Investing in residential apartments has become increasingly risky as rising vacancies and slow rental growth creep into even this traditionally safe investment option.
This market used to carry the advantage of “extremely low” vacancy rates, but this is no longer the case, says Kobus Lamprecht, head of research at Rode & Associates.
Rode’s research discloses the national apartment vacancy rate in the first quarter of this year was 7%, an increase from the 5.5% in this same period last year. At the same time rental rates grew by about 4.5%.
“This was the fourth consecutive quarter of slower rental growth after rentals grew by 5.7% in the first quarter of 2018.” According to the Rode Report, vacancy rates in Joburg and Cape Town were between 1% and 3% a decade ago, but are now in the high single digits of 7% and 8.1% respectively.
“On a provincial level, the highest vacancy rate was recorded in Gauteng (9.3%), according to TPN’s fourth quarter 2018 data. The vacancy rates of KwaZuluNatal (6.5%) and the Western Cape (5.7%) were also high. This bodes ill for the prospects for flat rental growth.”
Explaining this structural increase, Lamprecht says households continue to be under “significant financial pressure”, especially with continued increases in fuel and electricity prices. This is negatively impacting demand.
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In addition to this, the stock of new housing for rent has also increased notably, thereby pushing the rental market into over-supply.
“Many a residential developer has perforce become a landlord as the sales of new houses stalled.” Although Seeff Property Group chairman Samuel Seeff says the weak economy has been a “major boost” for the rental market as affordability or an inability to buy drives more people to rent, there are still concerns about high landlord expectations in terms of rental returns and escalations.
“Generally, while the rental market is seeing better growth at around 4% to 5%, this is still below the 2017 average according to the PayProp Rental Index.”
Furthermore, the index that the consumer rent-to-income ratio is “under pressure”.
In such a climate, Seeff says looking after good tenants should “top looking for quick wins with high rents”.
Concurring that the South African rental market is going through “a bit of a tough time right now”, with both rental growth and tenant payment performance experiencing a multi-year decline, Jacqui Savage, national rentals manager for the Rawson Property Group, says it has become more difficult for landlords to find reliable, trustworthy and financially responsible tenants.
“Properly vetting tenants is always a vital part of any rental property’s success, but it is even more important when the market is slow and demand is limited.” While it can be tempting to let the vetting process slide in order to fill a vacant property sooner, Savage emphasises this is “dangerous” for the security of such investments.
Professional
vetting of
potential
renters is a
good idea
It's far more difficult and costly to get rid of an unreliable or nonpaying tenant than it is to place a reliable one, says Jacqui Savage of the Rawson Property group. She advises landlords to use professionals to vet tenants, and says Rawson’s background checks include:
- A credit and identity check through the Credit Bureau
- Confirmation of income and employment via payslips and a call to the employer
- Confirmation of monthly expenses via three months of verified bank statements
- Personal references from previous landlords (if applicable) by phone call.