The 2016 Residential Rental Forecast

Rental income is a great source of passive income for landlords, and the latest quarterly PayProp residential Rental Index indicates that there has been impressive growth in the over R10,000 rental bracket. However, it also illustrates that 77.4% of all rentals remain below R7,500.

At present the Rental Index points to the Northern Cape being the most expensive province to rent in with an average rental of R7, 219, followed by Gauteng at R7,090 and the Western Cape at R6,979. While the higher rental bracket has seen some growth the under R7,000 market is still the most active. PayProp’s data also shows that the average residential rental rate in South Africa shows a downward trend that sits at just above R6,500 per month.

Tenants Come under Pressure

“Due to concerns about affordability (in terms of maintenance, municipal rates and the rising repo rate) and difficulties with obtaining a home loan, many South Africans are opting to rent a property and, while there have been rental increases, you can see that the average rental rate is still quite low. PayProp is now also indicating that rates are in a downward cycle”, says Bruce Swain, MD of Leapfrog Property Group. 

PayProp Group CEO, Louw Liebenberg also points out that; “Over the past three quarters a concerning trend has been emerging that shows tenant incomes declining while debt repayment commitments have been increasing. As a result, tenants are currently spending close to 37% of their income on repaying debt, as opposed to 32% at the beginning of this year (otherwise known as the debt repayment ratio)”. Michelle Dickens, MD of rental credit bureau TPN adds that operating costs, including municipal tariff hikes for items such as electricity and waste removal — which are rising quickly in major metros — are being passed on to tenants.

Harry van der Linde, Manager at Leapfrog Moreleta Park reveals that the rental markets have been different over the last four months with larger places remaining on the market for up to two months; “In some cases we have to lower the asking price to get properties rented out. This was never the case previously. Also, existing tenants are finding it difficult to meet their obligations and it’s taking longer to collect the rentals due”.

Adding to the increasing costs could be the proposed sectional title reserve fund legislation that calls for an increase in levies to build sectional scheme reserves.

“With the increasing operational costs expected in 2016 our advice to tenants is to do their homework carefully before committing to a rental agreement and for landlords and rental agents to do their due diligence in terms of credit checks and risk assessments before renting to a new tenant”, advises Swain, “Tenants who are already feeling the pinch would also be wise to speak to their letting agents or landlords sooner rather than later to avoid falling into arrears”.