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Average SA Residential Rent Up By 3,4% To R8 175 - 18,1% Tenants Still In Arrears

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Average SA Residential Rent Up By 3,4% To R8 175 - 18,1% Tenants Still In Arrears

In 2022, the rental market continued to recover from the low rental growth rates recorded in most of 2020 and 2021 because of the global pandemic.

However, ongoing recovery and rising rental growth rates cannot be guaranteed as we move into 2023, as higher interest rates, persistently high levels of inflation and a struggling economy all affect tenants' ability to pay higher rents. Although interest rate increases are commonly used to curb inflation, other factors - like the high price of globally-traded commodities - are keeping prices stubbornly high. More interest rate increases are forecast for this year, as is a possible recession.

Higher interest rates make it less affordable for tenants to buy properties, which increases the demand for (and prices of) rental properties.

Average national rent increased by 3,4%

The PayProp Annual Market Report for 2022 shows that the average national rent increased by 3.4% year on year from Q4 2021 to Q4 2022. This amounted to an increase of R268 to R8 175 over the 12-month period.

Johette Smuts, head of data analytics at PayProp, says rental growth has rebounded impressively over the last five quarters since Q3 2021, when year-on-year growth was just 0.2%. "We have reached a very positive milestone in that rental growth has now recovered to pre-pandemic levels. It is now higher than the 3.2% recorded in Q1 2020."

Improvement in national rental arrears

In Q4 2022 only 18.1% of tenants were in arrears, which is significantly lower than the Q2 2020 peak of 24.9% - just after lockdown was first announced. Although the average size of tenant arrears as a percentage of one month's rent also declined during the year, there was a slight increase again towards the end of the year from 77.4% in Q3 to 78.2% in the last quarter. This was still lower than the pre-lockdown figure of 78.7% recorded in Q1 2020.

Landlord Risk - Tenant Credit Risk - No reprieve for tenants under financial pressure

Nationally, 28.5% of tenants presented a high risk during the final quarter of 2022. That was an increase of 4% from 24.5% the year prior. In the same quarter, 18% of tenants had a major delinquency against their name, up 1.2% from Q4 2021. The average credit score also worsened slightly over the past year.

"During the last quarter of the year, tenants across the country spent an average of 46.6% of their net income on debt repayments, including subscriptions such as cellular phones. Another 29.1% was spent on rent, leaving tenants with only 24.2% of their income to pay for important elements like food and school fees," says Smuts.

Prior to the COVID pandemic, SA tenants' debt-to-income ratio hovered between 42% and 48%. The low interest rate cycle of 2020 and 2021 helped bring this ratio down giving tenants the chance to save on interest-related repayments. But as inflation started to rise in mid-2021 and interest rates did the same in November 2021, so too did this ratio, which breached 48% by the beginning of 2022.

Smuts says that while 2022 brought a lot of good news for the rental industry as well as an ongoing recovery in the market, it's prudent to note that affordability challenges could curb a continued recovery in 2023. "Slow economic growth due partly to unreliable electricity supply, and interest rate increases are just two of the factors stretching tenants financially - the effects of which we'll continue to see throughout the year."

Since tenants' financial and credit risk can change over the course of the tenancy, Payprop recommend to perform a credit check on them when they renew - especially as the average tenant's financial position is currently getting worse.

Tenant Risk Categories

The riskiness of a tenant is measured by their credit score, which takes many factors into account. Different credit bureaus have different scoring mechanisms and bands.

Payprop categorises tenants into the following predefined credit score ranges:

Risk category                                 Credit score range

High risk                                               500 - 610

Medium risk                                          611 - 628

Low risk                                                 629 - 659

Minimum risk                                         660 - 750

2023 Trends Shaping the Rental Market

Price sensitivity remains top of the agenda for landlords and property managers in 2023, due to high inflation and steadily rising interest rates.

This trend will compound in future years as tenant income growth remains weak, unemployment levels remain high, interest rates continue to creep upwards, and inflation - particularly utility and municipal expenses - outpaces rental escalations

Here are the two main trends Payprop expects over the next year:

  1. Landlords affected by mismatch between rent escalation and inflation

The pandemic period had a dramatic effect on rental growth, which briefly turned negative (-0.3% YoY in November 2020). Meanwhile, inflation (Consumer Price Index or CPI) bottomed out at 2.1% in May 2020. Inflation has fallen back from its high but is still soaring at 7.2%. Meanwhile, rental growth has now recovered to pre-pandemic levels, but even with growth of 3.4% in Q4 2022, landlords are still being left behind. Landlords are also feeling the effects of increasing interest rates, while property expenses like levies and municipal charges continue to increase at higher-than-inflation rates. Continued rental growth escalation could give landlords more breathing room, but may be difficult to achieve while tenants' affordability is also being squeezed.

  1. Rising interest rates worsen tenants' debt-to-income ratio and drive down rental escalation

While most tenants are receiving below-inflation rent increases, each interest rate hike has put tenant affordability under increasing pressure as their debt obligations to credit providers increase. The average tenant now spends 46.6% of their net income on debt repayments, up from 45.3% in Q4 2021. The increasing cost of other essentials has also taken a bite out of tenants' ability to pay rent. All that is putting downward pressure on rents. In the most recent PayProp State of the Rental Industry Survey, 85% of agents reported "moving to a more affordable property" as one of tenants' top three reasons for moving, up from 58% last year. Prior to the COVID pandemic, SA tenants' debt-to-income ratio hovered between 42% and 48%. The low interest rate cycle of 2020 and 2021 helped bring this ratio down to 37%, giving tenants the chance to save on interest-related repayments. But as inflation started to rise in mid-2021 and interest rates did the same in November 2021, so too did the tenant debt-to-income ratio, which breached 48% by the beginning of 2022. This reinforces the overarching trend of affordability as the real driver behind the real estate market in 2023.

Provincial Statistics - Western Cape

Arrears

The percentage of tenants in arrears in the Western Cape decreased slightly during the year, from 14.9% in Q2 to 14.6% in Q4. The province had the lowest percentage of tenants in arrears in the country.

The average arrears size also decreased during the year, with tenants in arrears owing only 64.8% of one month's rent in Q4, down from73.4% in Q1. This was also the lowest out of all provinces during the last quarter.

Rent and rental growth

Year-on-year rental growth in the Western Cape remained modest during the year, ranging from 2.8% in Q1 to 3.4% in Q4, which was in line with the national average. The Western Cape remains the most expensive province in which to rent, with average rent increasing by R323 year on year to R9 737 in Q4 2022.

Author Payprop / Real Estate Investor
Published 02 Mar 2023 / Views -
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