Rental property a paying proposition in Johannesburg’s listless sales market

According to PayProp’s rental index for the first quarter of 2017, an unexpected spike in the year-on-year growth in Gauteng rentals, along with the Western Cape’s double-digit growth, was largely responsible for the first notable rise in the national weighted average seen since the end of 2014.

A Sandton penthouse with open plan entertainment areas including a double volume dining room, a family room, two balconies, an upstairs entertainment deck and a private pool is for rent for R110 000 a month unfurnished, or R120 000 furnished. Amenities in the building and available to prospective tenants include a concierge, boardroom facilities, fibre connectivity, a restaurant and a gym.

Shaun Groves, Gauteng rentals manager for Lew Geffen Sotheby’s International Realty, says: “This is a very welcome market shift, especially afterspiralling consumer inflation, the highest unemployment levels in over a decade and ongoing semigration to the Western Cape saw Johannesburg's property rental market virtually flat-line in 2016.

“Payprop’s Rental Index at the end of the third quarter of 2016 reflected a meagre growth of 4.8% for the Gauteng rental market since the beginning of last year – considerably lower than the 6.4% national average and disheartening for a province that has historically provided stable growth of around 8%.”

According to the current report, Gauteng rentals increased almost 10% year on year for Q1, which is a considerable leap from a total growth of 10% since the third quarter of 2014 when the slump first made itself felt. Newly appointed PayProp Index editor, Johette Smuts, believes that the high growth over the reporting period should be regarded with cautious optimism.

“Although figures show that Gauteng rentals have increased almost 10% year on year for the three months, Gauteng is a very large region, and it’s impossible to generalise over the different areas in the province,” says Groves.

“There are probably nodes where rentals have increased by 10% - or even more, however, in most of the northern suburbs of Johannesburg this is certainly not the case.

“At present, few landlords are achieving 10% escalations, and most leases are linked to the consumer price index, which is around 6.5%. This is the fairest way to circumvent disagreement between landlords and tenants, and have both parties feel they have a good deal.”

According to the PayProp figures 32.04% of rentals countrywide are still in the R5 000 to R7 500 bracket, although the R15 000 plus bracket has increased from 4.95% in the first quarter of 2016 to 6.2% of rentals in the first quarter in 2017.

Groves says the high-end ceiling for rentals in Johannesburg is about R100 000 – irrespective of what the property is worth, or which area it is in.

“Recently a number of properties in the R20 million to R30 million bracket have come into the rental market because they have been on the sales market for some time.

“The owners have either bought elsewhere, are emigrating or moving to the Western Cape or elsewhere and are letting their Johannesburg properties. Most people who buy a property for R30m would normally pay cash, but if you financed the property your monthly repayments would be around R300 000, so to rent that property for R100 000 is a very good proposition, especially as you aren’t responsible for rates and taxes,” says Groves.

Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, says that although South Africa is officially in recession, there is no doubt that investing in rental property in Johannesburg offers excellent returns in the long term.

“According to the Rode Report for the fourth quarter of 2016, the growth in flat rentals nationwide is at least outperforming the growth in house prices, for now.

“Flat rentals in Johannesburg were again the best performer as rentals here showed growth of roughly 7%. This was followed by Cape Town and Pretoria at 6% and Durban at 5%. Over the same period, consumer prices - excluding owners’ equivalent rent - showed growth of 7%, so in Johannesburg nominal rentals were able to grow at the inflation rate.”

When it comes to rental deposits, PayProp figures show that Gauteng tenants are on average required to put down 1.22 times the monthly rental, compared to 1.62 times in the Western Cape.

However, Groves says Lew Geffen Sotheby’s International Realty requires deposits of one month’s rental on unfurnished units and two months on furnished units.

“Some of the agencies that operate in the lower-priced areas would require higher deposits to mitigate the risk to landlords. However, the crux of letting homes in any price bracket is ensuring that tenants are thoroughly vetted before taking occupation.

“You can’t set prohibitive standards for someone to rent your property, and you need to be reasonable. Rental shouldn’t be more than one third of net salary, so to rent a R100 000 property, a household would need to earn about R300 000 a month.”

He says landlords need to bear in mind that at the moment it’s a tenants’ market, and they are shopping for the best deal.

“Rentals can be even more competitive than sales. When you are buying a home, you view yourself living there for many years to come, but when renting a home, that doesn’t apply. If a rental home doesn’t tick the boxes for you at present - for instance, in the right area, close to schools, four bedrooms, or staff quarters - you will move on to the next one. It’s a far less emotional acquisition than buying a home, and tenants are more inclined to bargain for better value,” says Groves.

“On the whole, landlords need to become far more tolerant of certain conditions to compete. They need to fine tune the value proposition, and be willing to accommodate tenant requirements.”

Smuts concludes that a few more months’ worth of data will be needed to know for sure if Gauteng’s rental growth recovery is more of a long-overdue recovery off a low base value than a reason for genuine optimism or if it will play a big role in a market revival.

“If the spike is temporary, growth should again normalise to move with inflation. There is a clear positive correlation between the two throughout 2016. If this relationship resumes and continues as before, rental growth should track above the 6% a year mark later this year, in line with inflation expectations for 2017.”

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