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Why it’s the best and worst time to be a landlord

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Many institutional and single-property investors will attest to the fact that the residential rental market is – by and large – soft at the moment. Rental inflation is tame at 4.19% as at June 2018, down from last year September’s 5.68% according to StatsSA CPI data.

Sentiment, too, is dismal right now, according to FNB’s John Loos whose Q3 2018 FNB’s Estate Agent Survey reveals that 77% of respondents say “economic stress and general pessimism” is affecting household spending – this is up from 18% in Q1 2018 (just six months apart!).

“Simultaneously, the percentage of agents perceiving ‘positive consumer sentiment’ in their market has dropped from 56.7% in Q1 2018 to 9% in Q3 2018,” he says, noting that such negative sentiment could have four major impacts. “It could very likely slow the rate of entry in to the homeownership market, which could imply a higher portion of aspirant first-time buyers ‘hanging out’ in the rental market for longer, boosting rental demand.

“It could also encourage a greater portion of home sellers not to buy another home, but to opt for the rental market. It could discourage buy-to-let buying, constraining rental home supply.

“It could encourage investment homeowners to sell their rental properties in greater numbers, further constraining supply.

“These four factors, should they play out, could exert downward pressure on home values but upward pressure on rentals.”

How to find a good tenant?Hopeful tenant.resize

The challenge, then, for current and aspirant buy-to-let investors is sourcing and retaining good tenants.

TPN data reveals that this is not as easy as one assumes, with its percentage of tenants “in good standing” with their landlords in Q3 2018 sitting at 82.64%.

“Tenants in good standing have not all paid on time, with some paying but paying late,” said Loos. “The percentage of tenants paying on time has dwindled by a more significant 7%, from 72.52% as at Q3 2014 to 65.49% by Q2 2018.”

Price-sensitivity plays a big part in the payment performance of tenants too, amid economic landscape changes.

“As is to be expected, the lowest income groups are hardest hit by weak economic conditions, so the most noticeable decline in the percentage of tenants in good standing has taken place in the ‘Below R3,000/month’ rental category, where the percentage of tenants in good standing has dropped by a significant 8.8% from 81.95% back in 2014, to 73.19%, and is now the poorest-performing rental category,” said Loos. “The ‘sweet spot’ for landlords remains the R7,000 to R12,000/month category, with its percentage of tenants in good standing the highest at 87.34%, having shown no noticeable decline in recent years.”

Homeowners who find themselves under too much financial pressure to maintain bond repayments, and who sell to rent (instead of re-buy), make up a large pool of current tenants.

“The recent results have been significant, with those believed to be moving into the rental market having risen from 40% as at Q1 2017 to 65.6% of the total as at the Q3 2018 survey,” said Loos, noting that these tenants were likely not forming part of the “sweet spot” rental category for landlords due to their financial positions.

While negative sentiment and financial pressures should help to prop up rental demand, those very same factors are bad news for landlords as non-payment and below-inflation rental increases mean landlords need to rely on supplementary income to make up the shortfall in their expected yields.

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david.steynberg@gmail.com

David A Steynberg, managing editor and director of HomeTimes, has more than 10 years of experience as both a journalist and editor, having headed up Business Day’s HomeFront supplement, SAPOA’s range of four printed titles, digimags Asset in Africa and the South African Planning Institute’s official title, Planning Africa, as well as B2B titles, Building Africa and Water, Sewage & Effluent magazines. He began his career at Farmer’s Weekly magazine before moving on to People Magazine where he was awarded two Excellence Awards for Best Real Life feature as well as Writer of the Year runner-up. He is also a past fellow of the International Women’s Media Foundation.

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