Residential Rentals - the COVID-19 dilemma for landlords

Everyone is talking about the COVID-19 pandemic and the enormous impact it is having on our lives and the economy. And unfortunately, there seems to be no relief in sight until well into 2021 and even beyond.

One area that has been affected is the residential rental property market and landlords that have invested in residential properties to rent. With the advent of the pandemic, a new dynamic has entered this market.

Vartrust Real Estate has seen a significant shift in terms of requirements by potential tenants. In the past, security was the number one prerequisite, with access control and 24 by 7 guarding being the foremost consideration. With COVID-19, while security is still an important condition, it is no longer the primary one. Instead, tenants are looking for homes that can comfortably accommodate their entire family (and sometimes an extended one); where they can work from home; and where they can control their living environment in that they do not have to share communal spaces, such as play areas and swimming pools, with other tenants. As a result of this trend to cocooning, there is a bigger demand for free standing properties, including small holdings. Significantly, these rentals are holding steady and stable or even increasing slightly as tenants are prepared to pay a premium for these types of rental properties.

Conversely, when it comes to the sectional title rental property market, landlords are experiencing a decline in both demand and rental prices. Landlords in this market are seeing more vacancies and are finding that in order to attract quality tenants, they are having to become much more competitive on rental pricing. While landlords in the lower market may have been happy with a 5% to 8% escalation in rental pricing this year, they are in fact seeing a 5% to 8% de-escalation. And for landlords with larger and more expensive units in the R11,000 plus range, they are finding that they are having to reduce rental prices by 10% - 15%.

The primary cause is one of affordability on the part of tenants. With the COVID-19 pandemic there has been widespread business shutdowns and a consequential rise in retrenchments; and for those tenants lucky enough to still be employed, many have had to take salary cuts. This has impacted their ability to pay rent as many tenants lose either all or part of their income.

According to the Q2 2020 PayProp¹ Rental Index, year-on-year rental growth rates for April, May and June were 2.3%, 1.1% and 1.6% respectively - half of the 3.2% growth measured in the previous quarter. This is the lowest quarterly growth rate in the history of the PayProp Rental Index and was below the rate of inflation - even as the latter figure dipped to its lowest level in years. At 2.1% year-on-year, the inflation number for May reached its lowest point since September 2004.

The effect of COVID-19 on rent is as expected. Rental growth over the last quarter was extremely low, and we don't expect it to pick up anytime soon.

Added to this is the fact that many tenants are beginning to default on their rental payments.

According to the TPN² Q2 2020 Residential Rental Monitor Report, the percentage of total tenants that were recorded as being in good standing with their landlords dropped sharply in the second quarter of 2020. From 81.52% of tenants being in good standing in the first quarter, the percentage declined to 73.5% in the second quarter, a decline of 8 percentage points. 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 59.48% of total tenants in the second quarter, down from 64.84% in the previous quarter.

So, where to from here for the residential rental property market and how will landlords survive and thrive in this new COVID-19 era? There are several areas that landlords need to focus on and explore in order to remain competitive:

1. Get the right tenants: It is now more important than ever to ensure that landlords have arrears under control, and that they vet tenants properly when placing them.
2. If your rental properties are bonded, look at dropping rental prices in order to retain or attract quality tenants. While low rental inflation may seem to be a negative for landlords on the one hand, the positive side is that it has contributed to low consumer price inflation (rentals being a significant weighting in the Consumer Price Index), and as such has assisted in taking interest rates lower for bonded landlords. And with the drop in interest rates, landlords are able to drop rental prices to bring them in line with their bond payments.
3. Landlords also need to change their perspective in terms of the kind of tenants they want to attract. For example, while single families may have been an ideal target market pre-COVID-19, perhaps it is time to begin exploring the "house-share" phenomenon. House share is about renting out a property to unrelated tenants. So, no longer would a landlord rent out a two-bedroom apartment to a single tenant, but would rent it out to two single tenants who would then each have a bedroom and share the living areas. For the tenants, giving up the privacy of their own apartment and sharing is a lot less expensive than a single person renting a one-bedroom apartment. And while some landlords may believe that this opportunity is restricted to the student market, this is not the case. More and more young professionals are looking at sharing as a way to save money and be able to live in areas that they may not have been able to afford had they rented on their own.

At the end of the day it comes down to thinking more creatively and exploring new and innovative ways to attract prospective tenants and maintain the right occupancy level for your properties.

Until next time.

1. The PayProp Rental Index is a quarterly guide outlining trends in the South African residential rental market and is compiled from transactional data collected by PayProp, the largest processor of residential letting transactions in South Africa.
2. TPN is a registered credit bureau which services the rental market in South Africa.