Last year saw the national average year-on-year (YoY) rental growth rate plummet from 6.4% in 2017 to just 3.9% at the end of 2018, however not all markets performed equally with some showing more resilience to the prevailing economic climate and shifting market conditions than others.
It was a tough year with inflation consistently outperforming growth in this sector and the old adage, ‘the bigger they are, the harder they fall’ wasn’t far off the mark for some areas. A case in point is the Western Cape which, after four consecutive quarters of double digit year-on-year growth in 2017, realised lowest growth figures since the launch of the Payrpop Rental Index in 2012, with a low of 3.96% in Q4.
However, despite this notable decline, the province still managed to achieve the highest average rental during the year which, at R9,124, was 18% higher than the national average and R1000 (12%) more than the runner-up, Gauteng. And, although the Western Cape’s average rental price dipped to R9,030 in first quarter of 2019, it retained its percentage lead over its closest rival and the national average and also has the highest percentage (11%) of rental properties in the R15,000 plus price band.
Last year, several factors contributed to the steady decline of the rental market, including slowing semigration and the reluctance of landlords to adjust their price expectations, especially in the higher price bands which continue to be subdued by a growing stock surplus. Owners are understandably frustrated that they cannot achieve the same rental prices they did two years ago but in the current market, increasingly well-informed tenants have more choice than they have had in almost a decade and are not averse to negotiating a better rental.
Despite the fact that Cape Town has the lowest percentage of risky tenants and the second highest credit score, landlords are also faced with a growing risk of delinquency as consumer inflation and a dwindling economy continue to put the squeeze tenants. Net income levels increased by only 1.56% between Q4 2017 and Q4 2018, whilst food, petrol and rental prices increased by considerably more.
Experts are cautiously optimistic about an uptick in rental growth later this year, but recovery will be slow and won’t happen overnight. There are still solid returns to be made in the rental market, but landlords have to be realistic and realise that its ultimately far more costly to have an empty property for months on end than a quality tenant at a slightly lower rental.
The fact that pricing plays a critical role in even the most resilient of markets further emphasises the importance of correctly positioning a property in the market to secure quality tenants and maximise returns.
Do your homework
It’s essential that potential investors and landlords do their homework as a level of shrewdness is required to reap the best rewards. There are two key factors that will determine short and long-term returns right from the start, the first being to avoid over-capitalising on upgrades and renovations and then it’s crucial to determine a reasonable yet competitive monthly rental.
It’s equally important to be negotiable on rentals and annual increases as creditworthy tenants who pay on time and look after your property are not always easy to come by these days.
Knowing what drives supply and demand of rental stock in your province and your area is critical when looking at the bigger picture as it will allow you to position your property within the market. Ultimately, a well-priced home in sought-after area, especially those in close proximity to amenities like good schools, will always find a tenant.