Rental supply exceeds demand in Cape town

In spite of the winter rains arriving in Cape Town, many landlords in the city are facing unlet properties for the first time in years.

“Before property investors throw in the towel, this is by no means a reason to panic. Cape Town is a resilient market and this shift is only a realignment that would inevitably follow the unprecedented growth the area has experienced in the last couple of years,” says Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa.

Grant Rea, residential sales and letting specialist at the RE/MAX Living office that operates in the Cape, says it is the first time in seven years that he has noticed a shift to an oversupplied and under demand rental market.

“We noticed a significant shift occur from around October 2017 with landlords facing vacancies for the first time in years. Previously, the demand was always significant enough to ensure each property found a good tenant,” he says.

It is a harsh reality for landlords who have been used to an average gross yield of around 6% a year and now have to be content with 4.5% to 5.5% yields. But, far from being a hopeless situation, Rea suggests that landlords simply need to reassess the anticipated returns.

“Everything rents at the right price as everyone needs a home. There is no question that you will find tenants provided that the rental is competitive,” he says.

What’s more, landlords might also have to revisit their marketing strategies. Rea says that a search on one of SA’s largest property portals indicated more than 4 000 rentals available across the City Bowl and some of the more affordable Atlantic seaboard suburbs. This excludes a significant number of landlords that are offering their spaces privately across social media platforms and on community Facebook pages.

“Agents and landlords will need to do just a little more to expose their properties to a wider audience. This includes video marketing and exposure on social media platforms, as well as creative wording for ads that highlight the best features and consequent benefits for potential tenants. You may want to entice tenants by including extras like Wi-Fi, utilities and services like cleaning,” Rea suggests.

Rather than being an ongoing problem that should raise caution for investors, Rea suggests the following reasons for the shift in an oversupplied rental market:

  • Developers have taken advantage of the remarkable growth and every conceivable space that was available to develop has been snapped up. As these buildings reach completion, most of the units go into the rental market. This problem will persist for the next two years or so as new developments are coming online now, with as many as 35 approved development and blocks nearing completion.
  • Airbnb reached its tipping point during 2017 when the number of units available to let in the City Bowl and Atlantic seaboard reached over 10 000. As more units flooded onto the short-term letting market, owners had to price their units more competitively to compete. Eventually, many landlords became disgruntled and have returned to letting long term again, flooding the rental market as a result.
  • Media reports of the impending drought disaster in Cape Town resulted in those planning a move to the Mother City changing their minds. Earning potential in Cape Town was also significantly lower by as much as 22% in certain sectors, as reported by CareerJunction’s salary review in the last quarter of 2017.
  • Most rental agencies only qualify tenants who earn at least three times the rental amount and ask at least two months rental as a deposit, and this has placed huge pressure on tenants. Combine this with the fact that the growth in income has been disappointing in relation to living costs, and it’s understandable that many tenants have simply decided to move away from more expensive areas and rent elsewhere.

“If you want to ensure you do not face long drawn-out vacancies, then it may be prudent to speak to a realistic agent who can help you take a detailed look at the market to ensure that your rent is set at a competitive rate to attract tenants in this market. Competent agents should be well aware of the situation and will be seeking the best value possible. If you are facing vacancies, perhaps see it as an opportunity to critically assess the property and make necessary repairs and or upgrades,” Rea concludes.