Property rental increase at slowest rate

Average residential property rentals are increasing at the slowest rate in two and a half years and in the third quarter rose by less than the inflation rate, indicating that investors were not being fully rewarded for inflation risks.

The PayProp rental index for the third quarter revealed that average rentals increased year on year by only 3.9 percent to R5 221 in September, compared with the 5.5 percent rise in the consumer price index.

"With the economic recovery still very slow, it seems that landlords are finding it difficult to increase rents at pre-recession rates and renters, whose financial position has deteriorated due to cost of living increases, cannot afford much higher rents in many places in South Africa," it said.

PayProp said the main drag on average rentals seemed to come from Gauteng, where average rentals increased by only 1 percent. It said this could be the result of oversupply that was starting to have an effect on the ability of landlords to increase rentals.

PayProp said rentals were likely to remain under pressure following the strikes that had recently hit the North West, Gauteng and parts of the Free State. However, it said salary increases in the new year provided some hope that rental increases would recover to some extent.

PayProp reported a steady increase in the percentage of damage deposits required when expressed as a percent of rental invoices.

It said this percentage had grown over the past four quarters to 122.8 percent from 114.2 percent, which might indicate that owners and agents were adjusting the amount of security required based on a perceived increase in tenant non-payment risk.

PayProp said rents peaked in June this year at R5 232 a month and had actually declined by R11 over the past four months. It added that year-on-year rental increases had been in single digits for 23 months and the last big boom for the residential market was during the 2010 Fifa World Cup.

Mpumalanga had the highest average rentals at R6 202 a month, followed by Limpopo at R6 113 a month, Gauteng at R5 430, KwaZulu-Natal at R5 313 and Western Cape at R5 204.
North West had the lowest average rentals at R3 981 a month, particularly in the more depressed and older gold mining towns in the province.

PayProp attributed the high average rentals in Mpumalanga and Limpopo to both these provinces suffering from a lack of rental stock in smaller boom towns such as Lepahalale, Tzaneen and Lydenburg.

PayProp said rental yields had remained relatively flat for more than three years, despite increases in the price of a medium-sized house and steep rises in municipal assessment rates and other municipal services. However, it said net rental yields had remained far below what investors could earn in the bank or with risk-free government bonds.

At stages over the last four years, net rental yields were half the risk-free rate which, for government bonds was 6.5 percent in September for the 10-year bond, it said.

But PayProp stressed that rents were only one part of the return that landlords would get over time and adding the capital value increase to the net rental, including maintenance costs, showed that total returns were 6.7 percent in September.

(Business Report)

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