Is a rental market boom on the cards?

 

** Contact IGrow Wealth Investments to discuss starting or expanding your property investment portfolio to capitalise on the predicted rental boom. Read more below**

 

Recent housing market surveys from FNB suggest that an increasing number of South Africans are choosing to rent instead of buying and that there are fewer rental properties on the market. Will this increased demand and constrained supply lead to better returns for landlords?

FNB Property Sector strategist, John Loos, gives his take on whether we can expect a stronger rental market.

Recent StatsSA CPI data for residential rentals has shown that rate at which rental prices are increasing is actually slowing down. From a multi-year high inflation rate of 5.68% year-on-year in the September 2017 CPI survey, it decreased to 4.19% as at the June 2018 survey.

The low rental inflation has been good news in terms of keeping inflation down and playing a role in keeping interest rates relatively low. However, this subdued rental market has not been good news for landlords.

A look at South Africa’s economy over the last few years points to 2 reasons for the rental market not performing as well as some might have expected.

  • Interest rates rose from early-2014 to early-2016, and rate hiking cycles normally mean a stronger rental market due to some aspirant home buyers postponing the buying decision. However, this rate hiking cycle was tame, with interest rates only increasing by 2 percentage points. At the end of the cycle, interest rates still remained relatively low and home buying was not affected by much.
  • Poor economic growth since around 2012 has been gradually applying pressure on tenants, limiting landlord ability to increase rentals.

Data shows that tenants are under pressure
The gradually increasing pressure on tenants can be seen in TPN’s data regarding the percentage of tenants “in good standing” with their landlords regarding rental payments. 

Tenants “in good standing” declined from a high of 85.95% of total tenants at the 3rd quarter of 2014, to 82.64% as at the 2nd quarter of 2018.

The data also shows that not all tenants in good standing are able to pay on time, with an increasing number paying late. The percentage of tenants paying on time has dwindled from 72.52% as at the 3rd quarter of 2014 to 65.49% by the 2nd quarter of 2018.

The lowest income groups are hardest hit by weak economic conditions, so the most noticeable decline in the percentage of tenants in good standing has taken place in the “Below R3,000/month” Rental Category, where the percentage of tenants in good standing has dropped from 81.95% back in 2014 to 73.19%, and is now the poorest performing rental category.

The “sweet spot” for landlords remains the R7,000-R12,000/month category, with its percentage of tenants in good standing the highest at 87.34%, having shown no noticeable decline in recent years.

Where too from here for the rental market?
A significant increase in the numbers of “aspirant” rental tenants is expected to come about in the near term, along with a more constrained supply of rental stock. However, landlords will need to identify the strong tenant from the financially pressured ones as the economy continues to apply pressure on households in general.

When questioned on their expectation of home buying activity, in FNB’s Estate Agent Survey, a high percentage of agents pointed to “Economic Stress and General Pessimism”, with the poor economy and political and policy uncertainty contributing factors.

From a relative low of 18% of total survey respondents citing “Economic Stress and General Pessimism” as a key factor in the market in the 1st quarter of this year, this percentage has risen sharply to 77% of total respondents by the 3rd quarter 2018 survey.

Simultaneously, the percentage of agents perceiving “Positive Consumer Sentiment” in their market has dropped from 56.7% in the 1st quarter of 2018 to 9% in the 3rd quarter.

Such negative sentiment can have 4 major impacts:

  1. It could very likely slow the rate of entry into the homeownership market, which could imply a higher portion of aspirant 1st-time buyers “hanging out” in the rental market for longer, boosting rental demand.
  2. It could also encourage a greater portion of home sellers not to buy another home, but to opt for the rental market.
  3. It could discourage buy-to-let buying, constraining rental home supply
  4. It could encourage investment homeowners to sell their rental properties in greater numbers, further constraining supply.

The above 4 factors, should they play out, could exert downward pressure on home values but upward pressure on rentals.

THE EVIDENCE

1. 1st-time buying has been gradually stagnating

According to agents surveyed, 1st time buying as a percentage of total home buying has declined from 20.03% in the 2nd quarter to 18.3% in the third quarter. This is well down from 28% peak reached early in 2014.

The evidence suggests an increasing number of aspirant 1st-time buyers holding off on buying, compared to 4 years ago.

2. Sellers aspiring to rent instead of buying again

The estate agents surveyed in the FNB Estate Agent Survey suggest that SA’s long economic “slow puncture” is taking its toll on the Household Sector, with the 3rd quarter estimate for sellers “selling to downscale due to financial pressure” reaching 16.3%, the highest percentage since 2013.

In a follow-up question, we ask agents to estimate the percentage of these financially pressured sellers who intend to “rent down” versus those intending to “buy down”

According to agents, those believed to be moving into the rental market after selling has risen from 40% as at the 1st quarter of 2017 to 65.6% of the total as at the 3rd quarter of 2018 survey.

This reflects a growing caution amongst this group of sellers, fueled perhaps by increasing economic and future policy uncertainty over and above rising financial pressure.

It is possible that the other groups of sellers are also becoming more cautious in uncertain times, and that this rise in rental aspirations amongst the financially pressured sellers is to an extent indicative of the trend in the broader seller population.

3. Buy-to-let buying

The one key indicator of future rental home supply is the FNB Estate Agent Survey’s estimate of the level of buy-to-let buying.

As a percentage of total home buying, buy-to-let buying has dwindled to 7.13% by the 3rd quarter of 2018. This is a slide from 9.77% as at the 2nd quarter of 2017, and the lowest estimate since 2013.

It stands to reason that tougher and more uncertain economic and policy times should constrain non-essential buy-to-let buying, and that’s what appears to be taking place.

4. Selling off of investment properties

An increase in the selling of investment properties could be expected, given greater financial pressure on some landlords, as well as weaker expectations regarding the future performance of the asset class.

However, there is no evidence to suggest that this is happening according to the FNB Estate Agent Survey. Only 2.25% of properties were being sold due to owners not getting the expected rental income, according to agents.

Conclusion
There are some emerging signs that the rental market could be in for a mildly better run in the near term.

Demand may increase due to fewer 1st-time buyers entering the market and a greater portion of sellers may choose to rent instead of buying again.

Supply may decrease as there are indications of declining levels of buy-to-let home buying.

Rising rental demand and constrained supply of rental homes could conceivably see rental inflation picking up mildly, outperforming lowly house price inflation in the next few years, and translating into gradually rising yields on residential properties.

But it remains tough to predict, and we certainly wouldn’t expect any rental market “boom”. Rather, a moderate and gradual strengthening at best. Important to remember is that levels of financial stress/pressure on households is rising, and a significant portion of the aspirant tenant population won’t necessarily be financially strong.

 

Sourcewww.privateproperty.co.za/advice/news/articles/is-a-rental-market-boom-on-the-cards/6593?utm_source=newsletter-investor&utm_medium=email

 

**Contact IGrow Wealth Investments to discuss starting or expanding your property investment portfolio to capitalise on the predicted rental boom. Call 021 979 2501 or email enquiries@igrow.co.za**