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Western Cape’s residential rental market reverts back to historically low vacancy rates

A sharp decline in vacancies points to improved confidence and a residential rental market which is starting to normalise according to TPN Credit Bureau’s Residential Vacancy Survey for Q1 2022 – good news for landlords who have been battling consecutive quarters of de-escalation.

While demand for residential rental property has been waning since 2016, the pandemic, coupled with other economic shocks, has resulted in a depressed Market Strength Index for eleven consecutive quarters from Q2 2019 to Q4 2021.

The index is a measure of market supply and demand of residential rental property. Market equilibrium is reached at 50 points, at which point demand and supply are on equal footing, indicating the potential for reduced vacancy rates and rental escalations.

Now, the TPN Market Strength Index is finally back in positive territory at 52.9 points, after the three-year period in negative territory, and the upward trend in the index’s demand strength is likely to assist landlords recover from below inflation escalations that have negatively impacted returns in recent years.

However, while the lower national vacancy has recovered from the double-digit vacancy rates seen in 2021 – 13.31% in Q1 of 2021 compared to 8.26% in Q1 of 2022 – it has yet to return to the pre-pandemic level of 7.47% achieved in Q1 of 2020.

Business confidence has seen a small uptick with the Bureau of Economic Research’s (BER) Business Confidence Index increasing from 43 in Q4 2021 to 46 in the Q1 2022. Despite this improved business confidence, slow economic growth, high rates of unemployment and financially constrained households continue to be a challenge in the property sector, slowing down recovery.

From a provincial perspective, the vacancy rate is mixed with growth in supply of rental housing in some provinces limited a return to pre-pandemic vacancy levels.

In Gauteng, home to nearly half of all tenants in South Africa, a surplus of additional rental housing stock is slowing the province’s vacancy rate recovery. According to Stats SA, the formal rental housing market increased in Gauteng from 40% to 48% in 2020. The province’s vacancy rate peaked at 14.66% during Q4 2020 but it has since hovered slightly above the national average vacancy rate of 8.26% to 8.69%. Its slower rate of recovery is being exacerbated by a higher rate of office buildings being converted into rental housing accommodation as commercial real estate remains under pressure. However, negative rental escalations that have been a trend in the province for the past five consecutive quarters, are back in positive territory.

In the Western Cape, tenant demand continues its positive trajectory, and it is reverting back to historically low vacancy levels last seen in 2016 and 2017. Its vacancy rate peaked at 14.38% in Q2 2021, recovering to 2.9% in Q1 2022. Its percentage of rental properties relative to the percentage of total households is stable at 38%, indicating an increase in owner-occupied properties. Rental escalations have been under pressure since 2019 and it was one of the only two provinces that experienced de-escalation for more than four consecutive quarters between Q3 2020 to Q2 2021. Encouragingly, rental escalations are back in the ‘green’ in 2022.

KwaZulu-Natal bucks the declining vacancy rate trend with a sharp increase in vacancies during Q1 2022 to 13.26% from 9.34% in Q4 2021, which is likely the result of the impact of the July 2021 civil unrest and riots. Pre-Covid-19, the province had a lower vacancy rate compared to the national average.

Over the past six years, the Eastern Cape has maintained the lowest vacancy rate of all the provinces at 6.3% – more than 2% lower than the national average for the same period. This lower vacancy rate is partially attributed to its reduced number of rental properties and its vacancy rate has remained largely static in 2022 compared to 2021.

After two years of strained escalations and rapidly increasing costs in the form of rates, taxes, maintenance and utilities, landlords will be looking to above inflation escalations to recover. This is likely to result in prime, high demand areas achieving above average rental growth. However, other pockets of the residential rental market will continue to see high levels of vacancies due to high supply or a lack of demand that is linked to unusual economic stressors.