South African tenants are starting to default more on their rental payments as the rising costs of living puts them under increasing financial pressure.
More residential tenants are also ‘squatting’, states TPN Credit Bureau’s latest Residential Rental Monitor.
While rental escalations in the first quarter of 2022 were at 1.93%, and the figure is expected to increase as inflation forces landlords to try and remain abreast of escalating costs, landlords need to be aware that getting rental payments in on time is likely to be a challenge going forward. This is as inflation continues to place consumers under pressure and landlords are forced to escalate rentals.
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“The financial pressure consumers are under is reflected in the fact that the number of tenants in good standing with their landlords has started to drop. In the first quarter of 2022, the number of tenants in good standing with their landlords dropped from 81.4% in the fourth quarter of 2021 to 80.78% in the first quarter of 2022. A tenant is considered in good standing when they have paid their rental account in full for the month.”
TPN says the worst performing category of tenants were those paying less than R3 000 per month, with only 68.10% of tenants in good standing.
“The only rental price brackets which have continued to improve on the number of tenants in good standing, are the R12 000 a month or more.”
Inflation is removing financial buffers, impacting the ability of tenants to pay their rental on time, including those tenants in higher rental brackets. Close to 70% of the rental market pays R7 000 or less per month, while 22% pays between R7 000 and R12 000 per month. This means that only 8% of the rental market is improving their good standing, it adds.
At the same time, demand for rental properties is growing as more people who wanted to buy a home now feel that they cannot afford to.
The data has revealed that, in the first quarter of 2022, the vacancy rate recovered to 8.26%, compared to 13.31% a year earlier.
“Increased demand for residential rental stock in the first quarter of the year was the result of low rental escalations which was further supported by slightly improved employment figures. Unemployment figures are a key economic indicator when it comes to residential rental stock; the more people that are employed, the higher the demand for formal rental stock. Weak demand for residential rental stock, on the other hand, pushes vacancy levels to record highs,” TPN states.
Vacancies are expected to decrease further to below 8% by the end of the second quarter as consumers continue to face financial pressure.
“Rising fuel and food prices combined to push inflation to 5.9% in March 2022. Fuelled by spiking inflation, the South African Reserve Bank (SARB) has embarked on a series of interest rate increases.”
Increased demand, however, may not necessarily translate into improved escalations.
“Lower interest rates created a theoretical bubble during the pandemic as new buyers entered the market motivated by cheaper debt costs. This resulted in property inflation peaking at 5.1% according to FNB’s House Price Index, the highest since 2016. Although property inflation peaked, escalations went the other way and are only now falling into sync with property inflation.
Even with improved rental escalations, rental property yields for sectional title properties remained flat at 10.1%, while the yield on full title properties dropped from 7.1% to 7% in the first quarter of 2022.
“Rental properties between R7 000 and R12 000 had the lowest vacancy levels in the first quarter, followed by those priced between R12 000 and R25 000. The highest vacancies recorded are those in the R3 000 to R7 000 category,” TPN says.
Its data also reveals that the number of residential tenants ‘squatting’ – defined as having not paid three consecutive months of rental and continue to occupy the property in the fourth month – has seen a progressive increase in the last decade.
“Although the trend is cause for concern for landlords, the total number of tenants classified as squatting remains small when compared to the number of tenants who do meet their rental obligations. In reality, less than five out of 1 000 tenants end up classified as ‘squatters’. However, the pandemic has resulted in some tenants abusing the system to their advantage creating fear and uncertainty with the property investment market.”
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