Residential rental sector benefits from low vacancies amidst higher interest rates

The residential rental sector continued to perform strongly with low vacancies in the fourth quarter of 2023, continuing its recovery trend of the previous three quarters, according to TPN Credit Bureau’s latest Vacancy Survey Report.

Waldo Marcus, Industry Principal at TPN Credit Bureau says higher interest rates and low consumer confidence are amongst the reasons for this strong performance. “The current environment has deterred many South Africans from home ownership, resulting in a shift to the more secure and predictable alternative of renting residential property.”

Consumer confidence hit a 23-year low for fourth quarter readings, according to the FNB/BER Consumer Confidence Index while persistently high interest rates have put increased financial pressure on consumers and encouraged a more frugal approach to household expenditure.

A lack of economic growth combined with high unemployment and strained municipal service delivery has made many South Africans very sensitive to location risk, a trend which has been amplified in areas where coalition governance has delivered more obstacles than progress, reveals Marcus.

“Consumers are prioritising safe and well-serviced locations to live. Their list of considerations includes access to decent schools, amenities, retail, security, healthcare, and employment, amongst others. As employers continue to push employees to return to the office, this is also helping to drive demand for rental accommodation in proximity to commercial hubs. Another growing trend is that of extended family and friends cohabitating to save costs,” he says.

Residential rental property investors – as well as the various industries that support the overall residential rental market ecosystem – have benefited from the increased cost of living and financially constrained consumers.

TPN's latest Residential Vacancy Survey for 2023 showcases a continued stability in vacancies nationwide, with the national vacancy rate dipping to 6.69% by the end of the year, down from 6.76% in the previous quarter. Impressively, the average vacancy rate for the year plummeted by 11.69% compared to 2022. Equally heartening, tenants have shown steadfast commitment to rent payments.

Marcus, from TPN, highlights a robust demand rating alongside a slow but steady improvement in supply, indicating a responsive adjustment to heightened demand. This dynamic has led to a strengthening of the TPN Rental Market Strength Index, reaching 57.51 points by the end of 2023.

Despite this positive trajectory, Marcus warns of economic constraints necessitating cautious navigation for property investors and practitioners. Strained consumer finances call for judicious rental escalations and emphasis on good payment behaviour while maintaining occupancy rates.

Addressing long-term challenges, Marcus underscores the impact of unemployment, particularly among youth, on rental demand, especially in lower-priced, well-located residential properties. Notably, student accommodation remains in demand, but graduates facing job scarcity tend to return home rather than seeking rental housing.

Examining vacancy rates by rental value bands, TPN's data shows increased vacancies in properties priced at R3,000 or less per month, attributed to oversupply. However, the R12,000 to R25,000 band exhibits strong performance, with declining vacancies and high demand ratings.

Across provinces, Gauteng struggles with oversupply, while the Eastern Cape experiences seasonal fluctuations due to holiday rentals. The Western Cape boasts the lowest vacancy rates, supported by consistent demand and limited supply growth.

Conversely, KwaZulu-Natal faces weakened demand and increased vacancies, exacerbated by weather challenges and inadequate infrastructure maintenance.

Looking ahead, Marcus anticipates continued financial strain for consumers, favouring the residential rental market. However, careful rental adjustments will be essential to balance affordability with supply and demand dynamics.

In summary, while the residential rental market shows resilience, informed decision-making and strategic planning will be critical in navigating economic uncertainties.

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