Property party loses its fizz as tenants hold sway

Property ownership has traditionally been considered a good path to building wealth. In the property boom period of 2004-2008, more than 80% of primary residence properties sold for more than a 25% profit. That changed with the global financial crisis of 2007-2008, which crashed the property party, sending almost 30% of properties into forced sales at a loss. This resulted in about one in five properties losing more than 10% of their value.

The Covid-19 pandemic has had a similarly negative effect on the property market, with a spike in forced sales as sellers discounted offers in 2020. With more than 2-million jobs lost at the height of the hard lockdown, quick sales were a relief from bond and property costs.

Though the market has recovered slightly in 2021, it has undoubtedly been a tough period for property investors since the onset of the pandemic, with 18.6% of investment properties selling at a loss and a further 6.89% only just breaking even after estate agent commissions have been paid, according to TPN’s Vacancy Survey for the second quarter of 2021.

It is a tenant’s market, with an oversupply of vacant properties driving down rental prices. Tenants are thus shopping around for a better deal, with price their most important consideration, closely followed by security and then proximity to work, schools and shops.

Nationally, vacancy rates have stabilised at 13.2%. A demand rating of 53% indicates that tenants are still in the market but in reduced numbers, while a supply rating of 68.8% means landlords are having to compete for tenants.

Rental reductions

Ironically, landlords have a more pessimistic perception of the market than estate agents, reporting a weaker view of demand and a perceived strong supply rating. This is probably driven by fewer tenants responding to property adverts. In some instances landlords are reporting no interest in a property until the price is dropped and re-advertised. Landlords reported a vacancy rate of 14.29%.

The question is whether landlords were slower to reduce rentals, causing them to have ended up bearing the brunt of overall vacancies.

Estate agents have a slightly more optimistic view of the market, arguably because they have the benefit of foot traffic or more property adverts to entice the reduced number of tenants. Their perception of the market indicates slightly more tenant demand than landlords perceive, and a lower vacancy rate.

According to TPN’s Vacancy Survey, the perception is that Gauteng is not yet showing signs of recovery. The province, home to half the country’s rental population, has seen the demand rating dipping below 50, accompanied by a persistently strong supply rating, which combined has resulted in a severely restricted market strength. The vacancy rate has recovered from 13.8% in the first quarter to 12.4% in the second quarter. Of concern is Sandton, which has a high 26.7% vacancy rate.

The Western Cape’s property market was fortunate to recover from the global financial crisis, with prices driven up further by the “semigration” trend in 2016-2017. Despite the Western Cape’s mini property bubble taking a turn for the worse with a slowdown in demand in 2017 due to the extreme drought and consequent water shortages, properties in the province continued to sell at a 25% profit.

Stable supply

However, according to our survey, neither landlords nor estate agents have felt a recovery in the Western Cape market, where tenant demand has deteriorated. This is the first time the Western Cape’s vacancy rate of 14.4% has breached double digits. In Cape Town, the situation is worsened by the conversion of short-term holiday rentals into long-term lets and work-from-home opportunities, which has resulted in increased supply. It has also provided an opportunity for tenants to relocate to the more affordable northern suburbs.

In KwaZulu-Natal, landlords and estate agents perceive a stable supply rating, indicating that the potential shock of the pandemic on market strength was cushioned by a recent history of limited supply of new rental property stock. Though the demand rating has diminished over time, it continues to support sufficient demand for the available supply and has been able to maintain a positive escalation. Vacancies in the North Coast area have increased to 17.2% due to limited new supply.

Supply has not kept up with demand in the Eastern Cape, keeping occupancy levels high and leaving landlords with a low 4.3% vacancy rate. The Eastern Cape has thus managed to implement positive escalations of 2.9%.

Our research indicates that though tenant payment recovery is painfully slow, landlords can take comfort in the fact that 78.38% of tenants are back in good standing for the first quarter of 2021. Tenants in good standing are those whose accounts, including any arrears, have been settled in full by the 30th of the month.

Tenants in arrears with a salary are still recovering from their partial, full or temporary loss of earnings during the hard lockdown in the second quarter of 2020. A total of 13.9% of tenants are stuck in the partial payments category.

These trends are a reminder that property is an illiquid asset with monthly holding costs that need to be serviced. The persistently high and increasing rate of unemployment remains the biggest threat to the recovery of the residential rental market, particularly as household size is expected to increase as co-living becomes a solution for affordability while tenants get back on their feet financially.

For investors, low interest rates have arguably provided property owners with a false sense of affordability. All we need are a few interest rate hikes to push up bond repayments and the dynamic is likely to shift once again in the buyer’s favour.

• Dickens is CEO of TPN.