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SIMON BROWN: I’m talking with Waldo Marcus, industrial principal at TPN Credit Bureau. Waldo, I appreciate the time today. Recent data out from yourselves on residential rental vacancies – and we are talking of the rental market here – shows six-year lows as demand for rental property continues to pick up.
WALDO MARCUS: Good day, Simon. Yes, thanks very much. Yes, the Residential Vacancy Survey is conducted on a quarterly basis by TPN Credit Bureau and it provides useful insights for the industry to understand the number of vacancies across various provinces, as well as various rental value bands.
As you stated during the introduction, in quarter three of this year we recorded one of the lowest numbers of residential units standing vacant since 2017. So it’s showing that there is a real demand for residential rental property in South Africa. But of course various provinces, as well as various rental value bands, perform very differently when we start looking at this data.
SIMON BROWN: I want to dig into some of those geographic and price points, but I suppose in some ways this really low vacancy is not so surprising; high rates have forced many out of the ownership market. They still need a place to stay, and that then says, well, look at the rental market.
WALDO MARCUS: That’s correct. During the pandemic in 2020 and 2021 we saw double-digit vacancies taking place. That was due to the hard-lockdown measures. Then the low interest rates also migrated people from renting property to purchasing it. And, as we’ve seen, the South African Reserve Bank, trying to combat inflation as much as possible, hiked interest rates aggressively and two things happened.
Those who already owned a property and could not afford it exited that agreement and then entered the rental market. New people entered, not necessarily having a clear line of sight of what the interest rates were going to be, and opted for renting rather than purchasing.
We expect that the demand for these properties will remain high as we see the interest rates not going to come down as quickly as possible, as inflation still remains on the high part.
SIMON BROWN: Yes. Expectations are prime, somewhere around 11% at the end of next year. That’s still well up from the 7% we had in the pandemic. You mentioned it’s price dependent. Where are we seeing sort of the biggest growth, and are there certain price points which are perhaps still struggling a bit?
WALDO MARCUS: The rental value band below R3 000 – so those tenants who pay R3 000 or less a month – is still sitting with relatively high vacancies. It has come down from the previous quarter, where it was 14%; it’s now sitting at 7%, so that’s almost halved from the previous quarter to this quarter. Then we see that the very high rental value bands, the luxury market – those units that achieve a R12 000 to R25 000 a month rental – are still well above the national average at 8.56%. It’s a trend very similar to what we see in our residential rental monitor, where we look at tenants in good standing and those that do not pay their rental.
And again, those two value bands, the lowest and the highest rental value bands, those tenants have lower good-standing ratios than other rental value bands. We see that then in their vacancies as well – that they are standing a bit more vacant – although those paying less than R3 000 have recovered very well.
Units achieving R3 000 to R4 500 are sitting just under 8% [vacancy]. They’ve also had a very good recovery from quarter two, where 11% were vacant. And those sitting between R4 500 and R7 000, although they have seen three consecutive quarters of increased vacancies, still remain below the national average, the R7 000 to R12 000 rental value band, which performs exceptionally well across all major property key performance indicators. They are still sitting under the 6% vacancy mark. At the beginning of this year they were sitting at 5%.
So we are starting to see in the R4 500 to R12 000 rental value band a slight increase in vacancies. But that is also because more rental units are available [owing to] escalations. And what that means is with rental escalations increasing various units that would have fallen below the R4 500 are now maybe achieving R4 600, so then they would be moving up into the higher rental value band. So we’re starting to see that migration as we’ve seen healthier rental growth coming through.
SIMON BROWN: Do you get a sense of escalations coming through sort of in line within inflation, or are these sorts of perhaps taking rental increases slightly below inflation or perhaps even above?
WALDO MARCUS: We’ve seen rental escalations remain slightly below inflation, CPI, as of the third quarter of this year they were very similar; but there has been some catch-up on the rental growth side, as during 2020 and 2021. We’ve seen really, really low escalations coming through as property investors and landlords, who are more cautious on increasing rentals and [would] rather ensure that their tenants can afford to pay but, more importantly, that their rental units are occupied. We expect the rental escalations to remain between 5% and 6.5% for quarter four and quarter one going into next year, and we expect that trend to kind of continue unless there is a fast decrease in interest rates – which we doubt will happen in 2024.
SIMON BROWN: I like your point there. It’s that debate around occupancy but also quality of tenants. And of course TPN Credit Bureau sits firmly in at the centre of that. It is a juggling act for the landlord to find a great tenant versus not having your place empty for perhaps a month or two, as you do.
WALDO MARCUS: Yes. That balancing act is something that has been going on for quite a few years, and we see it in our data. Increasing your rental too much will result in a month with a vacancy or two months with a vacancy, which deteriorates your return very quickly. For instance, in Gauteng we’ve seen investors and landlords strike a very good balance between managing their rental increases and growth and reducing their vacancies. Although Gauteng is still above the national average, it has maintained a very good balance on trying to ensure that a unit is occupied rather than sitting vacant.
Some of the other provinces have not really struck that balance. If we look at, for instance, the Eastern Cape, they are kind of sitting at above the national average [with] double-digit vacancies. But they’ve also hiked their rental growth quite aggressively. We start seeing that filtering into their vacancy numbers.
SIMON BROWN: A last question. Any sense of the renters paying their rent or being able to pay? It is tough out there for a consumer [with] inflation, interest rates, and all the other bits and pieces. Are renters paying on time and consistently?
WALDO MARCUS: Yes, they are. We’ve seen quarter three rental [in] good standing, improving again from the previous quarters. Overall, tenants are committed to making their rental payment on time. The number of tenants who did not make any payment towards their rental in a specific month has dropped to 16%.
In your lower rental value bands and in your higher rental value bands we are seeing ‘did not pay’ dropping as low as 4.5% and 5%. So tenants are committed to making their rental payments. That really helps landlords and investors with their cash flow, considering that you’ve got high interest rates but also high maintenance and security costs, etc. So landlords are enjoying the fact that they can increase their rentals, they have better occupancy, but they are also collecting their rental, which is critically important for their businesses.
SIMON BROWN: I take that point, absolutely. Waldo Marcus, industry principal at TPN Credit Bureau, I appreciate the time.
