Rental trends in 2022 | 'Improved tenant payment behavior as churn drops'

Vacancy rates at the height of the pandemic were over 13% during December 2020 and in the first half of 2021. However, they dropped to 10.66% in the third quarter of 2021, according to the TPN Vacancy Survey for the fourth quarter of 2021.

Civil unrest in July 2021 resulted in a sharp rise in unemployment with a total of 660 000 jobs lost in the third quarter of 2021. This resulted in reduced demand for rental property, reveals Michelle Dickens, CEO of TPN Credit Bureau.

Despite less-than-ideal circumstances, the last half of 2021 showed the first signs of light at the end of the tunnel. Tenant payment behavior improved, churn dropped, and vacancies began to trend downwards. According to Jacqui Savage, National Rentals Manager for the Rawson Property Group, these positive indicators are likely to continue into 2022, even with ongoing concerns over COVID-19 and its economic fallout.

A closer look at the provincial breakdown of the Vacancy Survey

Tenant demand for rental property in Gauteng is back to pre-pandemic levels at 57.21%, supported by 66% of households who receive a salary as their main source of income.

"Gauteng is home to nearly half of all tenants in South Africa with 2.8 million households renting in this booming province," reveals Dickens.

However, the supply of rental property in Gauteng remains stubbornly high with a supply rating of 74.77. "For Gauteng landlords, this translates to an over-supplied rental market with a market strength index of 41.22," says Dickens. "Although this is an improvement from the 39.31 recorded in the third quarter of 2021, an over-supplied market means the vacancy rate remains high at 11.9%."

Western Cape, the second largest province hosting 738 000 tenanted households, is the province with the highest level of salaried households at 68%.

According to Dickens, tenant demand in Western Cape is improving at a rate of 63.01 coupled with an improved supply rating of 59.16. "This puts Western Cape back in the positive position of excess demand for rental property with a market strength index of 51.93," says Dickens. "Western Cape landlords benefited from the improvement in tenant demand with the province's vacancy rate declining from its high of 14.38% in the second quarter of 2021 to 11.4% in the fourth quarter of 2021."

KwaZulu-Natal has 664 000 households in rented accommodation. Households in this province rely equally on salaries and social grants. A total of 9.34% of rental properties were vacant in the fourth quarter of 2021, driven by a deteriorating demand rating of 56.34 and a slightly increased supply rating of 57.04, causing the market strength index to slip into excess supply territory with a rating of 49.65.

The Eastern Cape is home to 427 000 tenanted households. A total of 64% of households in the province are supported with social grants, highlighting the desperate reality that only 46% of households receive a salary. A lack of property development leaves this province with a low supply rating of 53.17 coupled with a demand rating of 62.7, which translates into a market strength index of 54.76. High demand means lower vacancies of 8.2%.

These are the main trends expected to be driving the positive momentum.

Strong emphasis on tenant quality

While 80% of existing tenants are now in good standing (up to date on their rental payments), Savage says it's become increasingly difficult to find new tenants that pass muster.

"Since the start of COVID-19, we've seen a huge drop in the quality of tenant applications," she says. "It's not unusual for up to 80% of applications for a rental property to be unsuitable."

As a result, landlords and their rental agents are casting their nets much wider to find quality tenants, and subjecting applicants to far more stringent vetting procedures.

"There's just no room to take risks. With inflation, rising petrol prices, higher utilities and municipal charges, tenant affordability is being eroded on every side. It's become vital that tenants not only have stable income and a good track record, but also the ability to weather a few bumps in the road, should they come."

Because of these increasingly conservative tenant placement trends, Savage is optimistic that payment performance will continue to shift back towards pre-pandemic levels in the coming year. Landlords with a lighter touch on tenant vetting could have a different experience, however.

Greater focus on affordability

As financial pressures increase, Savage says the rental industry's focus is extending beyond simply ensuring tenants meet affordability criteria. There are also proactive steps being taken to create more affordable rental opportunities, both through new developments and cost-saving improvements to existing properties.

"I think we're going to see more developers focussing on the affordable rental housing space, tapping into trends like co-living and mixed-use properties," says Savage. "Forward-thinking landlords are also going to be leveraging things like energy- and water-saving improvements to reduce costs for tenants, making their properties more affordable without necessarily having to sacrifice rental income."

Growing demand in "Zoom towns"

While rental properties in major metros may have their work cut out for them in 2022, Savage says demand in the so-called "Zoom towns" could well begin to outstrip supply in the coming year.

"We've seen an amazing about-face in demand, thanks to COVID and work-from-home," she says. "Where metros were once thriving rental centres, we're now seeing properties in small towns - particularly on the coast - flying off the metaphorical shelves."

With commute times no longer an issue, people are very clearly choosing quality of life over city proximity. Savage does not expect this to change any time soon, regardless of whether businesses return to some semblance of workplace normality in 2022.

Technology-driven service improvements

Not everything to come out COVID-19 has been negative for property rentals. Savage says the pandemic has been an important push for the industry to embrace the power of technology.

"There's no doubt that technology has improved the experience we're able to offer both landlords and tenants," she says. "Things like virtual viewings, online lease applications and electronic leases with digital signatures have made the rental process much more efficient for everyone involved."

While the investment in technology came at a significant cost to many rental agents, Savage strongly believes it will pay real dividends in the coming months - both to the agents themselves and their clients

"As rental agents get more familiar with digital tools and processes, their efficiency is going to grow exponentially," she says. "That'll free up a lot of time previously spent on mundane admin, providing a golden opportunity to refocus on the asset management element of their role. This will be the key to minimising risk and maximising returns for property investors in 2022, making the most of every opportunity the coming year holds.

One of the big take-outs from TPN's Vacancy Survey for the fourth quarter of 2021 is that tenants remain highly price sensitive. Although landlords will be feeling a measure of relief that rental escalations finally turned positive in the third quarter of 2021, the 0.4% increase in rent per annum is insufficient to cover inflation and higher property expenses on top of interest rate increases. The overall market strength index strengthened to 47.2 which indicates that this is still a tenant market struggling to claw its way back to 50, a figure which would indicate a market in equilibrium with sufficient supply to meet demand.