The South African Reserve Bank cut the repo rate to a record low of 3.75% since the beginning of this year, with the hope that this will help alleviate the anticipated sharp contraction in South Africa’s economic activity.
With welcomed relief for financially stressed consumers as we start the slow easing of hard lockdown restrictions, will this be enough to kick start our economy? And, how will the residential rental property look following Covid-19’s aftermath?
Ben Shaw, CEO of residential property disruptor HouseME, says that a global recession is inevitable post-Covid-19: “We’re not sure whether the shock will prove to be systemic or not. Stimulus packages may assist economies in the short-term, but the slowdown – particularly in emerging markets – is too widespread to be contained to just a few months“.
Despite this, Shaw believes that South Africa’s real estate fundamentals remain strong, as there’s much appeal for physical assets that cater to the needs – not wants – of a growing population in these uncertain times: “Property is a far more resilient asset class than other industries and provides the opportunity to unlock value for foreign direct investment when investor confidence returns. Buying or renting South African property in GBP or USD right now offers once-in-a-lifetime opportunities,” he says.
However, population growth – which should be a driver of increased value – is countered in South Africa by poor affordability, over development and a massively damaged economy. Because of this, retail and commercial sectors are expected to be hit particularly hard as businesses roll out likely-irreversible remote work policies, and residential units are increasingly used for work purposes for many of the middle class.
Added to this, Shaw says that the economic contraction will drastically lower disposable income for buyers and renters, which places pressure on bonded landlords: “Theoretically, we would see capital flow out of leveraged assets into more liquid instruments and in order to mitigate this to some degree, the repo rate reductions are a proactive measure to assist landlords in meeting their loan obligations, the majority of whom are bonded,’ he says. ‘For those who are no longer able to afford their bonds, or for those for whom liquidity is more important than their property investment, we expect to see an increase in properties available for sale.”
This means that well-capitalised buyers will find great opportunities to acquire assets at discounts to 2019 prices, but they will likely be wary of even these pricing levels, as Shaw believes we haven’t hit the bottom of the economic curve yet. “Sellers may drop prices further to entice transactions, which will result in lower property valuations, which in turn has a knock-on effect on rental prices.”
Yields as a percentage of property value stay relatively consistent in the medium-term, which means that as prices drop, rentals do too. Driven by this, as well as economic pressure on the consumer, Shaw believes rentals for tenants will become cheaper and more appealing for the next few years. He notes that many Airbnb hosts are already capitalising on this as their units would otherwise stand vacant. This increase in supply is again likely to pull prices down, with the result that HouseME predicts an average rental reduction of 10% over the next twelve months.
With liquidity and stability of income expected to be the two most important drivers of decisions in the coming years, Shaw advises landlords to accommodate tenants who are under pressure from the COVID-19 pandemic.
“Our advice is to be as negotiable as possible to assist your tenant: retention is key as finding new tenants will be challenging in the current lockdown period and for some time afterwards. Some options other than to reduce the rent is to offer a longer time to repay, or a one-month payment indulgence which must be repaid by the end of the lease. It’s also worth both landlords and tenants investigating alternative rental platforms that offer lower rental fees and additional financial benefits. We believe this is the reason that HouseME has grown its number of new listings by 20% within a month.“
With technology coming to the fore as an enabler of industry, HouseME has experienced a significant uptick in adoption of its platform.
“Lockdown has forced rapid behavioural change towards online systems that are safer and more efficient. Whilst real estate value may fall, transactional volume will not as people still need places to live.” concludes Shaw.