of caution. Those aspirant first-time buyers may just wait in the rental market a bit longer. “
Jobs in retail have normalised somewhat, and the hard lockdowns are long since a thing of the past, so the economy is back to some semblance of normality, although it is still weak.” He expects to see some acceleration in rental inflation, although it will not be great.
“If rental inflation reaches 4% or 5% next year, which is more or less in line with general inflation, then I would say it will probably do well. I do not expect to see a piping-hot rental market but a significant improvement from where it has been recently.”
Echoing this, Grant Smee, property entrepreneur and managing director of Only Realty Group, says the country’s housing market has been turned on its head once again with the current spike in the rental market.
“The residential property sector tends to ebb and flow. While the past 18 months saw a notable buyers’ market coming to the fore, landlords can now breathe a sigh of relief as the rental market starts to gain momentum.”
He attributes the shift to the fact that South Africans are now prioritising quality of life, flexibility and cash flow, and that tenants get to enjoy the perks of a home without being tied into a long-term commitment and unforeseen costs.
“In many cases, tenants can live in homes that they may not be able to finance through a home loan.” Despite the low-interest rate, Smee notes that homeownership is still out of reach for many, largely due to unforeseen costs, potential repo rate increases, high levies and escalating rates and tariffs.
TPN chief executive Michelle Dickens believes affordability will be an “ever-present factor” shaping the behaviour of tenants. “Incredibly, tenants clawed their way back to a pre-pandemic payment profile of 81.07%.
“Tenants are paying but they do hold the upper hand. It’s a tenant’s market and likely to remain as such for 2022. “This will translate into low or flat escalations and incentives to entice tenants.”
Properties and rental prices in demand
As the security of home is linked to the security of self, Dickens says tenants list security in their top three factors when they are house hunting. Not surprisingly, affordability is the first factor.
“Working from home will have a lasting impact on tenants’ needs – wi-fi is no longer a luxury – it is a basic need to enable working from home and job security.” Flats and, to a lesser extent, townhouses, will be most in-demand by tenants next year, Loos believes.
“I don’t think freestanding houses will be in major demand. “We are still in a financially constrained environment, so smaller is better as you save on the rates bill and maintenance costs, all of which are built into rental value. So, smaller is better to a significant degree.”
Properties in the middle price segment of R7 000 to R12 000 a month – and possibly a little above that – will be most in demand. “This sector usually outperforms and is normally the most solid in terms of tenant payment performance and vacancy rates.”