Only 67% of residential tenants will, on average, be in good standing with their payments when measured across the whole of 2020.
John Loos, property strategist at FNB Commercial Property Finance, says this “weak” figure is “likely to include a very significant rise in the percentage of tenants being given a grace period to get through the lockdown too”.
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According to credit bureau TPN, the figure for tenants in good standing in the first quarter was 78.57%, a decline of over 3.3% from the last quarter of 2019. Loos says that while lower, this figure will still help the annual average look “less severe”.
TPN counts those who paid rent in full, whether it was on time or late, as tenants in good standing. The two other categories are those tenants who only made a partial payment, and those who did not pay at all.
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Loos’s model uses the recession in 2009 caused by the global financial crisis as a guide. He says “using TPN tenant performance data, we observed that a sharp dip in the percentage of tenants ‘in good standing’ with their landlords coincided with that recession early in 2009″.
“From around 85% early in 2008, the percentage of tenants in good standing dropped sharply to 71% by the first quarter of 2009, while the percentage that paid on time dropped from 70% early in 2008 to 54% by the end of 2008.”
During the contraction in 2008/9, “the percentages of tenants that ‘did not pay’ as well as the percentage receiving a grace period from landlords spiked quite sharply around that time”.
If a “mild recession, including a 1.5% annual dip in 2009, caused the tenants in good standing percentage to bottom at 71% early in 2009, we should probably expect a more significant decline in this percentage in 2020, based on the more severe FNB GDP contraction forecast of -4.5%,” says Loos.
This is the most recent forecast by the bank, but Loos notes that “certain other forecasters are more pessimistic”.
Based on a contraction of 4.5% in GDP, Loos expects “the quarterly bottom point [of tenants in good standing] to likely be in the 50-60% range, possibly in the second or third quarter of 2020”.
A decline of closer to 10%, as some scenarios project, will surely drive that number to below 50%. This will be dire for landlords.
|Residential tenants||Q4 2019||April 2020*|
|In good standing||81.88%|
|– Paid in full and on time||66.23%||±64%|
|– Paid in full, but late||15.65%|
|Did not pay||6.98%||±16%|
* Preliminary data, as at April 21
Preliminary TPN data for April, released three weeks into the month, showed that at that point approximately 16% of tenants had only partially paid their rent for April, while a further roughly 16% had still not paid. TPN MD Michelle Dickens said: “The main priority right now is rent collection, there is still time in April for late payment collection which of course will reduce the number of tenants currently reflecting as partial or non-payers.”
It is worth highlighting that according to TPN data from April 7, 24% of tenants were in the ‘did not pay’ category.
Dickens said that TPN has seen a 30% increase in tenant letters of demand so far. Evictions are not permitted under National State of Disaster regulations. But she cautioned that “the stark reality for many tenants with limited or no income for the month of April means they are facing 1 May with no savings for rent”.
FNB’s Loos notes that the year-on-year decline in GDP bottomed out in the second quarter of 2009, “one quarter after the ‘tenants in good standing’ percentage hit rock bottom”.
“But while the GDP post-recession peak was early-2011, the residential tenant population took significantly longer to fight its way back to health, the post-recession peak in the percentage of tenants in good standing only being achieved at a level of 85.95% in the third quarter of 2013, over two years after the economic growth recovery peak.”
This translates to a recovery period totalling 3.5 years, following the global financial crisis. This benchmark, says Loos, is “perhaps a useful perspective on how long we should expect the full process to be”.
However, Loos says one aspect that could see the number of tenants in good standing surprise “on the upside is the possibility that many landlords are sympathetic to the problem many good tenants face during lockdown, and may [be] far more accommodating this time around [compared to 2009] in terms of granting grace periods to tenants”.
Compounding the woes of landlords, Loos says the weaker market will mean rental deflation this year and next. His forecast is for -3% in 2020 and -4% in 2021.