Key Insights on Rental Escalations from Latest TPN Rental Monitor

The latest TPN Residential Rental Monitor for Q2 2024 shows that, despite the ongoing economic pressures, the majority of South Africa’s residential tenants (83%) are managing to pay their rent on time and in full.

This consistent performance highlights the effectiveness of stringent vetting and collection processes by landlords, despite high levels of household debt and rising living costs.

• Tenant Payment Performance Remains Strong: 83% of tenants continued paying rent on time in Q2 2024, despite economic pressures and rising debt levels.
• Slower Rental Escalations: Rental increases slowed to 4.29% in Q2 2024, with landlords adjusting rates to avoid vacancies, particularly in the R3,000 to R7,000 band.
• Increase in Squatting Rates: The TPN Squat Index rose to 3.71% in Q2 2024, highlighting the growing risk of non-paying tenants for property managers and investors.

The report paints a picture of a rental market experiencing slower growth and rising financial strain, with high interest rates and escalating debt burdens affecting both tenants and landlords.

The most important key insights and trends from the latest data:

Tenant Payment Performance

• 83% of tenants are in good standing, paying rent in full and on time.
• Tenants in the R7,000 to R12,000 rental band perform the best, with 88.6% in good standing.
• Luxury rentals (above R25,000) have stable performance, though 6.2% of tenants failed to make any payment, the second-highest percentage across all rental bands.
• The R3,000 to R7,000 rental band has a good standing rate of 82.2%, but tenants in this band show the highest proportion of late payments and partial payments.

Rental escalations slow

• The rate of rental escalations has eased, dropping from 4.87% in Q1 2024 to 4.29% in Q2 2024.
• Gauteng has seen three consecutive quarters of slower rental growth, while the Western Cape’s rental escalations, after peaking at 7.1% in Q1, have now slowed to 6.98%.
• KwaZulu-Natal and Eastern Cape saw slight upticks in rental increases.

Rising squatting rates

• The TPN Squat Index rose to 3.7% in Q2 2024, indicating a growing number of tenants not paying rent for three consecutive months while still occupying the property.
• Squatting tenants pose a significant risk for landlords, highlighting the importance of proactive legal action and timely intervention.

Shift in tenant segmentation

• The market is seeing more tenants moving into higher rental bands, with a notable drop in tenants paying below R3,000 and an increase in those paying between R7,000 and R12,000.
• In 2014, 23.7% of tenants paid less than R3,000; today, only 13.1% fall into this category.

Better returns on Sectional Title properties

• Sectional title properties are showing stronger yields, with the Residential Gross Yield for sectional title properties reaching 10.79% in Q2 2024, the highest in the market.
• Full title rental yields also showed improvement, rising from 7.44% in Q1 2024 to 7.52% in Q2.

Investor behaviour shifts

• Investors are increasingly focusing on smaller portfolios and more tax-efficient structures like companies and trusts.
• Women now make up over 50% of individual property investors, a shift that has been growing since 2020.

Advice Going Forward

• Landlords Should Exercise Caution with Rent Increases

With many tenants under financial strain, particularly in the mid-tier rental bands, landlords should be careful with escalating rents too aggressively. Slower rental escalations and competitive pricing may help to maintain occupancy rates and attract quality tenants.

• Focus on Tenant Quality, Not Just Rent Growth

Given the high levels of household debt and the risk of squatting, landlords should prioritize securing reliable tenants over maximizing rental growth. This approach will help safeguard cash flow and avoid the risk of vacancies or rent non-payment.

• Be Proactive with Legal Action on Squatters

With squatting rates on the rise, it is essential for landlords to monitor rental payments closely and take swift action when tenants fall behind to prevent long-term financial losses.

• Consider Sectional Title Investments

With sectional title properties yielding higher returns, investors may want to consider diversifying their portfolios with these properties, which have historically offered better yields than full-title properties.

• Monitor the Impact of Lower Interest Rates

As interest rates potentially decrease, it will take time for tenants to feel financial relief. Landlords should remain patient and stay informed about market conditions before adjusting rental strategies.

In conclusion, while the residential rental market is navigating a period of slower growth and rising financial pressures, there remain opportunities for landlords and investors who adapt to these changing conditions.

Prioritising tenant quality, controlling rental escalations, and staying proactive in managing the risks of squatting will be crucial for maintaining stable returns in the coming quarters.

DOWNLOAD REPORT