How are tenants expected to fund an increase in rental inflation if their salaries are not growing at the same pace? This is the question of PayProp CEO, Louw Liebenberg, who adds that rentals make up just over 25% of the average tenant’s after-tax salary.
Most consumers tend to gravitate toward short-term debt as a first call of action when stretched financially. Currently this means that the average tenant has eight store (Credit Provider Association) accounts and three loan (National Loan Register) accounts.
The cost to the consumer to repay these accounts is R10,620 per month on average – 43% of the average tenant’s after-tax earnings of R24,442.
“If consumers were able to balance their debt obligations with their ability to manage their credit, that would be acceptable,” says Louw. “But the reality is that instead of reducing their level of debt, consumers are increasingly dipping into their available credit resources.
“In a sample of 20,000 prospective tenants, PayProp found they have used up almost 70% of the available credit that has been provided to them. This means that their ability to absorb any economic life shocks (new tyres, braces, unexpected medical expenses) is vastly limited. And considering that after debt repayment, their next largest financial commitment is rental, which is R6,576 (or 27% of a tenant’s after-tax earnings) on average. Their chance of defaulting on this expense continues to increase.”
High-end not immune
Liebenberg says that letting agents who assume that if they operate in higher income areas these levels of debt will not affect them. But the finding is that while prospective tenant incomes increase, and in general their credit rating decreases, the opposite is true in rentals above R15,000 per month.
There are, on average, more high and very high risk prospective tenants in this category than in the price band of R7,500 to R10,000 per month. The assumption is that these consumers are signing up for leases beyond their means.
There are two really powerful strategies to employ. The first is better tenant selection, which does not only mean placing better scoring tenants, but understanding tenant affordability and placing tenants accordingly.
Services such as PayProp Tenant Assessment Report and TPN are good starting points for private and institutional landlords to provide information on prospective tenants’ credit ratings and the ability to “predict” tenant payment behaviour.
The second strategy concerns deposits. Louw explains while deposits are there to protect landlords against non-payment and damages, one would assume that as the risk increases, agents should increase the deposits. But increasing a deposit in tough economic times may just push a tenant into a worse cash flow position and increased the risk of non-payment.
To ward off this risk, deposit replacement products have been introduced. PayProp’s Capital Deposit Guarantee is one such product which provides the landlord with 2,5 times the cover of the rental value. The tenant does not put down a deposit, but instead pays a premium towards the insurer who then warrants to the owner that any contractual costs (i.e. damages, one month’s unpaid rent, etc.) will be paid by the insurer.
“Whichever way you look at it, the coming year is not a case of ‘business as usual’ for the letting industry,” says Louw. “The agencies that are going to excel in this environment will be those who pay attention to selection and spend more time with prospective tenants to understand how they can help them find, afford and structure the financing of the home they want to rent.”