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Vacancies an ongoing challenge for landlords

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There is a surfeit of rental flats with tenants being hard hit financially and others taking advantage of low-interest rates to buy their own homes.

Demand for rental flats is plummeting in South Africa and landlords who are fortunate enough to find tenants will probably have to drop their rents. The bleak reality for this sector of the property market is not only a result of weak tenant finances but also an oversupply of rental properties, as well as an increase in the number of tenants opting to take advantage of the current low-interest rates to buy their own homes.

Flat vacancy rates reached 11% in the third quarter of 2020, a climb from 7% in the second quarter, according to data from Rode & Associates. The Q3 figure for 2019 was 6%. Also, figures from Stats SA show that rental growth in Q2 of this year slowed to 2.8%.

In the Q3 Rode’s Replandort on the State of the Property Market, Erwin Rode says rents are “heading south” due to the oversupply of flats linked to “huge increases” in new rental stock in 2018 and last year, and weakening demand from tenants who have been hard hit financially. Rising vacancies are being seen in all major cities, with the rates in double digits. Durban (19.1%) and Cape Town (16.7%) are the worst off.

 

“We warned about the prospect of further rising vacancies in the previous Rode Report as tenants opt for more affordable apartments or move in with family and friends to cut costs. Job losses are at record highs and many South Africans have also experienced salary cuts.”

He adds that some “financially sound” tenants have opted to buy their own flats or houses as the sharp decline in interest rates makes the monthly cost of owning versus renting “now closer to equilibrium”. In Cape Town, the market is “flooded” with vacant properties, says Mic Brand of Dogon Group Rentals.

The city is not getting its usual influx of foreign visitors and many owners are letting their properties on a long-term basis until tourism picks up. “The pandemic has meant some companies could not afford full salaries and employees took a salary cut to keep their jobs. The troublesome UIF claiming system is not helping matters. This means tenants are requesting rent reductions.

“For some landlords this is possible, but if you have a heavily bonded property, plus the need to pay rates, taxes and levies, a rent reduction is not always financially viable and the tenant then cancels the lease and moves out.”

Brand says tenants unable to downsize any further have been forced to move in with family and friends. The increase in apartment vacancy rates has been seen throughout the country by the Rawson Property Group, but national rental manager Jacqui Savage has noted an increase in sales in the lower price brackets over the past three months.

“With the interest rates being at such a low, we have noticed that our tenants in the R7 000 to R11 000 rental range are now taking advantage of these rates and buying homes rather than paying off someone else’s bond.”

The group’s regional sales manager, Craig Mott, says more than 70% of its current buyers are first-timers. “They are starting off small and affordability is their main priority. We find that those with steady employment and a good financial track record are taking up properties that they can afford and banks are eager to offer them finance.”

Savage says the trend of moving in with family and sharing living costs is also being seen but that this was happening pre-Covid, due to the high cost of living.

Mott agrees: “The multi-generational living trend was in existence way before Covid-19 hit. In some cultures, this was a standard procedure, but due to the economic challenges over the past few years and high unemployment rates, we saw more people moving in with family as it made financial sense to combine resources and share living costs.”

This increase in multi-generational living is being seen throughout the country, agrees Adrian Goslett, chief executive of Re/Max of Southern Africa. “This means demand for stand-alone rental properties is shrinking and the demand for properties with semi-detached flatlets is on the rise.”

And, as pandemic restrictions ease and the country enters the post-lockdown period, he predicts that the trend to multi-generational living will continue. Citing preliminary data from the Deeds Office obtained by FNB, Rode says there has been a strong increase in transaction volumes by buyers under 35. This age group forms the core of tenants in the country.

The good news for the oversupplied flat rental market though is that the number of new completed rental units has “declined considerably” since the Q2 of 2019. “Developers are also planning to build less,” Rode says.

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