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Monday Sep 06, 2021

Rental yields fall as affordability remains an issue

Property market trends have a significant influence on the residential rental market. When rental values increase, so too does the gross yield. When rental escalations are negative, gross yields weaken. Somewhat counter-intuitively, when property prices increase and rental prices remain flat, gross yields deteriorate.

Income yield is an important metric in the property market, because vacancies and non-paying tenants mean lost rental income and ultimately less profit for landlords. Of concern currently is the fact that in many provinces of South Africa, yields are being driven down as tenant affordability continues to be an issue.

The residential rental market was hard hit during the pandemic. Many former tenants sought refuge with family and friends after facing income losses. As a result, the residential rental market faced the twin challenges of rising house prices as pent-up demand for property ownership was unleashed and negative rental escalation.

Tenants in good standing – defined as those who have paid in full and on time – dropped to 73.5 percent in the second quarter of last year. This has slowly improved quarter-on-quarter, with 80.34 percent of residential tenants in good standing by the second quarter of this year, according to the latest TPN Residential Rental Monitor.

Despite this recovery, and although paying rent is a top priority for residential tenants, affordability remains under pressure. This is made worse by above-inflationary increases in utilities and municipal charges, the fact that overall rental escalations are back in positive territory, and growing unemployment.

South Africa's official unemployment rate reached a record high of 34.4 percent in the second quarter of this year, and it is predicted that this figure will increase as the impact of July's unrest begins to reflect in the unemployment data.

Although most major provinces have seen an improvement in tenant payment behaviour above 80 percent, Gauteng lags with only 78.67 percent of tenants in good standing. Negative escalations in the province continued for the third consecutive quarter. However, if delinquent tenants and negative rental growth are risk indicators, then gross yield is the reward and, in this respect, Gauteng takes top honours with gross yield at 11 percent.

Landlords in the Western Cape and the Eastern Cape are clearly more riskaverse as illustrated by the fact that their tenants are ahead of the curve with 84.78 percent and 84.15 percent, respectively, in good standing.

However, after a year of negative rental escalations, the Western Cape is experiencing rising vacancies at 14.38 percent. The province, which historically outperforms the rest of the country as far as property prices are concerned and rental prices that struggle to keep up, is recording gross yields of 8.7 percent.

The Eastern Cape, on the other hand, has a low 4.28 percent vacancy rate coupled with strong demand, which has allowed it to maintain its positive rental escalation of 2.09 percent. As a result, the province's gross yield of 10.7 percent is seeing it punch significantly above the national average of 10.3 percent.

Although KwaZulu-Natal's tenant payment performance has improved to 80.08 percent, its vacancy rate has jumped to 13.95 percent, which means that it has only just achieved a double-digit gross yield of 10.1 percent.

The most sought-after residential rental properties are in the R4 500 and R7 000-a-month price band, with about a third (35 percent) of all lease agreements made up of this segment. The majority of tenants in this segment (82.76 percent) are in good standing, with 67.67 percent paying on time. Although only 4.94 percent failed to make payments, 10.58 percent paid late, indicating that cash flow remains constrained.

Landlords with properties in the lower end of the market, below R3 000 a month, continue to struggle, with 16.08 percent of tenants unable to pay rent and a further 15.72 percent of tenants making only a partial payment. The vacancy rate of 15.19 percent in this segment of the rental market indicates that landlords would prefer no tenant to a defaulting tenant.

The traditional sweet-spot segment are monthly rentals between R7 000 and R12 000. This segment continued to perform well in the second quarter of this year, with the majority of tenants (86.32 percent) in good standing and close to 75 percent paying on time. Of concern, however, is that affordability is acting as a key constraint in this segment, while rental escalation remains in negative territory of -1.03 percent.

While lower-income earners were hardest hit by the pandemic, middleand high-end income earners also appear to be under financial pressure, according to research by the National Income Dynamic Study: Coronavirus Rapid Mobile Survey and the Liberty Institute of Strategic Marketing at UCT.

Given the slow pace at which the economy is growing and South Africa's rising unemployment numbers, all indications are that affordability will continue to be the biggest constraint impacting the local residential rental market in the third and fourth quarters of this year.

Cape Argus 3 Sep 2021 MICHELLE DICKENS Chief executive of TPN Credit Bureau


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