After 18 months of minimal growth, South African landlords may not be feeling particularly optimistic about their rental investments at present. However, the latest PayProp Rental Index (Q2 2019) shows trends may finally have ceased their downward trajectory. This is good news for landlords, but not necessarily a sign of a market turnaround quite yet.
Rental growth over the last six months has been virtually flat, with Q1’s 3.85% increasing to 3.86% in Q2 this year. That might not seem particularly positive for landlords, but when taken in context with moving average trend lines dating back to 2017, it shows the first reliable sign of an end to the national rentals growth decrease.
While a flat trend line is unlikely to get anyone’s pulse racing, the majority of rental assets are still delivering solid returns over the long term – and it’s this long-term outlook that landlords should be encouraged to focus on.
It’s easy to overlook the fact that we had long periods of higher-than-inflation rental growth as recently as 2017. In order to remain sustainable, these periods of high growth need to be balanced by slower growth to maintain tenant affordability.
Weakening tenant credit metrics
With consumer purchasing power under heavy pressure as a result of high unemployment, prolonged below-inflation income growth and increasing living expenses, tenant affordability has, indeed, become an issue. Reports indicate weakening tenant credit metrics, despite relatively stable credit scores, and an increase in the frequency of tenants in arrears.
This has made it essential for agents and landlords to implement stringent vetting procedures for all tenants and, ideally, repeat these processes on lease renewals. However, the combination of flat rental growth, improved income growth, marginal inflation and decreased interest rates seen in 2019, could offer tenants some financial relief and improve affordability over time.
It’s this balance that landlords need to keep in mind when times are tough. In order for rental growth to recover, tenant affordability needs to recover too. Trends like flat growth may not appear to be overly positive indicators, but they do suggest that the market has reached a vital equilibrium.
That’s not to say we’re about to see a turnaround with record growth by 2020. Recovery is likely to be a slow process with a few ups and downs along the way. However, we are optimistic that this is the start of a stronger cycle that will deliver sustainable returns to rental investors over the long term.
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Home owners should not take a knee-jerk reaction to the potential of SA being downgraded to junk status by Moody's says SA futurist/economist Daniel Silke.
If you woke up to the news that at 4.9% the economy was one of the fastest-growing in the world, and expectations are that it will grow at 4.4% for the rest of the year, leading to high demand for real estate of all types, you’d be in Budapest, Hungary.
South Africans however awaken to a reality that is cause for some anxiety; from a lagging economy, a Rand that tends to weaken more often than it strengthens, annual consumer price inflation dips, and now the threat by Moody’s to downgrade SA’s sovereign debt to junk status. We’ve been here before, we’ve avoided it before, can we survive again?
Daniel Silke, political economy analyst and futurist, clarifies the situation: “We really are on a knife’s edge. The only thing standing between us and the downgrade is the pending announcement of the restructuring of Eskom, and that decision needs to be made as soon as possible, and in a credible fashion. It does however have to be a bold plan, not a half-hearted effort and I think that if there is sufficient confidence in a restructuring plan it could save us from the Moody’s final downgrade.”
Interest rate hike?
A junk status downgrade will mean that South Africa will have to pay more to raise the money it needs for economic growth, and for its key projects to be actioned, and when government seeks to borrow money, locally or internationally, it has no option than to recover those borrowings from South African consumers. How that is done is usually through interest rates, which if Moody’s does downgrade the country, will most likely rise again, or introduce tax and levy increases thus further burdening already indebted South Africans’, impacting on their monthly home loan and vehicle finance repayments.
A higher interest rate however can limit the rate of economic growth but Silke does not believe that any interest rate hike will dramatically affect the housing market. “Interest rates are fairly benign here, so I would argue that any increase by the South African Reserve Bank would not be more than a quarter basis points. This is not really enough to assist the property market, which is now functioning on political confidence more than anything else, and clearly interest rate manoeuvrings, in their limited way, don’t have any substantial influence on, for example, the equities markets on the Johannesburg Stock Exchange.”
The property market is similar to that of the stock market, explains Silke, in that one has to be wary of selling in a declining market. “There is ample evidence that property prices have come down across not just the luxury end of the market but mid-market too. One should therefore, in my opinion, be cautious about panic-selling. South Africans are increasingly in debt and paying off a bond might be a better bet than selling right now.
“However when everybody sells the price comes down but those selling will have to adjust their expectations quite substantially and take a knock. That said you can never time the selling-and-purchasing processes perfectly. On a big asset class like property, I would strongly caution on taking any kind of panic view in terms of what to do going forward.”
Consumers hard hit
The wait-and-see approach is something that South African home owners have become adept at doing, paying in the meantime for increases such as annual council services, and fluctuations in fuel prices that impact on costs across all sectors. With the forthcoming National Health Insurance (NHI) there are indications that the public will experience one of, or a mix of, general tax revenue increases, payroll taxes, and surcharges on personal income tax. The NHI is some years away from being implemented but it is a consideration that has to be factored into budgets now, especially for those facing retirement.
With corporates already taxed to the hilt, personal tax is likely to be where the government will seek recovery, but, says a recent Debt Rescue survey, 24,8% of consumers are already in debt to pay for their day-to-day expenses. 43% of respondents claim they are directing more than 50% of their monthly income to debt. How much less consumers can live with is going to be tricky; even a staple like bread is experiencing an annual price rise of 7.9%.
Cause for optimism
Be that as it may, there is increasing conversation around Buy-to-Let, particularly co-ownership, be that among friends or families, to avail of the current buyer’s market conditions. Banks have become very accommodating in providing home loans and the recent interest rate decrease has certainly helped. There is also a good demand for rental properties as Baby Boomers and GenX experience the empty nest syndrome and want to downsize without the burden of a bond. Throw into that mix #GenerationRent; they are looking for rental properties close to business hubs thereby reducing expenses on transport.
The market is always going to be volatile; and the real estate market has long been considered a reflection of the state of the economy. When asked how bad the economy could get Silke used the adage that things always get worse before they get better. “In that spiral things have gotten worse, so it’s a difficult question to answer. However this is a critical moment in SA’s recent history where clearly some very tough decisions have to be taken by our President and his team.”
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