Rental increases slowest in 2.5 years

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15 Nov 2012

The third quarter PayProp Rental Index shows that rents in South Africa increased at the slowest rate since the index started. 

With the economic recovery still very slow, it seems that landlords are finding it very difficult to increase rents at pre-recession rates and that renters, whose financial position has deteriorated due to cost of living increases, cannot afford much higher rents in many places in South Africa.

The average rental rate increased to R5 221 in September, which was only 3.9% above the average rental charged in September 2011. According to the data, rents are increasing at their slowest rate in two and a half years. 

Rents peaked in June 2012 at a revised R5 232 per month in absolute terms, indicating that rents actually declined by R11 over the last four months. Rental increases have been in single digits for 23 months on a year-on-year basis, with the Soccer World Cup being the last big boom for the residential letting market. The 3.9% average rental increase is much lower than the 5.5% consumer price increase in September, indicating that rental increases are not rewarding investors fully for inflation risks. 

With the economic recovery still very slow, it seems that landlords are finding it very difficult to increase rents at pre-recession rates and that renters, whose financial position has deteriorated due to cost of living increases, cannot afford much higher rents in many places in South Africa. 

Chart 1: Increases in South African rents. Source: PayProp and economists.co.za

As the PayProp data is smoothed over the last four months, the data does not yet fully reflect the depressed rent environment, and with the strikes hitting the North West, Gauteng and parts of the Free State, it seems that rents in the following months will in all likelihood remain under pressure. However, with high salary increases there is hope that the rental increases in the new year may yet recover to some extent.  

Using Absa medium-sized house prices, PayProp has developed a gross rental yield index. This index is recording gross rental yields of 6.1% for the month of September. It is up from 6.0% from a year ago, but also slightly lower than at the beginning of the year when returns were closer to 6.4%. 

Chart 2: South Africa weighted average rental. Source: PayProp and economists.co.za

The 6.1% gross rental yield is fairly constant and has not changed by more 0.1% in the last four months. These gross yields have also remained fairly constant between 5.5% and 6.4% over the last three and half years, and at present are better than yields in a bank account where investors can expect to get only about 5%. 

Gross rental returns are, however, not the best way to compare property returns, as property assessment rates, sewerage and refuse collections are often left for the landlord to pay. This, along with a home maintenance cost index and agent income, must also be subtracted. Total deductions for a landlord on the average property are estimated to be R1 488 per month. This lowers the gross monthly rental from R5 221 to R3 733 per month. 

Nett rental excluding maintenance would leave a yield of 4.4%. However, not doing maintenance would lower capital returns on the property. 

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