June PayProp Rental Index reflects slower growth, higher inflation

Tough economic times seem to be causing some homeowners to sell their houses and rent instead, as consumers fight to keep the home fires going.

And with about 15 percent of the population partly depending on rental income, the immediate future income looks strained as the smoothed year-on-year increase in rental income according to the latest PayProp Rental Index is the lowest in more than two years at 4.9 percent – below the projected inflation rate of around 6 percent.

These findings are included in the June PayProp Rental Index, a research tool recently launched by PayProp, South Africa’s largest processor of rental transactions. The index tracks a series of indices from real-time transaction data to provide a comprehensive view of the state of the residential rental market in South Africa.

“Most developing economies seem to be propped up by low interest rates that are unlikely to rise anytime soon – perhaps not even until 2014,” says Mr Mike Schüssler, chief economist at economists.co.za. “Very low interest rates seem to keep the world going at present.

In South Africa, the Treasury expects inflation to rise to 6.2 percent and GDP growth to slow to 2.7 percent. Schüssler’s expected figure for inflation is around 6 percent and GDP growth 2.4 percent.

“We expect interest rates to stay low for the whole year. We are fighting a hard battle against a possible recession. We are likely to win, but at a higher debt cost,” he says.

More than 2.9 million SA households rent their homes, of which 1.6 million rent formal structures. Of this number, about 700 000 households rent properties in the formal (suburban) market, up from 675 000 in 2010.

PayProp processes the rental transactions for more than 50 000 of these properties and has another 8 000 plus on its database – some of which are not rented out.

More than 62 percent of all South African households own their lodgings, but this percentage has dropped in the last few years and is significantly lower than earlier in the decade when it was around 70 percent. This indicates that more and more former homeowners are now entering the rental market, says PayProp chief executive Louw Liebenberg.

To complicate matters further, nearly 10 percent of all South African households rely on rent for their bread and butter. About 5 percent use rent as supplementary income, adding up to around 15 percent of South Africans getting some form of income from rents.

“On the one hand, tough economic times are making times tougher for tenants as they have to cope with increasing fuel, electricity and services costs, which has put pressure on landlords to limit rent increases to below inflation in order to retain paying tenants who are struggling. On the other hand, landlords, for whom rental income is not necessarily a luxury, are biting the bullet as their income is not growing with their expenses. It is a tough situation,” Liebenberg says.

“Considering that around 77 percent of these landlords receive less than R3 000 a month for their properties, it is clear that it is not only the top end of the property market that is affected.

“Generally you could argue that the lower end of some of the formal rental market starts at about R1 000 a month. However, as it is unlikely that RDP house rentals can be advertised by estate agents, it is being estimated that, other than the 400 000 houses that rent for more than R3 001 a month, there are only about another 275 000 houses for rent in the formal market.

“About 26 percent of all households have second homes, but a large number of these are in rural areas and are generally not lettable.”

The average rent in South Africa was R5 178 a month, which is slightly more than the February figure of R5 172 a month. Using nominal rental income of R5 178 a month, the gross returns on a medium house (using Absa medium price of R968 600) would be 6.42 percent.

Using Absa’s average small house price (currently R666 900), the gross return is 9.32 percent. This means the average gross rental return for medium and small houses is 7.6 percent. This average drops to under 6.3 percent when estimated municipal charges and other minor factors are taken into account.

“This is at least a little higher than leaving money in the bank, and rents do improve slowly over time, and you could also get a capital gain,” says Schüssler.

In the provinces Mpumalanga still leads the rental market, with a year-on-year rental increase of 9.6 percent. Limpopo comes in second with 8.9 percent and Gauteng close third with 8.8 percent. KwaZulu-Natal then follows with 6.0 percent, the Northern Cape with 4.3 percent and the Western Cape with 3.3 percent. The Eastern Cape and North West provinces have again shown negative growth, with -2.1 percent and -2.3 percent respectively.

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