*Information derived from the Pay prop Rental Index

• Rental growth is still accelerating.
• Rent is up in every province, despite high interest rates.
• The effects of high interest rates on homeowners.

The rental market recovery continues during quarter three despite 2023’s challenges. Rental growth continues to climb, reaching all provinces, while inflation is finally cooling after a prolonged interest rate hike cycle. Tenants have also remained resilient despite financial pressure, with a welcome fall in the share of tenants in arrears.

Rent and Inflation

South Africa has now achieved eight successive quarters – two whole years – of positive rental growth after the rental market slump and spike in arrears caused by the pandemic. The average rent rose year on year by 4.7% in July, 4.4% in August, and 4.9% in September – the highest YoY growth seen in any month since 2017. Unlike previous quarters in 2023, it took place against a much more stable inflationary backdrop: inflation stayed within the 3% – 6% target set by the South African Reserve Bank (SARB) for Q3 but remained above rental growth in all months except July. It remains to be seen if the uptick to 5.4% in September is cause for concern. The question now is when SARB will lower interest rates, and economists are divided. Within-target inflation reduces the likelihood of further rate rises, but the SARB’s Monetary Policy Committee statement in September warned that core inflation appears sticky, making significant rate cuts unlikely in the near future. Another factor is the interest rate decisions by foreign national banks, particularly the US Federal Reserve, which also tend to affect SARB’s decision-making. As things stand, the historically high 8.25% repo rate has been discouraging first-time home buyers from entering the market, strengthening demand for rentals. Rental demand could soften in 2024 if interest rates come down, although further reductions in inflation could have the opposite effect, increasing the prospect of a return to real-terms rental growth while reducing the overall financial pressure on tenants.

 

Rental Growth

For the second quarter in a row, all provinces experienced positive YoY rental growth, and all but two – KwaZulu-Natal and the Northern Cape – also experienced faster growth than the previous quarter.

Gauteng:

Gauteng recorded just-above-average rental growth last quarter and has done the same thing again in Q3. Rents grew by 4.7% in the latest quarter compared to 4.6% nationally. That lifts the average rent in the province to R8 777, R326 above the national average, and it means Gauteng now has the third most expensive rents in South Africa, overtaking KwaZulu-Natal.

KwaZulu-Natal:

KwaZulu-Natal suffered the biggest fall in rental growth of any province this quarter. Growth fell from 4.4% in Q2 to 2.5% in Q3 – the second lowest in the country, above only the Free State. While rents in KZN are still R298 above the national average at R8 749, this means the province has fallen out of South Africa’s top three in terms of average rent. The average property in Gauteng is just R28 more expensive.

Western Cape:

In the Western Cape, rental growth picked up a little after several slow quarters. Rent grew by 4.3% in the last quarter, below the national average and the third slowest in the country, but it is a significant improvement on the previous quarter’s 2.8%. The Western Cape is also still South Africa’s most expensive province for renters. The average rent is now R9 946, up by R216 from last quarter.

 

Provincial and National Arrears

The percentage of tenants in arrears fell in Q3 2023 after two successive quarters of rises. Nationally, 17.5% of tenants were behind on their rent in Q3 2023, compared to 18.4% in Q2. At the provincial level, all provinces recorded falls in this metric except Limpopo, where it rose from 18.9% to 19.6%. The quarter’s biggest improvement came from the Free State, where the percentage of tenants in arrears fell from 25.2% to 22.6%. While the province had the highest share of tenants in arrears last quarter, it is now only the third highest. The Northern Cape and North West also had significant drops in this number – respectively from 19.3% to 17.0%, and from 25.0% to 23.3%. The downside for the North West is that this was not quite enough. It now has the highest percentage of tenants in arrears in the country. The Western Cape, Gauteng, and Northern Cape have the smallest percentages of tenants in arrears at 14.1%, 15.8%, and 17.0% respectively. Two provinces bucked the trend: Limpopo, where the average arrears percentage remained the same quarter to quarter, and KwaZulu-Natal, which recorded a rise from 75.0% to 76.4%. The Free State still has the highest average arrears percentage at 93.4% despite a massive 11.8% fall since the previous quarter. The biggest fall was in the North West, where the average arrears percentage fell by 12.7% to 79.2% – still the second highest in the country. The Western Cape continues to have the lowest average arrears percentage at 61.6%, followed by the Northern Cape (67.5%) and Mpumalanga (67.8%).

 

In conclusion, the rental market indicated that this investment class provides growing returns and is standing strong in a difficult economy. The risk of property investment is non-paying tenants and vacancies. Occupation of a property without receiving rent can be mitigated with eviction insurance. These products are these days very affordable. Owning property in right areas, high rent demand areas, and in the affordable price brackets will mitigate the risk of vacancies.