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Residential rental market: Still muddling through

Economic factors still weigh on the market.

The growth in rental flats over the last five years continues to muddle along, with the outlook remaining uncertain in light of a local economy still in limbo.

Since 2009, the growth in flat rentals has remained constrained but there are indications that the market may turn around.

This is according to the Rode’s Report on the South African property market for the fourth quarter of 2014, which shows that national nominal (before adjusting for inflation) flat rentals grew by 6%.

“Nationally, the yearly growth in flat rentals is gaining momentum. However, whether this trend is will continue is a moot point,” the report says.

While this growth is not shooting the lights out, it has been growing since the second quarter of the year. However, the growth is still below the 7% highs recorded in the third quarter of 2012 when taking a five-year view of the market.

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Source: Rode’s Report

On a geographic basis, rentals in Pretoria showed the strongest growth, netting in an 8% growth, followed by the East Rand (7%), Durban (5%), while Johannesburg and Cape Town saw rentals grow by only 4%.

When bringing inflation into the mix which stood at 6% during the period under review, it means that only Pretoria and the East Rand were able to grow in real terms.  

The report notes that signs of financial strain which households have to bear “come in the form of the decelerating and poor growth in the disposable income of households.” And economic and consumer conditions, largely employment, has an impact on the performance of the property market.

This principle is further shown by disposable income dynamics on a year basis which grew by 12% in the first quarter of 2014 and waned by 2% in the final quarter of 2014.

“Another factor that might constrain the demand for residential space to rent is the high deposits required by landlords. In most cases, prospective tenants have to fork out almost double the monthly rental to secure the property,” the report says.

Drilling into areas

On an area breakdown, areas like Kempton Park in the East Rand are showing gross income yields on rental flats of 9.4% for a three bedroom unit, for the period under review.

In Cape Town, an area like Tyger Valley for the same property category saw income yield of 7.9%. Areas in Centurion like Kloofsig and Rooihuiskraal are netting rental yields north of 8%.

Other property players also see pressures into residential yields. The national average residential yield declined to 8.61% for the final quarter of 2014 from 8.9% for the second quarter, according to the TPN-FNB National Average Gross Residential Yield. Since 2012, the national average yield has been declining, when at the period the yield recorded 9.65%.

On the outlook of residential yield depends on the movement of interest rates, TPN-FNB notes. “In the near term, we expect further yield compression (decline). Although house price inflation is slowing, so too is rental inflation…”.

“We believe, however, that the capital growth on letting houses could moderately exceed rental inflation in the near term, with interest rates not yet expected to rise, and home buying demand looking set to remain solid albeit not growing strongly anymore.” 

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I don’t know were the info came from for Cape Town – the rental market is really hot down here, certainly more than 5%.

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