Residential rental growth now below inflation

The growth in weighted average national (residential property) rentals has halved from a year ago and, as of June 2018, is at just 3.27%. A year ago, according to the PayProp SA Rental Index for Q2, this figure was 6.76%.

More alarmingly, weighted rental growth has been below inflation for all of the second quarter (during the first quarter, it effectively kept up with inflation). By June, rental growth of 3.27% was over one percentage point below inflation of 4.6% in the month.

Because of the subdued rental market, PayProp makes the point that “the actual price of goods rose even more than the inflation rate of 4.6%”. It adds that the upward trend in inflation was “to be expected after the increase in the Vat rate in April”.

Statistics SA reports inflation for “actual rentals for housing” (for the country as a whole) as 4.2% year-on-year in June 2018.

According to PayProp, the weighted index has been below 5% for all of 2018 so far. The last time growth dipped below 5% – based on historical rental index publications – was in 2014. It must be noted that this followed a period of strong growth following the recession caused by the global financial crisis.

A separate report from rental credit bureau Tenant Profile Network (TPN) – its Q2 Residential Sector Vacancy Survey – shows that vacancy rates increased to 7.9% in the quarter. For properties with rentals higher than R12 000 a month, vacancies are nearly double that, at 14%. TPN’s rating for demand continues to decline (70.49% in Q2), with the overall market strength index of 54.71 moving very close to equilibrium (50).

The market strength index per price band shows the disparity between activity in the lower end versus the upper-middle and higher end of the market. Regardless of band, however, the trend in market strength over the past two years is clear.

Weighted average national rental growth rate vs inflation – y/y to June 2018 

The difference in rental growth between provinces is stark, but perhaps expected. PayProp makes the point that “the top three provinces by weight (contribution to GDP) are Gauteng, KwaZulu-Natal and the Western Cape, [and this] explains much about the lower national growth rate – it’s thanks to the disproportionate influence of lower growth rates in those provinces.”

	Q2 2018 vs Q2 2017	Q1 2018 vs Q1 2017
Free State	8.14%	6.26%
KwaZulu-Natal	7.75%	7.31%
Western Cape	6.97%	8.86%
Eastern Cape	3.98%	3.42%
Gauteng	3.62%	3.80%
Mpumalanga	2.05%	1.48%
North West	-0.30%	-0.69%
Northern Cape	-1.08%	5.27%
Limpopo	-5.24%	-6.14%

Source: PayProp 

TPN’s market strength index per province provides further evidence of this divergence.

Growth in the Western Cape “slowed to just 6.97%” in the quarter: “This is the lowest rental growth we’ve seen for that province since Q4 2012, when the year-on-year figure was 6.44%. That being said, average rent levels are still highest in the Western Cape at R8 805, compared to the weighted national average of R7 359.”

How do the rest of the provinces measure up?

Average rent levels per province for Q2 2018 

Of concern is the picture in the Western Cape over the past five years. In its report, the rental platform provider notes that the fastest growing province “doesn’t show any clear peaks and troughs”. Rents continued to grow at around 10% throughout. “The two lowest points over the period are the first and last quarters, so one could view the entire period as one long cycle.”

Western Cape quarterly growth rate (y/y) since Q4 2012 

Compare this to other major provinces, where there is clear evidence of two cycles over the period. PayProp argues that it is “completely normal for rental growth to go through cycles”, and thus it expects the Western Cape to “normalise”, in other words “have clearer cycles”, in the quarters to come.

In an unambiguous warning, it says that “if provincial cycles are anything to go by, the Western Cape is at the start of a declining cycle. It is likely that there will be at least two more declining quarters before we can expect an upturn.”

While not directly correlated to the rental market, house price growth in the Cape Town metro has cooled almost across the board. On the Atlantic Seaboard, house price growth has decelerated further, with prices up just 1.94% year-on-year in the second quarter. This is a sharp drop from the multi-year high of 27.7% year-on-year in Q4 2016, just 18 months ago.

Read: After inflation, Atlantic Seaboard house prices are now in decline

Paradoxically, the historical trend could represent good news for Gauteng, if we take the “judging by the previous cycles, it is very possible that we’ll see signs of recovery within the next two quarters” long-view.

Gauteng quarterly growth rate (y/y) since Q4 2012 

In the Q2 Rental Index, PayProp has not provided any update on the arrears trends it published in Q1. By March 2018, the percentage of tenants in arrears had jumped to 23.2%, from 18.5% in April 2017. It points out that this translates to only “76.8% of tenants” paying “their rent in full every month”. One in four doesn’t.

The days of landlords banking on ‘guaranteed’ 10% (or even high single-figure) annual escalations in rent are long gone.

* Hilton Tarrant works at YFM. He can still be contacted at [email protected].