Property Advice

Relationship between property location and rental returns

Private Property South Africa
Sarah-Jane Meyer |
Relationship between property location and rental returns

South Africa has the largest real estate sector in sub-Saharan Africa, with sales and rental activity amounting to $50.2 billion - R1 trillion - in 2019, according to the fourth PayProp State of the Rental Industry Survey.

“Property investors track various tenant metrics to measure the risk and profitability of property investments, and tenants are a key determinant of landlord risk. Our survey sheds further light on these risks and other trends emerging in property investment,” says PayProp’s head of data analytics, Johette Smuts.

The survey highlights real estate professionals’ views and experiences with rental portfolios, landlords, the impact of economic conditions and the outlook for the year ahead. It shows that almost 80% of rental agents are optimistic about the future of the rental industry.

Smuts says confidence is slowly returning to the South African real estate sector, as indicated by the decreasing number of respondents planning to leave the industry.

“The number of business owner respondents considering selling their agencies fell from 22.0% in 2021 to 16.6% in 2022,” says Smuts. “Property practitioners weathered substantial challenges over the past three years, but they have stayed the course and are now looking forward to a good year ahead.”

Landlords

It’s a tough market, where higher vacancies and weak demand from quality tenants hamper the ability of rental agents to apply inflation-linked rental increases. More than 40% of respondents to the PayProp survey indicated that they implemented lower-than-usual rental increases in the past year, with only 19.5% saying their increases were higher than usual.

The rental market in South Africa consists of almost three million households that rent from private owners. These landlords are the backbone of the rental industry – without them, the available rental stock would be in short supply. But to attract new buy-to-let owners and retain existing landlords, the market needs to be robust to make it worthwhile to invest in.

PayProp’s survey shows that what drives rental vacancies is the familiar estate agents’ mantra - location, location, location. Corroborating this view, the Residential Rental Monitor for the fourth quarter of 2022 from TPN Credit Bureau found that well-positioned properties are expected to show improved rental returns. This is despite aggressive interest rate hikes expected to slow down residential property value growth.

“Rising interest rates act as a deterrent to homeownership with more households choosing instead to rent, and the increased demand for rental stock is expected to drive rental escalations,” says TPN’s head of marketing, Waldo Marcus.

“It’s interesting that the future of dwelling supply appears weak in the long term even though the number of completed houses increased by 1% in 2022. This is because the value of building plans approved decreased by 52.6% between January 2022 and January 2023, with Gauteng and KwaZulu-Natal experiencing the largest decrease year on year at 43.8% and 71.8%, respectively,” he says.

TPN’s Vacancy Survey shows that the perceived supply of rental stock decreased from 59.19 points in the fourth quarter of 2022 to 57.75 points in the first quarter of 2023. The adjusted real value of residential building plans approved was down 55.1% in January 2023 compared to January 2022.

Rental yields are showing improved growth, with sectional title properties offering the highest yields at 10.18% in the fourth quarter compared to just under 7% for freehold properties.

Marcus cautions that the impact of tenants' inability to pay rent will become more noticeable over time.

“Poor paying tenants will have an impact on the ability of investors to show returns as collection cost, vacancy, and opportunity cost will negatively affect yields. Returns will remain under pressure due to the increased cost of maintenance, rates and taxes, insurance, and security expenditure to safeguard residents and assets,” he says.

Writer: Sarah-Jane Meyer

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