Market conditions boost rentals

Current market conditions are forcing people to rent rather than buy, and this is resulting in a booming rental market.

"The NCA, rising interest rate hikes and diminishing affordability through inflation have resulted in many home buyers placing the decision to buy on hold," says Richard Gahagan, MD of Property24, "and if the predicted June hike of 100 basis points comes off, it will make things even tougher."

So where are people living who can't afford to buy? In rental homes, says Gahagan. "Even on the stock markets, when one asset class drops another climbs in reaction, and it's the same in the property industry. An inability to buy at present has resulted in many people turning to renting – an obvious benefit to those who own rental properties and can afford to ride out the storm."

His sentiments are echoed by John Loos, FNB Home Loans property strategist, who said recently that it appeared as if many potential first-time buyers may be biding their time in the rental market as it is currently an attractive option from a cost point of view.

"I believe that in the current environment of uncertainty and negativity the resumption of rate hiking will be an additional boost for rental demand," Loos says.

According to FNB's April rental index, tenants in South Africa are paying annual rentals that equate to approximately 8% of the property value. A cluster home worth R1m will cost around R8,500 per month to rent, but the bond repayment on buying the same property will cost in excess of R12,500 per month. "This makes renting significantly cheaper than buying," says Gahagan, "although of course there's no long term investment. In addition, a rental of R9,000 per month can offer a much nicer home in a better area than a bond repayment of the same amount."

This doesn't mean renting is not getting more costly, says Gahagan. "Increased demand is putting upward pressure on prices, as is the increasing interest rate. Trafalgar Properties released rental index figures for 2007 earlier this year that showed Johannesburg rental prices have risen by 11% over the past year, while nationally the increase was 9% - compared with 6,4% for 2006."

Rentals at all price levels are booming. Agents in the Western Cape metro region have seen significant activity in the top-end bracket in recent months, with prices of up to R50,000 per month for corporate rentals, particularly in the southern suburbs, the city bowl and the Atlantic Seaboard. The inner cities, too, seem to attract a younger, more cosmopolitan tenant prepared to spend more.

However, the lower end of the market is having a harder time, says Gahagan. "Landlords are becoming more careful as a result of defaulting tenants, and have begun insisting on double deposits and higher rentals to protect their investments. And the new municipal rates structure being introduced in some provinces will help to push rentals up even higher."

The type of rentals that are being sought has also changed. "Many people who have been forced into renting favour homes closer to work and schools," says Gahagan. "The rising fuel costs have taken a heavy toll and people prefer not to travel more than necessary."

Security is also an important draw card, but once again it can help to push up the rental price. All the same, FNB's property barometer showed that 75% of rental properties are snapped up within a month of coming to the market, while agents report that it's not unusual to have up to 30 potential tenants for each rental.

All this is very good for the rental market, says Gahagan. And the upside is that a good return on investment will encourage investors with spare cash to buy more potential rentals which will help to stimulate the market again. By Tracey Sandilands

Related articles