Two separate reports show that at least one in five residential tenants is in arrears.
The PayProp Rental Index for the third quarter says that by September, 22.6% of tenants remained in arrears. This is below the peak of 26.1% reached in May; arrear levels have slowly improved monthly since then. However, 22.6% remains noticeably higher than levels of just above 19% across the first quarter of 2020.
PayProp notes that because most tenants pay rent in advance “it is possible to surmise that many tenants expected to run into financial difficulty when lockdown was first announced and opted not to pay their rent in preparation for that, or perhaps only paid partially”.
Size of arrears relative to one month’s rent is another metric tracked by PayProp’s index and this “peaked in July at 105.9%”.
“From July to September, this metric dropped by only 3.5 percentage points to 102.4%,” it says, adding that it will take “some time to reach a figure close to 80%, last seen in March”.
Delayed impact of massive financial knock
A separate report from credit bureau TPN, while showing a similar improvement since the second quarter, says that only 74.57% of tenants were in good standing in Q3. However, TPN says this “remains well below the pre-lockdown first quarter percentage of 81.52%, a reflection of the lagged impact of the massive financial knock felt by the tenant population from the second quarter lockdown and resultant severe economic contraction”.
“As we had anticipated, the recovery post-lockdown appears to be stacking up to be a long and slow one.”
For context, the impact of the global financial crisis in 2008 and 2009 saw a low point reached of 71% of tenants in good standing. A “fully recovered” market, reached in 2015, saw that level improve to nearly 86%.
Perhaps more concerning for landlords (or want-to-be landlords) is that those “tenants that paid on time (those who paid late and those with grace periods making up the rest of the tenants in good standing) amounted to 60.74% of total tenants, which is slightly up from the second quarter’s 59.48%, but still down from 64.84% of the first quarter”.
Only one in six paying on time across the market
This means only one in six tenants is paying on time across the market. While better than the low of 54% in 2008, this remains far from levels of 73% achieved in a “fully recovered” market in 2015.
Put another way, nearly as many tenants paid on time when the market was “fully recovered” as are currently in good standing.
Digging into the breakdown of those tenants struggling to keep up with their payments is telling.
According to TPN data for Q3, the percentage not paying at all improved to 8.95% (from 11.22% in Q2), as did the percentage paying late, to 13.83% (from 16.68%).
Those making “partial payments continued to increase, from 15.28% to 16.49% over the two quarters”.
“Partial payments are the largest component of the two categories of tenants not in good standing (the other category being those who did not pay at all).”
Pay cuts and debt
This speaks to the possible impact of both long-lasting ‘temporary’ pay cuts, as well as households having taken on significant amounts of debt to get them through the lockdown period. This will take some time to unwind.
One positive sign in this data is that the number of tenants not paying at all is significantly lower than the peak reached in the aftermath of the global financial crisis.
What is also telling is that the middle-income segment of the market has remained most resilient. Over 80% of tenants are in good standing in both the R7 000 to R12 000 a month and R12 000 to R25 000 a month rent categories. These are the two top-performing segments. The lower end of that middle market (R3 000 to R7 000) is struggling a little more but has recovered as well.
TPN says it is “the very low end and the very high end showing the weakest tenant performances”.
“At the very low end we believe it is due to this group having few if any financial buffers to weather economic and financial storms, while at the very high end it is more likely to be financial over-commitment.”
The sub-R3 000 a month rental segment has just more than 62% of tenants in good standing.
TPN says its most recent set of indicators points to a “muted improvement in the payment performance of the residential tenant population, but to the continued weakening of the Residential Rental Market”.
“Tenant payment performance did improve mildly in the third quarter, following the major lockdown-related weakening of the second quarter, but it remains a weak situation.”
TPN has polled for data from its network and Q4 data – due to be released early next year – will give further clues about the fragility of the market.