Despite a tough economy and constrained household budgets, more tenants are paying their rent in full and fewer are falling into arrears.
In Q3 of this year, 83.34 percent of tenants were considered to be in ‘good standing’ with their rent payments, meaning that all their rental obligations were met by the end of the month.
These include tenants who paid on time; paid within a grace period afforded by landlords; or paid late but still ensured they covered their rental payments before month-end.
This figure is an increase from 81.86 percent in Q1 and 82.73 percent in Q2, according to Credit Bureau TPN’s Q3 Residential Rental Monitor.
While residential property investors are being impacted by the high cost of capital, maintenance, security, municipal charges, and the downward pressure on rental returns, the fact that they have been receiving their rent payments on time will have eased some of their cash flow strains, says Waldo Marcus, industry principal at TPN Credit Bureau
But although the longer-term overall good standing trend is positive, he says the concern is that the lowest and highest rental value bands fall short of national averages.
“The highest rental value band – those paying R25,000 or more a month – saw a slight drop in the number of tenants in good standing, from 82.15 percent in the second quarter to 81.94 percent in the third quarter. Late payment of rental occurs most frequently in the R3,000 to R7,000 band, with 12.41 percent of tenants paying late.
“The next highest percentage of late paying tenants is the luxury rental property segment with properties costing over R25,000 per month where 11.56 percent of tenants pay late.”
An interesting shift revealed by the rental monitor, however, is the significant increase in the number of tenants paying R12,000 to R25,000 per month. Since 2016, Marcus says the number of tenants in this rental band has almost doubled. This year alone, the percentage of tenants in this rental value band has experienced three consecutive growth quarters.
In comparison, the luxury rental market – defined as tenants paying R25,000 or more per month – has seen no noticeable change in the past four quarters. In fact, this market has shrunk in recent years. In Q1 2020 it accounted for 1.8 percent of the rental market but has declined to 1.2 percent in Q3 2023.
“Low interest rates during the pandemic made it very attractive for these tenants to purchase property. However, given that interest rates are expected to remain high for the foreseeable future, we anticipate growth in this rental band. The big question now is whether cash-strapped consumers can afford these high-end rentals in the current economic environment.”
Landlords unable to increase rents
The report also reveals that rental escalations continue to be on a slow upward trajectory, growing from 4.8 percent in Q2 to 4.84 percent in Q3. Escalations remain slightly below September’s consumer price inflation rate of 5.4 percent.
“The slowdown in the national average rental escalation rate indicates that price-sensitive consumers have reached a precarious point within the rental market. Property investors need to be cautious when escalating rentals as consumers remain under pressure and vacancies could increase if rentals become unaffordable.”
Tenant rent payments by province
- Vacancies in the Eastern Cape and KwaZulu-Natal have remained high, requiring a balancing act between escalating rentals, and keeping properties occupied.
- Gauteng’s vacancy rate has dropped from 8.8 percent in the second quarter to 6.85 percent in the third quarter, providing property owners with an opportunity to escalate rentals marginally.
- The Western Cape is the outlier with the lowest vacancy rate of all provinces. Rentals escalated from 6.47 percent in the second quarter to 6.56 percent in the third quarter.
Marcus cautions, however, that rental growth in the Western Cape could slow down early next year as vacancies started increasing in the second and third quarters.
The report also found that:
- Good standing tenants in Gauteng increased from 81.9 percent in Q2 to 82.47 percent in Q3, with a small decrease in the number of tenants that did not pay.
- KZN’s good standing dropped from 76.95 percent in Q2 to 76.45 percent in Q3. The Eastern Cape’s good standing is above the national average at 84.25 percent.
- The Western Cape has the highest good standing rating of all provinces at 86.87 percent, although this is marginally down from the second quarter’s 87.08 percent.
While TPN’s data reveals that tenants are willing to navigate rental escalations for now, there is clearly a fine balance between residential rental vacancies and the ability of property investors to ask for higher rentals.
“The data shows that where higher vacancies exist, lower rental escalations should follow. The alternative is that rental collections will start to suffer as tenants start defaulting on their lease obligations,” he states
The PayProp Rental Index for Q3 2023, echoes the TPN report findings, revealing the percentage of tenants in arrears has fallen to a record low despite ongoing cost-of-living pressure. The Index, which calculates arrears using real rent payment data, found that 17.5 percent of tenants were behind on their rent in Q3 – the lowest level recorded since PayProp began tracking arrears data in 2020.
The fall reversed a trend that briefly emerged earlier in the year. In Q4 2022, the percentage of tenants in arrears stood at 17.9 percent, but then rose to 18 percent in Q1 and 18.4 percent in Q2.
On average, tenants in arrears in Q3 had 74 percent of the monthly rent outstanding, down from 77.1 percent in the previous quarter.
The report states that the trend of falling arrears was observed in eight of the nine provinces, with only Limpopo seeing a rise from 18.9 percent to 19.6 percent of tenants. Meanwhile, the Free State, Northern Cape, and North West all recorded large reductions in the share of tenants in arrears.
Limpopo was also a regrettable outlier as the average amount owed by tenants in arrears was 78.4 percent of the monthly rent. It wasn’t the worst performer in this metric, though as, in KZN, the average amount owed rose from 75 percent to 76.4 percent of the average monthly rent, PayProp states.