The residential rental property market has remained surprisingly resilient in recent quarters, considering the financial stress consumers are under due to the high cost of living and escalating interest rates.

However, early signs indicate that consumer credit repayments are slipping – a loud warning sign for landlords.

According to the TPN Residential Rental Monitor report Q1 2023, vacancies were at 6.19% in the first quarter of 2023, down year-on-year from 8.26% in Q1 2022.

This, combined with a Market Strength Index of 9.14 points above the equilibrium, shows there is still healthy demand for rental properties in South Africa, and property professionals and owners are optimistic that the market remains strong.

The TPN Market Strength Index measures perceived demand and supply availability within the residential rental market. Equilibrium is achieved when demand and supply are equal. A strength index above 50 points means higher demand than supply in the current environment. At the end of March 2023, the index was 59.14, a figure last seen in 2017.

Additionally, higher demand for residential rental property, lower vacancies due to a slowdown in supply, higher debt servicing costs and the increased cost of maintenance, security, and municipal services resulted in a gradual recovery of rental escalations – another good sign for landlords.

“These issues provided property owners with an opportunity to increase rentals and play ‘catch-up’ with CPI, which, at the end of March 2023, was 7.1%,” said the report.

As a result, rentals escalated by an estimated 4.14% in the first quarter of 2023, almost double that of house price growth as determined by FNB’s House Price Index.

Traditional market factors indicate that the residential rental market is buoyant with improved returns, lower vacancies and interest rates, which are expected to increase by at least 25 basis points this year.

“This will further deter property purchases and retain healthy demand for residential rental property,” said the report.

Reg flags for landlords

Despite the buoyancy of the rental market and the drop in the national vacancy rate, the report noted that this is partly because home ownership has become unaffordable for many South Africans, and they’re still under immense financial pressure.

A critically important factor in the residential rental market is the overall financial health and endurance of consumers and, by extension, tenants.

Tenants have, by and large, remained committed to paying their rentals on time. In the third quarter of 2022, 82.9% of tenants were in good standing. However, this declined slightly to 82.34% in the last quarter of 2022 and even further in the first quarter of this year to 81.86% as economic challenges continued to filter into households.

Although the overall sentiment in the sector remains positive, property owners and professionals must consider how a tenant’s late or no payment will impact them.

The National Credit Regulator age analysis paints a similar picture, with almost all consumer credit types in good standing deteriorating slightly in the last quarter of 2022.

Mortgages in good standing decreased from 90.22% in the third quarter of 2022 to 89.58% in the fourth quarter. The overall credit good standing as of the end of 2022 was just 63.89%. The importance of consumer credit good standing revolves around consumers prioritising rental payments above other credit (excluding mortgage good standing).

However, a decrease in credit good standing is a predictor of rental payment rates. Adding to the increased risk of tenants defaulting on their lease obligation is the higher cost of living and, in real terms, flat growth in household income.

A concerning 36.11% of consumers have impaired credit records, which means that more than a third of credit-active consumers failed to meet their credit obligations.

TPN’s Squat Index, defined as the number of tenants who, every month, fall into a category of non-payment, has seen an increase in the number of tenants that have not made any payment towards their rental for three consecutive months and still occupy the property in the fourth month.

The TPN Residential Squat Index has increased from 3.81% in the fourth quarter of 2022 to 3.91% in the first quarter of 2023.

This means almost four out of a hundred tenants are now classified as squatting. These tenants pose a severe risk to the ability of landlords to collect and recover rental due to possible legal costs adding to the potential loss.

“Although a lower vacancy rate and higher escalations are a move in the right direction, a successful property investment ultimately relies on the ability of tenants to pay their rent.

“Early signs indicating that consumer credit repayments are slipping – combined with lacklustre economic growth – cloud the positive outlook for the residential rental market for the rest of the year. The current economic landscape means that the risk of defaulting tenants is more likely,” the report said.

Therefore, escalations should be considered cautiously – consumers are under extreme and ever-increasing pressure – with the credit repayment rate slipping as an early indicator of tenant rental collection risk.

“Landlords are encouraged to take advantage of the market strength but ensure that adequate tenant risk monitoring is implemented to mitigate the risk of an increase in defaulting tenants. In the property sector, it means that proper background checks and vetting are now more important than ever,” the report added.