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Tuesday Sep 08, 2020

Rental market impacted by several factors

With the lowest rental growth since 2004, the second quarter of 2020 has certainly highlighted the far-reaching economic impact of Covid-19, however the steady decline seen this year cannot only be solely attributed to the pandemic as other key factors have significantly contributed to the downturn.

So says Lorraine-Marie Dellbridge, Rental Manager for Lew Geffen Sotheby's International Realty, Cape Town Southern Suburbs, adding that the Western Cape market has had additional pressure in the form of a drought which severely hampered tourism and, thereby, the rental market.

"The number of properties coming onto the market have been steadily increasing for about two years now since the height of drought when low tourist numbers forced many Air bnb property owners to enter the long-term rental market.

"Additionally, a simultaneous decline in semigration significantly shrank the long-term tenant pool whilst stock continued to increase, resulting in a flood of properties into the market, many of which were still priced for a bullish market.

"To further compound matters, a lot of the holiday apartments have been available impeccably furnished and equipped - and at considerably lower prices." 

Dellbridge cautions that when landlords hold out for unrealistic rentals, they are actually losing money as the property is not earning anything while it is empty, so over a year it will yield a much smaller return than if the property had been rented out immediately at realistic, market-related rental.

"It also becomes a liability rather than an asset as you will still have to pay all municipal fees, such as rates, water and electricity levies and in some cases levies for sectional title. 

"Therefore, in order to recoup just one month's loss of income means you will have to raise your price significantly, but if you aren't able to rent it out at the current price chances are you won't get more for it."

The record low interest rate has also affected the rental market, says Dellbridge, as prospective tenants who can qualify for bonds are taking advantage of this excellent window of opportunity.

"Many have come to realise that they now can enter the market as owners instead of paying off someone else's bond."

However, Dellbridge says that one cannot ignore the affordability factor which was already becoming an issue well before the pandemic struck.

"The cost of living has been steadily rising in an increasingly subdued economy and during the last two years we have seen more and more tenants give notice to move to cheaper accommodation.

"They are not necessarily downsizing though, merely moving to nearby areas where average rental prices are cheaper yet properties are still on par with the more expensive area in which they were living.

"And when one considers that even a R2000 reduction in monthly rental gives you R24 000 back in your pocket after a year, for many the inconvenience of moving is well worth it."

Dellbridge believes that this is one of the main reasons that 23% of homes priced above R25 000 are now vacant, according to a recent report by the TPN Credit Bureau.

"Many landlords don't realise how much the market has shifted in recent years – in 2015 there were often 10 at least keen applicants per listed property and now that figure is reversed and tenants are spoilt for choice."

According to the latest Payprop index, the year-on-year (YoY) rental growth rates for April, May and June were 2.3%, 1.1% and 1.6% respectively, although the national average rent in Q2 came in at R7 746, up R115 from R7 631 the year before.

And, although there has been a definite increase in tenants in arrears since March, it's encouraging to see that Payprop stats show that the percentage of tenants in arrears is flattening out in most provinces.

"It comes down to communication," says Dellbridge, "and the fact of the matter is that most people are back at work but not all are earning the same as they were, so if tenants don't communicate with us timeously about any difficulties they are having, agents and landlords have no choice but to follow the legal process. 

"Tenants who do communicate difficulty do still have to prove the fact, but that proof allows us to set up payment plans accordingly to suit both parties."
Ultimately, though, Dellbridge believes that the onus falls to landlords to maintain rental returns during these challenging times.

"Landlords who are more flexible about rental prices as well as factors like allowing pets will attract better quality tenants and are less likely to suffer the considerable losses of having a rental property vacant for months on end."

While the goal is to maximise return on investment, the rent should be set at the highest point that will easily attract tenants, and Dellbridge advises that the best way for landlords to determine a realistic rental price is through research.

"They need to see what is happening in their areas and compare their properties to those that are similar in offering. It's is also advisable to consult a reputable real estate agency with experienced and knowledgeable agents who can offer up to date advice with regards to the ins and outs of the rental arena in their area."


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