The number of residential tenants classified as ‘squatting’ has progressively increased in South Africa in the past decade.
Tenants classified as squatting are defined as having not paid three consecutive months of rent and continuing to occupy the property in the fourth month.
TPN Credit Bureau said although this trend is cause for concern for landlords, the total number of tenants classified as squatting – fewer than five out of 1 000 tenants – remains small when compared with the number of tenants who do meet their rental obligations.
However, TPN said the Covid-19 pandemic has resulted in some tenants “abusing the system to their advantage, creating fear and uncertainty with the property investment market”.
This is a reference to government regulations issued during the pandemic in terms of the Disaster Management Act, which prohibited the execution of any eviction, even if authorised by a court, for the duration of the lockdown.
This regulation was intended to protect tenants and consumers during the pandemic because of reduced and unstable income, which resulted from many companies forcing employees to make salary sacrifices, particularly during the hard lockdowns.
Tenants in good standing
TPN Credit Bureau also reported a deterioration in the number of tenants in good standing with their landlords in the first quarter of 2022.
Tenants in good standing dropped to 80.78% from 81.4% in the fourth quarter of 2021.
A tenant is considered in good standing when they have paid their rental account in full for the month, even if they paid late.
FNB property economist John Loos said on Monday that this is not surprising.
Loos said there was a good recovery in the percentage of tenants in good standing to above 80% following the dip during the pandemic, but since late last year interest rates and cost of living inflation started to increase and fuel prices were already rising, resulting in the consumer price index (CPI) accelerating.
“Higher inflation starts to squeeze tenants and higher interest rates as well.
“It’s still a reasonably good figure when it’s above 80% but I would expect some further weakening as the quarters go by this year because of interest rate hiking and inflation,” said Loos.
“However, I don’t think it will drop as badly as it did during the lockdown.”
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The percentage of tenants in good standing dropped sharply to 73.5% in the second quarter of 2020, which was the quarter in which the hard Covid-19 lockdown was implemented in South Africa.
TPN believes landlords need to be aware that getting rental payments in on time is likely to be a challenge going forward, as inflation continues to place consumers under pressure and landlords are forced to escalate rentals.
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The worst-performing category of tenants were those paying less than R3 000 per month, with only 68.1% of tenants in this price bracket in good standing.
The only rental price bracket that has showed a continuing improvement in tenants in good standing is those paying R12 000 a month or more.
TPN said almost 70% of the rental market pays R7 000 or less per month, while 22% pays between R7 000 and R12 000 per month.
“This means that only 8% of the rental market is improving their good standing [percentage],” it said.
Tenants who paid late or within the grace period improved to 14.54% in the first quarter of 2022 from 15.06% in the fourth quarter of 2021, while tenants who only made a partial rental payment increased to 11.85% from 11.48% in the same period.
The percentage of tenants who did not pay any rental at all increased to 7.37% from 7.13% in this same period.
TPN reported a partial recovery in demand for residential rental properties in the first quarter of 2022, with the vacancy rate recovering to 8.26% from 13.31% a year earlier.
It attributed this to low rental escalations, further supported by slightly improved employment figures.
TPN said the more people who are employed, the higher the demand for formal rental stock.
It said vacancies are expected to decrease further to below 8% by the end of the second quarter as consumers continue to face financial pressure from rising fuel and food prices and spiking inflation, which has resulted in the South African Reserve Bank (Sarb) embarking on a series of interest rate increases.
The monetary policy committee at the Sarb last week announced a 0.75 percentage point increase in its repo rate, resulting in the prime lending rate rising to 9%.
Read: Sarb announces sharper 75bp repo rate hike
Loos believes residential rental demand could strengthen further, despite existing tenants being mildly poorer.
“There can be some new rental demand coming in, because a portion of aspirant [house] buyers will postpone their buying while interest rates are going up and hang out in the rental market for longer,” he said.
TPN warned that consumer pressure increased in the second quarter of 2022 and is likely to continue worsening in the third quarter in tandem with a worsening economic outlook, which includes rising food and fuel prices and higher inflation.
It said poor consumer confidence is reflected in the FNB/BER Consumer Confidence Index, which sank to -25 in the second quarter from -13 in the first quarter of 2022.
“The only time in recent history that it has been lower was at the start of the Covid-19 pandemic. This doesn’t bode well for economic growth or job creation,” it said.
TPN added that South Africa may well be heading for a technical recession, the term used to describe two consecutive quarters of negative economic growth.
“While it’s very clear that consumers will be under strain in the coming months, ironically this could see increased demand for residential rental property,” it said.
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