Indicators show some recovery after three-year decline in rental sector but planning is key
The Western Cape’s rental market, renowned for its record-breaking returns, has raised eyebrows with an uncharacteristically severe decline over the past three years.
With market strength plummeting from 85.57 to 45.32 since 2016 (TPN Rental Monitor Residential Sector Q2 2019), many rental investors are feeling justifiably pessimistic, says Schalk van der Merwe, franchisee for the Rawson Properties Helderberg Group.
However, the market is far from a sinking ship. In fact, he says recent indicators suggest the market is reaching an important equilibrium that could herald the beginning of a slow recovery soon.
Investors should employ the following strategies to make the most of their rental investments, despite the current conditions.
* Seek advice when planning rental escalations: Average rental escalation in the Western Cape might be the highest in the country at 4.5%, but growth is still slowing, having dropped from 2.96% in Q1 2019 to 2.51% in Q2. As a result, Van der Merwe cautions landlords to seek professional advice before implementing a rental increase to avoid overestimating the current rental value of a property based on outdated information.
“Depending on your property type, price band and area, the rental that you achieved 12 months ago may not be relevant by today’s standards. Rather consult a professional for a current rental assessment and add a clause in your lease to renegotiate an increase in six months’ time.”
* Prioritise tenant retention over short-term returns: Vacancy rates in the Western Cape have increased from 1.2% in 2016 to 7.08% last year – the second lowest in the country – but this is a disturbing trend for landlords, nonetheless.
To avoid expensive vacant periods, Van der Merwe urges investors to prioritise the retention of reliable, long-standing tenants over short-term returns.
“A decrease in demand, together with ongoing development, has put the Western Cape rental market into an oversupply situation. That means there is a lot of competition for good tenants – if you have one, do what you can to hang on to them.”
* Recheck credit records before renewing a lease: While tenant reliability has been declining nationwide, the Western Cape still boasts 87.7% of tenants in good standing. However, increasing economic pressure in what remains the most expensive province for renters in South Africa could see more and more households falling into financial difficulties over time.
“It’s really essential not to take the financial health of any tenant for granted, regardless of how reliable they have proven in the past. Performing another credit check before approving a lease renewal may seem like an unnecessary inconvenience but it has saved many an investor from a nasty surprise down the line,” he says.
* Monitor rental investment returns and portfolio risks: The rental situation might be less than ideal at present but Western Cape investors are still in a strong position to make solid returns with the right strategies in place.
To achieve this, however, Van der Merwe says active asset management is essential.
“It can be easy for landlords to adopt a passive role in the management of their rental asset, leaving day-to-day operations to a rental manager and paying little attention to the returns or growth their investment is delivering.
“While this may suffice when the market is strong, it’s never going to achieve results above average. For that to happen, you either need to vigilantly observe and respond to macro and micro market conditions or partner with a rental agent able to monitor, advise, plan and deliver on both management and investment strategies.”