Highest rents still Mpuma & Limpopo

18 Feb 2013

South African rental returns on its own are not keeping pace with either inflation or with cash in the bank, according to the latest PayProp Rental Index released last week. However, when combined with actual house price increases, total net property returns offered double digit growth. 

Using Absa house price indexes for medium-sized houses, it comes to light that gross returns on rentals in South Africa were steady at 6%. While money in a bank earns 5% on a call deposit, gross rentals earn a little more.

The average gross rental in South Africa was R5 357 for the month of December 2012. This was 4.5% higher than a year ago and was based on about 53 000 homes on the rental market. Overall rental growth is heading up again after reaching a low of 3.9% in September. 

However, rental increases have remained below 5% for five months now and have increased with less than the rate of inflation for the last eight months. The highest rent still seems to be in Mpumalanga and Limpopo, where towns such as Ellisras and projects like the building of the Medupi power station bring high demand and restricted supply. 

KwaZulu-Natal has overtaken Gauteng as the third highest rental income market. This is probably due to an oversupply of houses in the Gauteng market, coupled with holiday rental along the coast pushing up rentals in both KwaZulu-Natal and the Western Cape. Gauteng rentals dropped with 0.3% on a year ago. 

North West and the Free State still have the lowest rents in the country. There are also some strong indications that rent is growing fast in the Western and Northern Cape, as well as the Free State and Mpumalanga. 

The Eastern Cape and Gauteng seem to have struggling rental markets at present, as rental income has declined on a year ago. 

Graph 1: Actual weighted average rents in South Africa. Source: PayProp and economists.co.za

Using Absa house price indexes for medium-sized houses, it comes to light that gross returns on rentals in South Africa were steady at 6%. While money in a bank earns 5% on a call deposit, gross rentals earn a little more.

At present, trends indicate that rental increases are to pick up a little as the rental prices did increase with 2.6% over the last quarter despite the consumer remaining under pressure from high increases in energy and food prices. 

The quarterly increase is the fastest since July 2010. However, one must be careful, as the rentals along the coast seem to have increased above average, indicating that some holiday renting may have affected the figures from some coastal areas in December 2012. 

In Gauteng, the coming of the toll roads may make for changes in the rental market, as working citizens may want to move closer to their place of work. The coming of big projects in Durban could also affect rentals in that province, going forward. 

Despite high increases toward the year-end, indications from other data suggest that rental increases will not be much above inflation for 2013 and perhaps even 2014. The inflation rate may be a little higher, but we believe that rental increase will remain more or less in line with inflation. 

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