Tenant demand for rental property in the third quarter of
2021 remains weak. This low demand is perhaps not surprising considering that
the hard lockdown in the second quarter of 2020 wiped out 14% of all jobs. Even
after some subsequent initial job recovery, the unemployment situation remains
concerning at 34.4%, meaning 1.4 million pre-pandemic jobs have been lost.
The unemployment rate deteriorated again in the third
quarter of 2021 with an additional 375 000 more jobs lost in the formal
sector.
Exacerbating the challenge of high rates of unemployment are
increased housing costs, water, gas and other fuels which account for 15.9% of
household expenditure, with transport accounting for another 15.6%. Combined,
these factors are a powerful incentive driving tenant behaviour towards cost
savings such as downscaling, co-habitating or moving in with friends and
family.
The TPN Market Strength Index is based on the perceptions
and experience of estate agents and landlords of the residential rental market.
Respondents are asked to rate whether the demand by tenants looking to rent is
strong (100), average (50) or weak (0).
They are asked a similar question regarding their perception
of whether supply of rental properties is strong (100), average (50) or weak
(0). The data is then aggregated to provide a demand rating and a supply rating
while the difference indicates the Market Strength Index where a result of 50
would suggest a market in equilibrium.
According to the index, demand for rental property in the
third quarter of 2021 is only slightly higher than average at 56. Rental
property supply, however, remains at pre-pandemic highs with a rating of 67.
Weak tenant demand coupled with supply highs translates into a Market Strength Index
of 44 which, in short, translates to an over-supplied residential rental
market.
An over-supplied rental market with weak tenant demand has
played out in high vacancy rates.
Encouragingly, vacancy rates may have peaked given that they
have dipped to 10.66% in the third quarter, trending downward from 13.15% in
the previous quarter.
According to the Quarterly Employment Statistics, the average
monthly earnings paid to employees in the formal sector increased 9.7%
year-on-year in May 2021. Higher salaries, however, don’t always translate into
more disposable income particularly as the Consumer Price Index (CPI) is on the
increase at 4.9% and creeping higher. Consumers also now need to factor in the
higher cost of interest with the first of the South African Reserve Bank’s 25
basis point increases taking effect last week. An upward cycle of increases is
predicted for 2022 and 2023.
Residential rental prices appear to have also reached the
bottom of negative escalation and are slowly starting to rise into positive
territory at 0.4% in the third quarter.
The only segment of the market which escaped negative
escalation is the low value rentals category below R3 000 per month.
However, this category’s current escalation of 1.26% is now on a downward
slope.
Low value rentals are the most impacted category by
persistent high vacancies. Rentals below R3 000 per month experience 12%
vacancies while those between R3 000 and R4 500 are 13.32% vacant.
From a provincial perspective, only the Western Cape
continues to suffer double digit vacancy rates at 11.07% while Gauteng,
KwaZulu-Natal and the Eastern Cape are at 9.84%, 9.85% and 7.13% respectively.
With the exception of the Western Cape, most provinces have
not seen a significant recovery in residential building activity. Residential
building activity nearly halved year-on-year from 45 342 completed flats
and houses in 2019 to 24 178 in 2020 and only 22 270 completed
properties in the first nine months of 2021. Gauteng, which traditionally
experiences the most building activity, saw new residential buildings completed
reduced from 25 238 in 2019 to just 10 373 in 2020 and only
8 793 recorded to date in 2021. The Western Cape bucked the national trend
and has outperformed 2020 numbers in the 2021 year to date.
However, fewer new buy-to-let properties may be a welcome
relief for struggling landlords burdened with high vacancies, particularly as
they are being forced to compete against larger players with highly available
price-reduced rental portfolios.
Activity in alterations has also been subdued. This,
however, is not a new trend. Post the global financial crisis, there has been a
persistently slow decline in the number of square metres added to existing
residential housing.
What is becoming increasingly apparent is the interest rate hiking cycle is likely to add further pressure to tenants in good standing in the next six to nine months. Landlords will have to weigh up metrics such as vacancies, escalation and delinquency as they look to maximise profitability.
To download the TPN Vacancy Survey Report for Q3 2021, click here.
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