By Michelle Dickens, CEO of TPN
Consumer spending patterns shifted significantly in the first 12 months of the pandemic. Not surprisingly, not one category of consumer credit was spared in the hard lockdown of the second quarter of 2020 as jobs were lost and incomes slashed.
Short-term credit in this period took the hardest knock, dropping to the lowest level on record to only 50.59% of credit accounts paid in ‘current’ terms, although these levels quickly recovered in the third quarter of 2020 back to over 70%.
In a constrained financial environment when income and jobs are at risk, credit facilities such as credit cards, store cards and bank overdrafts become a critical line of credit for consumers. Since the onset of the hard lockdown in the second quarter of 2020, consumers have reprioritised credit facilities to higher up the payment ranking with 74.19% of these agreements classified as ‘current’ payment terms.
As many people continue to be compelled to work from home, consumer spend has shifted to items such as hardware and furnishings which saw a 124% increase between January 2020 and January 2021, according to FNB’s card transaction data. Similarly, medical and pharmaceutical spend increased 118% and general retail spend increased 111%. Spend on groceries, automotive and apparel, on the other hand, remained fairly flat in comparison in this same period.
Industries that were the biggest losers included dining out and entertainment (down 82%), fuels and tolls (down 84%) and tourism (down 50%).
In the period leading up to the pandemic, consumers in good standing with credit bureaus were in decline, dropping to 57.1% in 2019. Job losses and income vulnerability acted as a catalyst to spark industry wide payment holiday customer support and rental relief. Ironically, the payment holidays rolled out in 2020 actually improved the number of consumers in good standing to 62.6%. However, these were only ever intended as short-term relief measures. By the first quarter of 2021 consumers in good standing had once again started to slide to 61.8%.
The rental relief provided by residential landlords in 2020 is reflected in the declining number of tenants that are more than three months in arrears. However, similar to consumer credit, rental relief was a short-term solution to assist tenants who had lost some, or all, of their income. Once the restriction of movement was lifted in May 2020, TPN data reveals that tenant arrears shot up in value to new records with 13% of tenants in arrears now more than six months behind on rent. The challenge for landlords is that these tenants were still in occupation despite being in arrears.
Although tenant payment performance has shown a steady improvement from the third quarter of 2020 indications are that this improvement has now slowed down. Overall, the residential rental market’s recovery after the shock of the hard lock down in the second quarter of 2020 has appeared to flat line with the sector now characterised by diminishing demand, increased vacancies and lower rental escalations. FNB’s Commercial Property Broker Survey’s first quarter market activity report saw a perceived increase in activity in all the three major commercial property sectors (industrial, retail and office). However, despite this progress, activity levels are still not back to pre-pandemic levels.
TPN’s Residential Rental Monitor confirms this, revealing that residential rental tenants continue to downscale and the number of tenants in good standing from a payment performance perspective are still not back to pre-Covid levels. TPN’s data for the first quarter of 2021 reveals that the worst performing category of tenants from a payment performance perspective are those in the more affordable rental market. Two-thirds of tenants rent for less than R7 000 per month with one third of rentals falling into the R4 500 to R7 000 per month price range.
Rentals below R3 000 per month remain under pressure with only 65.73% of tenants in good standing. A concerning 17.76% of tenants in this category are unable to make any rental payment contributions.
The R7 000 to R12 000 rental per month category on the other hand, showed growth of 23.3% with 84.37% of tenants in good standing and only 4.86% of tenants who were unable to make any payment at all. This category clearly represents a sweet spot for landlords.
In the current environment the growing rate of long-term delinquent tenants – those who make no rental payments for a minimum of 4 consecutive months – pose a growing risk for landlords. Our experience shows that although tenants don’t intentionally set out to be serial squatters, they can become delinquent if their circumstances unexpectedly change. The challenge for landlords in these circumstances is that mediation is usually not a viable solution which leaves them no option but to resort to legal action. However, taking the matter to court can be a long and drawn-out process. Not only are courts compelled to consider new eviction law based on the state of disaster regulations, but court dates are not quickly available. Given the difficulty of evicting non-paying tenants, most landlords would rather endure a vacancy than a non-paying tenant.
Our data indicates that vacancy rates appear to have stabilised in the second quarter of 2021 at 13.1% which is down slightly from the first quarter’s 13.31%. Rental escalations are typically negative with the exception of the low end of the market with rentals of under R3 000 per month.
TPN’s Residential Rental Market Strength Index for the second quarter of 2021 reflects the widely held sentiment that supply in the residential rental market exceeds demand, caused by tenants cohabitating to cut costs.
There is no question that consumers continue to be cautious in terms of how they spend their money as incomes remain under pressure. Despite the fact that some jobs returned to the market in the last quarter of 2020 and the first quarter of 2021, the reality is that unemployment remains at record highs. The question now will be whether the GDP growth of the first quarter of 2021 can be maintained.
