Rental index shows luxury rentals are leading the pack

The PayProp Rental Index’s 2014 Annual Report has shown that the South African rental market experienced stable growth over 2014.

The average national rent was R5 963 in January 2014, ending on R6 207 in December– an increase of just over 4 percent for the 12 month period. The rental price band of R15 000 and over is the fastest growing in South Africa.

PayProp group chief executive, Louw Liebenberg, says it comes as no surprise that the Northern Cape is a major contributor driving the growth in this category.

“High-value rentals in the Northern Cape have almost tripled in number over the course of 2014 due to rapid industrial expansion. Mining as well as alternative energy projects are fuelling growth in the province,” says Liebenberg.

The Northern Cape is the one province where damage deposits of less than a month’s rental are still accepted – a sharp contrast to the national average of damage deposits almost 1.5 times the monthly rental amount. The index highlights other geographic areas that are drawing interest with growth in the higher price categories as KwaZulu-Natal and Gauteng.

Investor returns were stable over 2014. Gauteng is now the most expensive province in which to own a property, with Limpopo being the cheapest. Interestingly for investors, the second cheapest province is now the Northern Cape. When combining the lower-than-average cost of ownership and fast-growing rental values, the Northern Cape is the current darling of buy-to-let investors providing a net return of 6.27 percent compared to the national average of 5.05 percent.

Liebenberg says the weakening of rental growth in the last quarter may be linked to tenants’ ability to pay being under pressure. This has meant that in many instances landlords have chosen to keep existing paying tenants at lower increase rates, rather than risk placing new tenants who may not be able to pay. The inclusion of tenant financial profiles as part of this rental index has provided a valuable view into the potential ability of the average tenant to pay rentals.

“Using the PayProp Tenant Assessment tool we are adequately able to review the ability of tenants to meet their financial commitments, particularly their rental commitments. What has proved glaringly obvious is that SA tenants are over-committed in terms of their debt repayments with individuals on average facing a debt burden that is nearly double their rental commitment,” says Liebenberg.

Some of the key statistics reveal that an average tenant spends almost twice their rental payment on loan and credit agreement repayments – leaving very little financial manoeuvring room. What’s more, a significant proportion of tenants applying for tenancy at estate agents have major financial defaults against their names – showing that growing financial strain has already affected the average consumer.

“The rental market is still growing and our caution to the market remains that tenants are under increasing pressure. In this context we feel that investors who want to succeed in this market will be the ones who carefully screen their tenants, ensure that tenants can afford the leases they sign and who manage their costs carefully.”

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