Downturn hits home for landlords
Property owners will have to brace themselves for lower returns and rising vacancies as more tenants battle to pay their rent
Those landlords hoping to push up rentals on buy-to-let flats and town houses at the usual 8%-10% when leases come up for renewal this year are in for a rude shock. The market has weakened so much that rentals in some areas are down more than 30% year on year.
This is particularly true for Cape Town, where buy-to-let owners have been forced to either lower their asking rentals or face the prospect of sitting with empty properties.
That signals a sharp reversal of fortunes for Cape Town landlords. This time last year, rentals in the Mother City were still testing new highs, and demand for properties to let seemed never ending.
Seeff agent Imtiaz Adam says the sectional title rental market in Cape Town’s southern suburbs has softened to such an extent that two-bedroom units in popular complexes in Claremont that easily fetched R15,000/ month last year are battling to find tenants at R11,000/month. Even the lower end of the market is feeling the pinch. Adam refers to Plumstead, for example, where one-bedroom apartments that rented at R7,500/month a year ago now only bring in R6,500/month.
He says many landlords are still unaware of the market shift, which he believes has been driven largely by affordability issues on the back of the overall economic decline. "The lag effect of the economic decline is only now being felt in the rental market. The rental rates tenants are able to pay has declined notably," he says.
Cape Town’s well-heeled Atlantic seaboard suburbs are experiencing similar price pressures. The area has been dealt a double whammy: a drop in demand as well as an increase in stock levels.
Seeff Atlantic seaboard sales and rental manager Natalie Muller says rental demand is down about 10% this year, while the number of properties to let has increased noticeably. That’s primarily because some owners who were not able to sell their properties have placed them on the rental market.
The upshot, says Muller, is that many landlords’ asking prices are now 20%-30% above what tenants are prepared to pay. For example, a one-bedroom, one-bathroom furnished apartment in Green Point that Seeff had let for R16,000/month until the end of April, hasn’t had any offers above R12,000/month.
The Cape Town rental division of Re/Max reports a similar situation. Re/Max letting specialist Grant Rea says there has been a significant shift from October to a rental market that is oversupplied. "For the first time in seven years, Cape Town landlords now face vacancies in their rental properties," he notes.
He says there is no need for panic, however, as "everything rents at the right price".
There are more than 4,000 rental properties available in the City Bowl and Atlantic seaboard suburbs, according to Rea. He ascribes the oversupply to a combination of factors: a rush of new housing developments coming on stream; a slowdown in upcountry residents "semigrating" to the Cape; unrealistic asking rentals; and the subsiding of the hype around Airbnb. Cape Town’s water crisis has no doubt also not helped.
Rea says many landlords who were letting their units on a short-term basis through Airbnb have found that the returns don’t justify the time and effort involved. In addition, increased competition in the Airbnb market has placed pressure on rates.
"Many [landlords] have returned to long-term letting, which has flooded the rental market as a result," he says.
What it means
The increase in vacancies is good news for prospective tenants, but it’s less so for property investors, who can expect lower rentals
Affordability is also important. Rea says income growth has not kept pace with rising living costs, which have forced tenants to downgrade to cheaper rental properties.
While a weaker rental market is, of course, good news for prospective tenants who may be able to negotiate lower rentals, it’s not great for property investors. Landlords who have been used to achieving gross yields (rental income as a percentage of market value) of about 6%/year can now expect closer to 4.5% or 5.5%/year, says Rea.
The Cape Town rental market may have been hardest hit, but latest statistics from rental processing firm PayProp show that most other provinces have also experienced a slowdown in rental growth this year. Only three of SA’s nine provinces did not record a slowdown in the first quarter (year on year). These are the Free State, the Northern Cape and KwaZulu-Natal. However, growth rates in all three were in the low single digits.
The lag effect of the economic decline is only now being felt in the rental market. The rental rates tenants are able to pay has declined notablyImtiaz Adam
As a result, the average rental growth recorded for SA slowed to 3.8% in March, down from more than 8% a year earlier — the lowest year-on-year growth recorded by PayProp since 2011. The bulk of the rental properties included in PayProp’s survey were priced from R5,000-R7,500/month.
More worrying, says PayProp head of data and analytics Johette Smuts, is that the number of delinquent tenants is on the rise. The national percentage of tenants in arrears increased from 18.5% to 23.2% in the 12 months ending March. That means one in four residential tenants does not pay his or her rent in full every month.
Smuts attributes the rise in rental arrears mainly to tough economic times. "Tenants who are in arrears are on average almost one full month behind with their rent. This is the trend we see for every province."