Tenant Profile Network (TPN) credit bureau reports that the slow and steady deterioration in the percentage of residential tenants in good standing, which started in the third quarter of 2013, continued into the second quarter of this year.
Tenants in good standing are those who pay in full on time, during the grace period or who pay late.
TPN says tenants in good standing peaked at 85.95% in the third quarter of 2013 and deteriorated to 81.77% in the second quarter of this year. This comprised a combination of 66.15% of tenants who paid on time and in full, 4.72% who paid in the grace period and 10.9% of tenants who paid late.
Delinquencies increased overall to 18.24% in the second quarter of this year from 14% in the third quarter of 2013.
In the second quarter of this year, delinquencies comprised 11.3% of tenants who made a partial payment and 6.94% of tenants who did not pay, compared with the third quarter of 2013, when 8.43% of tenants made a partial payment and 5.61% did not pay.
Michelle Dickens, managing director of TPN, says the deterioration in residential tenants in good standing coincided with the start of the downward business cycle that started in December 2013, which historically has been the longest since World War II.
Dickens says TPN notes the quality of tenants applying for rent has weakened from 80% to 75.24% on the Credex default score. “With a similar deterioration in tenants placed, it is clear landlords are experiencing pressure caused by a shrinking pool of quality tenants.”
Economic slowdown hitting home
John Loos, property strategist at FNB Commercial Property, attributes the deterioration in the residential tenant profile to the slowdown in economic growth. He says the interest rate hiking cycle from 2014 would have had some minor role but the bigger reason is the slowdown in the economy, disposable income and job creation with, in some instances, increased job losses.
“It’s just gradually been getting tighter in recent years for households financially, due to the slowing economy and due also to things like increasing effective personal tax rates along with municipal rates and tariffs,” he says.
However, Loos stresses that the deterioration in the payment profile of residential tenants has to date not been severe and been more of “a slow puncture”.
Loos says in about 2008/2009 the percentage of tenants in good standing dropped to about 71%. Residential rental increases had broadly slowed as well and landlords did not have the pricing power they used to.
He doesn’t believe it’s possible to forecast when an improvement in the payment profile of residential tenants will commence.
“I think this economic stagnation is a long one and it could be a good number of years of gradual weakening.”
Jacqui Savage, national rentals manager for Rawson Property Group, says that after 18 months of minimal growth, South African landlords may not be feeling particularly optimistic about their rental investments.
However, the PayProp Rental Index for the second quarter of this year shows trends that may finally signal that they have ceased their downward trajectory. Savage says this is good news for landlords but isn’t necessarily a sign of a market turnaround.
“Rental growth over the last six months has been virtually flat. That might not seem particularly positive for landlords, but when taken in context with moving average trend lines dating back to 2017, it shows the first reliable sign of an end to the national rentals growth decrease.”
She adds that while a flat trend line is unlikely to get anyone’s pulse racing, the majority of rental assets are still delivering solid returns over the long term and it is this long-term outlook that landlords should be encouraged to focus on.
“For rental growth to recover, tenant affordability needs to recover too. Trends like flat growth may not appear to be overly positive indicators, but they do suggest that the market has reached a vital equilibrium.”
TPN says the best-performing tenants in terms of rental payments are in the R7 000 to R12 000 a month price bracket, where 86.93% of tenants are in good standing and only 4.19% don’t pay.
But TPN says the challenge for this segment of the market is its deteriorating market strength, because of tenant affordability constraints and an increase in rental stock.