Despite the residential rental rate showing slower growth in the first quarter of 2019, PayProp in its latest rental index is still forecasting a market recovery.
PayProp’s Rental Index for Q1 2019 revealed a quarterly year-on-year rental growth rate of 3.7%. This is down from 4.1% in the final quarter of 2018.
Worth noting is comparative data for the first quarter of 2018, which also showed growth of 4.1% and highlights the slower growth for the first quarter of this year on a year-on-year basis.
Just two years ago, rental growth in the first quarter of 2017 came in at 7.6%, more than double current growth rates.
Nevertheless, PayProp’s head of data and analytics, Johette Smuts, says the slightly lower growth rate for the first quarter of 2019 is “still a good indicator of market recovery”, considering that the final quarter of 2018 brought the first uptick in the national rental growth rate in two years.
“If we look at a moving average trendline in the quarterly growth graph, which plots the average of each pair of two consecutive quarters, we see that the line shows a turning point in Q4 2018 … Even with the lower growth in Q1 2019, the longer-term trend is still moving upwards, which means that we could be seeing higher growth levels again in the next quarter,” says Smuts.
“The election has been a source of uncertainty and volatility, which has affected the property market and its growth. Reluctant buyers who are holding off purchasing a property ultimately need to live somewhere, and we will likely see an increasing demand for rental property, which will push up prices and lead to further rental market recovery in 2019,” she adds.
Kobus Lamprecht, head of research at property research house Rode & Associates, however, disagrees saying that both residential rental growth rates and vacancies are expected to come under increasing pressure. In fact, the company’s research for the first quarter of 2019 shows residential vacancies hitting 7%.
He tells Moneyweb that there is still an oversupply of flats and townhouses in the market, in addition to many new developments coming on stream. “The oversupply is a problem as can be seen in the higher national vacancy rate of 7% in the first quarter, up from 5.5% in the first quarter of 2018,” he says.
Lamprecht says the next Rode Report on the overall property market, set to be published at the end of this month, will give more details on the market’s performance. In its last residential report in April, Rode’s estimates (based on Stats SA data) showed flat rental growth of roughly 4.5% in the first quarter of 2019.
This was the fourth consecutive quarter of slower rental growth, after rentals grew by 5.7% in the first quarter of 2018.
Asked about his expectations for the buy-to-let market, he says he still believes investing in the market is risky due to rising vacancies, slower rental growth and tougher general economic conditions in the country.
Lamprecht says the higher end of the market seems to be tougher with the highest vacancy rates, while the lower end is better placed. “However, in the lower-end of the residential rentals market, there is also the added risk of problems around rental collections.
“With the poor economic conditions and recent negative GDP figures for the first quarter of the year, households continue to be under significant financial pressure,” he adds. “Costs such as electricity and fuel are increasing, but salaries aren’t rising. This is impacting negatively on demand … I suspect many South Africans are downscaling and moving into smaller flats with cheaper rentals. Some may be even moving back in with their parents.”
Lamprecht says that despite increasing vacancies and slower rental growth, more rental stock is coming onto the market.
“In terms of building activity, the most concentration is in the flat and townhouse part of the market, with building plans passed up some 15% for the 12-month period to March 2019 … I think that with the office and retail property sector also under pressure and facing an oversupply, we are seeing some of the commercial and listed players going into residential to look for growth.
“However, more residential supply will see vacancies increase further.”
In October last year, Moneyweb reported that listed property fund Attacq was making its first foray into the residential property market. It launched the R1.2 billion Ellipse high-rise development at its flagship Waterfall City node, which is set to include 590 apartments within four residential towers.
Meanwhile, SA’s largest sectional title developer Balwin Properties launched a rentals business in February to diversify its income streams. The group, which previously sold units that it developed, is eyeing a rental pool of more than 4 500 units. Redefine Properties has also dabbled in residential, with its upmarket 159-unit Park Central high-rise apartment development in Rosebank.
Jonathan Davies, a director at Tyson Properties, notes: “The property market is flat and there are no quick fixes. Rentals are also coming under pressure … There are more properties available to rent, so tenants are able to be fussier with their selections.”
He adds: “There still remains a lot of development, especially in the investor environment. Developers are building new accommodation – especially townhouses and apartments, which are particularly attractive to new buyers and investors because transfer duty is not payable on these purchases. The net result of this is that there is an oversupply of rental accommodation, placing pressure on existing landlords [and] driving pricing down.”