Q3 TPN Rental Report: rental escalations are slowing in response to price-sensitive consumers
Category Industry News
TPN Credit Bureau
Despite a tough economy and constrained household budgets, for the third consecutive quarter, more tenants are paying their rent, and the number of tenants in good standing has continued to improve.
Credit Bureau TPN's third quarter Residential Rental Monitor reveals that in the first quarter of 2023, 81.86% of tenants were in good standing. This improved to 82.73% in the second quarter and 83.34% in the third quarter.
A tenant is classified as in good standing if all their rental obligations are met by the end of the month. These include tenants that paid on time (POT), paid within a grace period (GP) afforded by landlords, or paid late (PL) but still ensured they covered their rental payment before month end.
Waldo Marcus, Industry Principal at TPN Credit Bureau, says residential property investors are being impacted by the high cost of capital, maintenance, security, municipal charges, and the downward pressure on rental returns. However, although margins are under pressure, the fact that investors have received more of their rental on time will have eased some of their cashflow strains.
The low-end and high-end of the market is experiencing late payments
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 the second quarter to 81.94% in the third quarter. 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."
Mid-range rental demand is growing
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. This year alone, the percentage of tenants in this rental value band has 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 the first quarter of 2020, it accounted for 1.8% of the rental market but declined to 1.2% in the third quarter of 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 the second quarter to 4.84% in the third quarter, 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 by province
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 dropped from 8.8% in the second quarter to 6.85% in the third quarter, providing property owners a marginal opportunity to escalate rentals. The Western Cape is the outlier with the lowest vacancy rate of all provinces. Rentals escalated from 6.47% in the second quarter to 6.56% in the third quarter.
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.
Regarding provincial tenant performance, good-standing tenants in Gauteng increased from 81.9% in the second quarter to 82.47% in the third quarter, with a small decrease in the number of tenants that did not pay. KwaZulu-Natal's good standing dropped from 76.95% in the second quarter to 76.45% in the third quarter. 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%, which is marginally down from the second quarter'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 suffer as tenants default on their lease obligations," he concludes.
Author: Property Professionals
