ANALYSIS | How landlords can protect their property investments in 2022

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Landlords wanting to protect their investment need to remember that tenants are price sensitive and that safe and secure properties are considered more valuable, says Michelle Dickens.

Unemployment is a crisis in South Africa. In the last 18 months, 2.1 million jobs have been lost.

This has had a marked impact on the residential rental market.

Residential vacancy rates doubled during the pandemic. At the beginning of 2021, 13.3% of residential properties stood empty and 11.7% are closing off the year vacant. The loss of foreign tourists in the short-term holiday rental market will further drive up supply of rental stock as landlords pivot to the security of long-term rentals.

Reduced incomes have also become a reality, which means that even those who have retained their jobs don’t necessarily have a secure income. The Quarterly Labour Force Survey for the third quarter of 2021 reports that reduction in salaries continues to affect the work force and highlights education levels as a contributing factor. The report found that  “about 9 in 10 employed graduates (94.5%) are receiving a full salary, compared to 86.7% of those with less than matric as their highest level of education.”

BankservAfrica Take-home Pay Index corroborates the stagnation of salaries, stating that “South Africa’s take-home pay has remained between R12 000 to R13 150 over the last 25 months, with the average pay remaining below R11 000, indicating that salaries in the formal sector have not changed drastically over the years.”

Negative rental escalations - when a tenant pays a lower rental rate on a lease than they did before - ripped through the rental market in 2021, only stabilising back into positive territory by the end of the year.

Overall, the cost of housing and utility charges (the latter including water, electricity, sanitation and refuse removal) have outpaced inflation for over a decade. The cost burden of keeping the lights on and water in the taps has suffocated landlords’ ability to match inflation at a basic rent level, eating into their profit margin.

As a parting gift to 2021, the interest rate hiking cycle kicked off in November. The Reserve Bank is forecasting small, slow, incremental increases for the 2022/23 period ahead. Paying the mortgage just got more expensive.

Property investors must start to factor higher finance costs into their budget.

Often overlooked is the impact of higher interest rates in the tenant market, with a perception that residential rental prices are not affected by the change in interest rates.

What tends to be forgotten is that tenants are exposed to other types of credit – vehicle finance, credit cards and personal loans, amongst others - and servicing this debt just got more expensive too. The impact of higher interest rates is not immediate with previous interest rate cycle hikes indicating a six to nine-month lag in deterioration of tenant payment performance.

If occupied properties with paid-up tenants is the goal, affordability assessments of quality tenants will be the enabler.

The reality of stagnant salaries, excessive increases of utility costs and job losses impacting the demand for rental properties will remain a constraint in 2022.

Landlords wanting to protect their investment need to remember that tenants are price sensitive and that safe and secure properties are considered more valuable.

Attending to repairs and maintenance quickly are useful ways to maintain a happy tenant.

Collectively, these motivate tenants to keep their rental payments settled and up to date.

Michelle Dickens founded the TPN Credit Bureau. Views are her own. 

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