News Research Residential

Property owners faced with the fine balance between residential rental vacancies and asking for higher rentals

Despite a tough economy and household budgets, more tenants are paying their rent for a third consecutive quarter with the number of tenants in good standing continuing to improve, according to TPN’s Q3 Residential Rental Monitor.

The data reveals that in Q1 2023 81.86% of tenants were in good standing – an improvement to 82.73% in Q2 2023 and 83.34% in Q3 2023.

A tenant is classified as ‘in good standing’ if all their rental obligations are met by the end of the month which includes tenants that paid on time, paid within a grace period afforded by the landlords, or paid late but still ensured they covered their rental payment before month end.

Residential property investors are being impacted by the high cost of capital, maintenance, security, municipal charges, and the downward pressure on rental returns, says Waldo Marcus, Industry Principal at TPN Credit Bureau. “However, although margins are under pressure, the fact that investors have been receiving more of their rental on time will have eased some of their cashflow strains.”

Although the longer-term overall good standing trend is positive, Marcus says the concern is with the lowest and highest rental value bands which fall short of national averages.

The highest rental value band – those paying R25 000 or more a month – saw a slight drop in the number of tenants in good standing from 82.15% in Q2 to 81.94% in Q3. Late payment of rental occurs most frequently in the R3 000 to R7 000 band, with 12.41% of tenants paying late. The next highest percentage of late paying tenants is the luxury rental property segment with properties costing over R25 000 per month where 11.56% of tenants pay late.”

An interesting shift revealed by TPN’s latest Residential Rental Monitor is the significant increase in the number of tenants paying R12 000 to R25 000 per month. Since 2016, the number of tenants in this rental band has almost doubled. In 2023 alone, the percentage of tenants in this rental value band have experienced three consecutive growth quarters. In comparison, the luxury rental market – defined as tenants paying R25 000 or more per month – has seen no noticeable change in the past four quarters. In fact, the luxury rental market has shrunk in recent years. In Q1 2020, it accounted for 1.8% of the rental market but has declined to 1.2% in Q3 2023.

Low interest rates during the pandemic made it very attractive for these tenants to purchase property,” explains Marcus. “However, given that interest rates are expected to remain high for the foreseeable future, we anticipate growth in this rental band. The big question now is whether cash-strapped consumers can afford these high-end rentals in the current economic environment.”

The monitor reveals that rental escalations continue to be on a slow upward trajectory, growing from 4.8% in Q2 to 4.84% in Q3, albeit that escalations remain slightly below September’s CPI of 5.4%.

The slowdown in the national average rental escalation rate indicates that price sensitive consumers have reached a precarious point within the rental market,” says Marcus. “Property investors need to be cautious when escalating rentals as consumers remain under pressure and vacancies could increase if rentals become unaffordable.”

Vacancies in the Eastern Cape and KwaZulu-Natal have remained high, requiring a balancing act between escalating rentals, and keeping properties occupied. Gauteng’s vacancy rate has dropped from 8.8% in Q2 to 6.85% in Q3 providing property owners with an opportunity to escalate rentals marginally. The Western Cape is the outlier with the lowest vacancy rate of all provinces. Rentals escalated from 6.47% in Q2 to 6.56% in Q3.

Marcus cautions, however, that rental growth in the Western Cape could slow down early next year as vacancies started increasing in the second and third quarters.

When it comes to provincial tenant performance, good standing tenants in Gauteng increased from 81.9% in Q2 to 82.47% in Q3 with a small decrease in the number of tenants that did not pay. KwaZulu-Natal’s good standing dropped from 76.95% in Q2 to 76.45% in Q3. The Eastern Cape’s good standing is above the national average at 84.25%. The Western Cape has the highest good standing rating of all provinces at 86.87%, although this is marginally down from Q2’s 87.08%.

While TPN’s data reveals that tenants are willing to navigate rental escalations for now, there is clearly a fine balance between residential rental vacancies and the ability of property investors to ask for higher rentals.

The data shows that where higher vacancies exist, lower rental escalations should follow. The alternative is that rental collections will start to suffer as tenants start defaulting on their lease obligations,” he concludes.