PROPERTY: PayProp Rental Index Q1 2015
Recent Gauteng Business News
Rising economic pressure on South Africans is proving especially true in the residential property rental market. Louw Liebenberg, Group CEO of PayProp says that with tenants suffering under the weight of their financial responsibilities, buy-to-let investors need to consider carefully the non-payment risk of a potential tenant. “Each month of non-payment drops a landlord’s already meagre return by roughly half a percentage point. The financial argument for better tenant selection, and looking after good tenants, is now more relevant than ever.”
According to the PayProp Rental Index for Q1 2015, the current national average rental stands at R6 354 and has been on a steady upward curve above the R6 000 mark for a year. Liebenberg says that the market has historically seen cyclical swings in average rental as the market finds a balance between what tenants can pay and what landlords are demanding.
“In the latest quarter it seems as if we have hit an upward turning point– landlords have been trying to push through higher increases for the past six months, but tenant payment risk appears to have had a dampening effect on that.”
Based on actual monies paid to owners, the current net yield for an average property is just under 5%. While rentals have been growing at a fairly steady pace over the past year, so to has the cost of owning and maintaining a property. “What we are seeing is that the maintenance costs of owning a property are increasing at a faster rate than the rate at which landlords can increase rental values.” Net yield has dropped over the last quarter and this could explain why landlords have again started to increase rentals across the board.
Provincial growth rates
Reported as having the highest growth rate in previous Indices, Limpopo’s growth has not just cooled down, but actually gone into flat-to-negative territory. Mpumalanga follows the same trend, another strong recent contender with 8% - 10% growth rates as recently as 2014. Liebenberg says that this is as a result of short-term supply and demand mismatches in provinces where rapid industrial expansion hit smaller towns.
Interestingly, months of consistent growth has helped Gauteng finally reach the top spot, as expected. For five out of the last six quarters, it has recorded rental growth in the 8% - 10% range – bringing the average rental to R6 946 in the province.
Decrease in damage deposits
Liebenberg notes a decline in the damage deposit ratio (value of damage deposit held, relative to the value of rental invoiced). He says that it has dropped for each of the three months in this quarter – from 1.42 times the average rental in December 2014 to 1.38 in March 2015.
“Provincially, the one area that has bucked the national trend is the Western Cape, where damage deposits are 1.75 times the average rental value, and deposits equal to two months’ rent seem fast on their way to becoming the norm.”
Currently 77.5% of all rentals fall in the lower-than-R7 500 price category. However, the fastest growing price bands are those above this level – with rentals above R15 000 growing at 36%; the R10 000 to R15 000 price band increasing at 30%; and the R7 500 to R10 000 growing at 22% over the past quarter.
State of the tenant
Liebenberg says that to better understand a tenant’s risk profile PayProp uses data from its Tenant Assessment tool to assess the value of debt repayment a tenant is committed to, versus declared income. “Currently the average tenant is committed to the tune of 36% of reported income. As shocking as it sounds, this ratio is actually in decline from a high of 45% in December 2014.”
The axiom of landlords increasing rentals and tenants paying what they can has been proved once again in the latest Property Rental Index. If tenants are pushed too far in the level of rentals and damage deposits extracted from them, their ability to meet their financial commitments – including their rent – decreases, and they are exposed to ever increasing levels of financial distress, in turn amplifying the landlord’s risk of non-payment.
Liebenberg says that accordingly, landlords are prepared to accept lower increases in exchange for ‘good tenants’, but only until they realise that their cost of owning the property is increasing faster than their rental income – and so the pendulum swings in the opposite direction again, driving increases in rentals once more.
“Landlords need to look after good tenants when found and consider their merits at the outset before pushing them away with marginal gains on rental increases and limited deposit options, ” advises Liebenberg.
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