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Tenants still battling with rent arrears

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Financial impact of the lockdown hits tenants hard as they are particularly sensitive to job losses and reduced income.

About 40% of South African tenants are still in arrears with their rental payments as unemployment and the financial impact of the hard lockdown continue to bite.

Many of these tenants are slowly clawing their way back through payment plans or grace periods given by their landlords – and are thus considered to still be in “good standing” – but just over a quarter (25.44%) are making only partial payments or not paying at all, according to TPN’s Residential Rental Monitor for Q3 2020.

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It is no secret that many homeowners are also struggling to meet their mortgage repayments but the tenant population of the residential market is more sensitive to economic trends. And this, says TPN managing director Michelle Dickens, means that their employment and income levels are harder hit.

“(Homeowners) also feel the impact of job losses, but are more sensitive to movements in interest rates.”

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Tenants renting properties for less than R3 000 a month have the weakest rental payment performance and are likely to recover the slowest as they are the most “financially fragile” and have “significantly fewer financial buffers with which to weather any storms that translate into income loss” or unexpected increases in household expenses.

By comparison, tenants renting properties above R25 000 have the second poorest rental payment performance but this is more than likely a result of being financially over-committed, says the TPN report, to which FNB property economist John Loos contributed.

The R7 000 to R12 000 monthly rental segment is at the top end of the performance spectrum in Q3 and has been there since 2013. The R12 000 to R25 000 a month segment is the second-best performer.

Provincially, Western Cape tenants continue to outperform those in Gauteng and KwaZulu-Natal.

“However, the latter two provinces showed some very slight improvement in the third quarter, after the sharp second-quarter drop, whereas the Western Cape showed further weakening.”

Citing PropStats data, Ben Shaw, chief executive of digital rental agency HouseME, says provincial datasets do not show drastic deviance from the national average performance – and that nowhere in the country has tenant performance recovered to pre-lockdown levels of collection/payments.

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“PayProp’s recent report shows arrears as an average percentage of rental amount at more than 102%, and more than 22% of tenants are reportedly in arrears… Job security is the most significant factor in understanding this risk going forward and, as the economy recovers, we believe that tenant performance will improve.”

In addition to landlords being under pressure from poor tenant payment performance, they are also challenged by slowing rental price growth.

Monthly rents continue to trend down, says Shaw, noting that, on average, South Africa has become a cheaper place to rent  this year.

“Consumers are struggling, affordability is low, and we, therefore, expect monthly rental to continue to trend down for a further 12 months.”

Johette Smuts, head of data and analytics at PayProp South Africa, says it is “not at all surprising” to see rents dropping and high levels of arrears due to the impact of national restrictions on tenants’ pockets.

“If we consider rental price growth and tenant arrears together, it’s clear that while the worst might be over, it will take some time for the market and economy as a whole to recover.”

In Q3, national rental growth measured just 1.5%, the lowest quarterly year-on-year growth rate since the index was launched in 2012, she says.

“The moving average trend line, which shows the underlying growth trend more clearly in the midst of short-term variations, has been pointing downward for the whole of the past year.

“Before that, rental growth mostly trended ‘sideways’ – that is, neither up nor down – since the beginning of 2018.”

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Smuts adds: “We don’t expect to see growth rates recover within the next year since both the economy and the rental market will need time to bounce back.”

PayProp’s latest rental index notes that the average monthly rentals per province, and their growth rates from Q2 to Q3, are:

Free State: R6 455 🡫 4.1% from 4.7%

Eastern Cape: R6 213 🡩 6.6% from 3.6%

KZN: R8 123 🡩 0.9% from -1.6%

Gauteng: R8 432 🡫 3.2% from 3.6%

Limpopo: R6 881 🡫 3.9% from -3.7%

Mpumalanga: R7 442 🡩 1.9% from 1.1%

North West: R5 147 🡫 0.2% from 3.9%

Northern Cape: R7 979 🡫 0/2% from 3.7%

Western Cape: R9 041 🡫 0.4% from 0%

Rental properties in suburban areas further away from the city are often priced more affordably, Smuts says, and more tenants are likely to consider moving further out. Echoing this, Shaw says HouseME is seeing an increased interest in larger properties further away from traditional work hubs.

“This follows two trends: working from home has necessitated personal office space and larger family rooms as children are at home for longer periods.”

There is also a drop in demand for properties close or in cities, where the need to come in to work has tapered off.

“These trends are certainly going to hold in the short term, and many businesses are providing for a fully remote workforce in the future. However, other companies are gradually phasing in a return to work – which should see demand for properties near work return.”

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