Demand for residential rental property in Q3 2021 remained weak, according to TPN Credit Bureau’s Vacancy Survey Q3 2021. CEO, Michelle Dickens, says that this is not a surprise, considering that the hard lockdown during Q2 2020 wiped out 14% of all jobs in South Africa.
Unemployment remains concerning at 34.4% translating into 1.4 million pre-pandemic jobs lost and the situation further deteriorated during Q3 2021 with an additional 375 000 jobs lost in the formal sector.
Dickens says that increased housing costs, water, gas, and other fuels, which account for 15.9% of household expenditure, as well as transport accounting for another 15.6%, is exacerbating the high rates of unemployment and combined, these factors drive tenant behaviour towards cost savings such as downscaling, co-habitating, or moving in with friends and family.
According to the TPN Market Strength Index, which is based on the perceptions of estate agents and landlords in the residential rental market, the demand for rental property in Q3 2021 was only slightly higher than ‘average’. Rental property supply, however, remains at pre-pandemic highs.
Weak tenant demand, coupled with an over-supplied residential rental market, has played out in high vacancy rates.
However, she says that vacancy rates may have peaked given that they dipped to 10.66% during Q3, trending downward from 13.15% in the previous quarter.
Average monthly earnings in the formal sector increased 9.7% year-on-year in May 2021, according to Quarterly Employment Statistics. Higher salaries, however, does not always mean more disposable income, particularly with the Consumer Price Index (CPI) on the increase at 4.9% – and creeping higher. Consumers now need to factor in the higher cost of interest with the first of SARB’s 25 basis point increases taking place recently and more predicted for 2022 and 2023.
Residential rental prices appear to have also reached the bottom of negative escalation and are slowly starting to rise into positive territory at 0.4% in Q3.
The only segment of the market to have escaped negative escalations is the low value rentals category (below R3 000 per month) but its current escalation of 1.26% is on a downward slope. The most impacted category by persistent high vacancies, low value rentals below R3 000 per month experience 12% vacancies while those between R3 000 and R4 500 are 13.32% vacant.
From a provincial perspective, the Western Cape continues to suffer double digit vacancy rates at 11.07% while Gauteng, KwaZulu-Natal and the Eastern Cape are at 9.84%, 9.85%, and 7.13% respectively.
Most provinces (except for the Western Cape) have not seen a significant recovery in residential building activity which nearly halved year-on-year from 45 342 completed flats and houses in 2019 to 24 178 in 2020 with only 22 270 completed properties during the first nine months of 2021. Gauteng, which traditionally experiences the most building activity, saw new residential buildings completed reduce from 25 238 in 2019 to 10 373 in 2020 and only 8 793 recorded to date in 2021. The Western Cape bucked the national trend, outperforming 2020 numbers in the 2021 year to date.
What is becoming increasingly apparent is that the interest rate hiking cycle is likely to apply further pressure to tenants in good standing in the next six to nine months. Landlords will have to weigh up metrics such as vacancies, escalation, and delinquency as they look to maximise profitability.
