Rentals will suffer after lockdown, 'especially at lower end'

21 May 2020 - 15:05 By Ernest Mabuza
Since about 2014, the tenant performance of the two lowest rental/month segments has weakened more noticeably than the higher two major segments, a property sector strategist says.
Since about 2014, the tenant performance of the two lowest rental/month segments has weakened more noticeably than the higher two major segments, a property sector strategist says.

Lower-income households are taking a big hit from the weakening economy of the past five years, with their ability to pay rental diminishing.

This is according to FNB property sector strategist John Loos.

Loos said it was likely that the relative pressure of the deepening Covid-19 economic fallout would be felt more at the lower end of the rental market than at the higher end.

Loos said before 2014, there was not always a clear performance difference between low- end and higher-end tenants in the rental market.

He said according to TPN Credit Bureau, the worst drop in the percentage of tenants “in good standing” with landlords after the financial crisis of 2008 was not even in the lowest monthly rental category; that of less than R3,000 a month.

It was the higher R12,000/month-R25,000/month segment, which saw the tenants “in good standing” percentage bottom at 54% in the first quarter of 2009.

Loos said in the past five years or so, economic stagnation appeared to have been taking a bigger toll on the poor.

He said at the end of the second quarter of 2014, the less than R3,000/month rental segment reached its post-2008 recession-crisis high, in terms of the percentage of tenants “in good standing” with landlords, at 81.95%.

From then on, this segment had deteriorated the most noticeably.

“By the final quarter of 2019, the R3,000/month segment had fallen to 71.35% of tenants in good standing.

“This was in contrast with the R7,000-R12,000/month segment, which registered 86.96% of tenants in good standing.”

There was a deterioration in the second-lowest rental/month (R3,000 to R7,000) segment too, whose tenants in good standing dropped to 83% in the last quarter of 2019.

“It thus appears increasingly plausible that the R12,000-R25,000/month segment could become the outperformer, just going by the trends,” Loos said.

Property rental specialists Flow this week said its research showed that just 37% of residential tenants could afford to pay rent in full, because of the effect of the lockdown on their incomes.

A significant 22% cannot pay their rent at all, according to Flow's survey, sent to its database of more than 80,000 registered tenants this month.

Both the high end (rentals of R12,000+ per month) and low end (R2,000-R3,999 per month) of the market were affected – indicating that no part of the rental market has escaped rental affordability damage.

“This is also a major risk to landlords, who are used to high-risk tenants representing just a fraction of their portfolio,” says Flow co-founder and CEO Gil Sperling. “Landlords who are receiving partial payments are at risk of tenants stopping the payment of rent altogether, as their savings are depleted and credit lines maxed out; 49% of renters are certain that the negative monetary effects of the lockdown will last longer than three months; 42.72% of tenants are relying on their salaries to pay their rent, 30.09%, their savings and 21.6% are relying on loans.”

With 78.8% of tenants’ income affected by Covid-19, Flow said 55% of respondents had either already applied or intended to apply for assistance to help pay their bills.

Landlords have accommodated 35% of renters with reduced or waived rent.

Individual landlords have proven to be more forgiving, with 44% agreeing to waive or reduce rental payments, along with 24% of companies and trusts doing the same.

Pam Golding Properties CEO Andrew Golding commented during a webinar on the Flow findings that the impact of the lockdown on both sales and rentals could not yet be accurately predicted.

“We’re seeing a situation where 20% of our tenants are not able to pay their rent. People are having to find creative ways to pay what they can – borrowing from friends or family or extending the terms of personal loans,” he said.

“What we can say is that the market is in for a significant reset. Signs are that the volume of sales is set to drop by 50%, with owners who aren’t forced to sell, not putting their properties on the market. It’s definitely going to be a buyers’ market, with plenty of opportunities for those who are placed to be opportunistic.”

Golding said that the few sales they have pushed through under lockdown have been on aggressive offers by as much as 25% below the pre-lockdown listing prices.

“Our best guess is that prices will contract by 15%-20%. We’re going to see more people looking at renting than buying, from an affordability perspective, which will put downward pressure on rental levels,” he said.

The Flow results also indicated that 32% of tenants said they were likely to move out after lockdown – 12.63% of those due to their lease ending, 50.93% due to lockdown-related affordability issues and 15.11% of them due to general affordability issues.

“In a typical month, the rental market sees 5% of tenants moving. Because of lockdown restrictions, there’s been a huge spike in tenants staying in their rental homes for much longer than usual – but we expect a far higher than average number of tenants moving, post-lockdown – which will cause a huge bottleneck,” said Sperling.

Trafalgar Property Management MD Andrew Schaefer said the rental market was already under pressure before lockdown, and things have got worse.

“How do landlords plan ahead when tenants aren’t able to make payments if their income has been affected? They won’t be able to catch up with their arrears any time soon, so we need to consider how this all clears through the system. We believe that rental credits are the only way forward,” he said.

Just Property CEO Paul Stevens concurred, with rentals down as far back as the end of 2019. “Annual escalations are stagnant and we’re looking at a possible reversion of rental amounts,” he said. “It’s not only the middle class being affected – it’s hitting everywhere. Business owners are among the hardest hit, with responsibilities to keep their staff paid and pay rentals at the top end of the market.”