If you’ve ever wondered who pays the most rent in South Africa, you may be surprised to know that Mpumalanga and Limpopo both top Gauteng, according to the PayProp Rental Index released on Friday.
Mike Schussler, economist and developer of the rental index says that when compared to bank savings rates of 5.5%, the growth in rental income is still giving a reasonable return.
The new rental index launched by PayProp, the largest processor of rental transactions in South Africa, showed that rental income grew by 6.6%, slightly higher than inflation over the past 12 months.
Mike Schussler, economist and developer of the rental index says that when compared to bank savings rates of 5.5%, the growth in rental income is still giving a reasonable return.
According to the index the national average rent in SA as at the end of November 2011 was R5 116 per month, up from R4 797 in November 2010.
“This represents the formal rental market in South Africa and excludes water and lights, but most likely includes property taxes that owners have to pay,” says Schussler.
He says that of the estimated 14.3 million households in SA, about 20% rented but only 17% paid in money and only 5% of households rented a house, flat or townhouse in the formal sector.
Using national mortgage data from the National Credit Regulator and General Household Survey from Statistics South Africa, Schussler says the formal rental market paying more than R500 per month represents about 660 000 properties and is growing at about 4% a year.
The 1.6 million households that pay less than R500 per month in rent and would typically be renting government subsidised, RDP-type housing or backyard dwellings, were not included in the data.
The rental index looked at the average number of active properties rented out on the PayProp database over the last three months, which was taken at a figure of 44 117.
According to Louw Liebenberg, PayProp CEO of Marketing and Sales, this means that they have insight into more than 6.5% of the total formal residential market, which allows for a very good overview of the South African rental market. PayProp represents about 10% of rental agents, he says.
All data is a moving four month average as rentals show seasonal fluctuation particularly in holiday towns and for the purposes of the Index it was estimated that a typical property has 2.5 bedrooms.
Mpumalanga had the highest rentals at an average of R6 101 per month followed by Limpopo where the average rental in the formal suburban market was R5 571, and in third position Gauteng where average rent was R5 465. The Free State was last on the list of provinces at a low R3 775 per month.
The most likely reason for formal rentals being higher in Mpumalanga and Limpopo is probably due to a shortage in suitable housing, says Schussler. He explains that in areas such as Ellisras (Lephalale), the mines and Eskom are very active and rental stock is limited.
Lephalale rentals now average R11 194 per month, Middelburg averages R8 921 and in Lydenburg the average property is rented out at R7 200 per month. These rentals are far higher than Johannesburg at R6 277 per month, Cape Town where the average rent is R5 425 and Durban at R5 405 per month.
While Free State rentals are lowest, this was followed by North West Province with average rentals of R3 855 per month and the Southern Cape with the third lowest average at R4 427 a month.
The PayProp index showed that rentals in the Western Cape had broken through the R5 000 per month barrier for the first time giving landlords an average income of R5 012.
Schussler says cheaper rentals can be found in older towns “where the sun has started to set on the boom years” and decreased mining activity has meant lower demand. Welkom has an average rental of R2 549 per month while the holiday town of Parys averages R3 250 per month.
In some cases the holiday status of a town does seem to help lift average rental income, he says.
Mpumalanga recorded the fastest increase in rental income at 12.4%, rent in Gauteng increased by almost 11% and Limpopo had the third fastest rental increase at 8% over the last year.
On the other hand the North West Province saw an actual decline of 6% in rents, while rentals remained flat in the Free State and in the Southern Cape there was an average growth of only 0.4% over the last year. The Eastern Cape (3.5%) and KwaZulu-Natal (4.2%) also had lower increases, as did the Western Cape with only 4.6% in the last year. All these increased at less the inflation rate.
The PayProp actual rent was R5 116 per month in November 2011, with estimated electricity payments now R1 434 per month and water is at R148 per month. Property rates are now averaging R609 per month. Schussler says this indicates that local governments now collect 29.9% of all payments on a property, which is up from 25.2% in June 2010.
What is concerning, however, is the steep increases in municipal tariffs. Schussler says since June 2010 electricity prices have increased by 42% and water charges by 18.5% while rents have increased only 7.2% as per the PayProp actual rental index.
The PayProp actual rent was R5 116 per month in November 2011, with estimated electricity payments now R1 434 per month and water is at R148 per month. Property rates are now averaging R609 per month.
Schussler says this indicates that local governments now collect 29.9% of all payments on a property, which is up from 25.2% in June 2010.
The highest price increases are by local governments whose increases over the last 18 months were 36.5% combined, while rents only increased 7.3% over the whole period since June 2010, he says. This is not to be confused with the actual year on year increase from the actual rental data which is 6.6%.
Schussler says local government increases are outpacing landlords’ increases in rent, which could result in less demand from people seeking to buy property to rent out as returns will remain under pressure in these circumstances.
Although he says it still makes sense to have a rental property, prospective investors should be careful of price in order to get a return. Other risks to be aware of are tenants not paying and more municipal tariff increases in the future, he adds.
Buy-to-let investors now need to look at real return as against the price return, he warns.
If local municipal bodies are taking such a great chunk of the income, landlords and tenants alike should be asking ‘where are the services we pay for?’ - Julia Hinton
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