Home rentals and tenant payments

11 Oct 2012

Tenants renting homes priced below R3 000 per month have a high rate of non-payment with 18 percent or nearly 1 in 5 tenants unable to pay any amount towards the rent, according to the Tenants Profile Network (TPN) Rental Payment Monitor Q2 2012.

According to the report, on a national average, 81 percent of tenants were in Good Standing with their landlords, with the make-up of the bracket comprising 68 percent in the Paid on Time sub-category and 13 percent Paid Late.

Writing in the report, TPN managing director Michelle Dickens says it appears investors are performing inadequate affordability assessments as the rent is considered of relatively low value.

Dickens explains that the South African Reserve Bank Quarterly Bulletin indicates that the household debt to disposable income ratio is starting to increase, from 74.6 percent to 76.3 percent.

There are concerns of food shortages with commentators suggesting an average 15 percent increase in the cost of food while Eskom has proposed a 15 percent annual increase in electricity until 2017.

“Increased pressure arising from such factors will no doubt influence the budgets of most tenants and TPN expects those at the lower end of the market in the rental category of R3 000 per month and below to be most affected.”

The report reveals that 17 percent of tenants renting homes priced R12 000 and above pay rent late.

“This payment behaviour requires the landlord to have cash flow available to fund monthly costs while waiting for incoming tenant payments,” says Dickens.

Those renting homes priced between R3 000 to R7 000 and R7 000 to R12 000 continue to perform best with 84 percent and 85 percent respectively in Good Standing.

Dickens points out that these tenants appear the most stable and are affected less intensely by changing market conditions.

According to the report, on a national average, 81 percent of tenants were in Good Standing with their landlords, with the make-up of the bracket comprising 68 percent in the Paid on Time sub-category and 13 percent Paid Late.

Dickens points out that while rental categories showed a slight improvement across all provinces, Gauteng and KwaZulu-Natal remain the most challenging.

Delinquent tenants in Gauteng are more likely to make a partial payment (10 percent) rather than skip the payment (13 percent) but tenants in KwaZulu-Natal show a higher probability of skipping payment (15 percent) with a smaller number electing to make a partial payment (7 percent).

Dickens says residential rentals will always be in demand, however, the key for investors is to select properties in the most appropriate value bracket and location – and then place quality tenants who have been properly screened, including an affordability assessment.

The Western Cape and Eastern Cape have proved over time to have the most reliable rental payment performance, with 86 percent and 88 percent of tenants in Good Standing when viewed against the national average of 81 percent.

Dickens says residential rentals will always be in demand, however, the key for investors is to select properties in the most appropriate value bracket and location – and then place quality tenants who have been properly screened, including an affordability assessment.

“A tenant’s ability to make a full and timeous rental payment is not only dependent on the desire to make such payments, as their financial position plays a critical role.”

 Without a full understanding of the financial position of a would-be tenant, no investor can assess whether the asking rental is within the means of the tenant, she says.

Given the risk of further deterioration in the overall credit market and unsecured credit lending concerns expressed by the National Credit Regulator, wise investors will be looking at affordability buffer zones in anticipation of a possible bubble, says Dickens.

Meanwhile, Seeff Properties report an increased demand for rental homes in the greater Constantiaberg area from Observatory through to Tokai in the Western Cape.

Andy Todd, Seeff’s licensee for the area explains that they are currently concluding about 20 new lease agreements monthly and have signed up about 80 new tenants in the last quarter at monthly rental rates of between R3 500 for a two bedroom apartment and R50 000 for a family home in Bishopscourt.

He says the continued good performance of the rental market presents a real opportunity for buy-to-let investors, while the flat house price growth along with the low interest rate make this a good time to invest.

Click here to read about house prices.

“It is important for would-be investors to do their homework and ensure that they partner with a credible rental agency and buy the right property in the right location to secure the desired return on investment,” says Todd.

He says while many of their tenants fall within the traditional rental demographic that includes students, young singles and professionals in the early stages of their career, they also find increasing numbers of young families looking to rent while still deciding where to buy.

“Economic challenges continue to spur demand as many still battle high household debt or simply cannot secure mortgage loans.”

Todd points out that there is sustained demand for corporate rentals to accommodate short and long-term contracts as well as from new residents moving into the city from up country areas such as Johannesburg.

Tenants look for apartments priced around R4 000 per month and medium-sized family homes and security estate residences priced between R10 000 and R15 000 per month in the suburbs of Claremont, Newlands, Constantia and Rondebosch.

She points out that tenants choose well-maintained properties and rental prices need to be seen to offer good value as overpriced properties do not attract any attention.

He says in the greater Constantiaberg suburbs, it is possible to find rentals priced from as little as R3 200 per month per studio apartment while a two bedroom unit can be rented from around R3 400 per month.

Units located close to Claremont and the University of Cape Town are priced from R4 000, according to Seeff.

In City Bowl, Seeff rentals agent Elzunia Singer says although the rental market is booming, landlords need to be flexible – they need to heed the advice of rental specialists in terms of what is in demand and, at what price as tenant’s circumstances change.

For example, she says, there is very little demand for furnished homes, as tenants prefer unfurnished.

Another vital trend is the high demand for pet friendly properties suited to small, house trained pets.

European tenants in particular are used to pet friendly properties, but Singer says the demand is across the board.

She points out that tenants choose well-maintained properties and rental prices need to be seen to offer good value as overpriced properties do not attract any attention.

Singer says they have already renewed 68 rental agreements for the year and concluded a further 25 new lease agreements.

“Current escalations are around 4 percent, slightly higher than the 2 to 3 percent average for the Western Cape, according to the latest statistics provided by TPN,” says Singer.

In demand mostly are three bedroom properties priced below R15 000 and at the top end of the market, she says rental homes in Tamboerskloof have been let out at rental yields of between R15 000 and R30 000 per month.

She adds that rental periods are about a year on average and many tenants are renewing their leases. – Denise Mhlanga

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