South African Residential Rental Market Analysis - Payprop Rental Index Q1 2024

 National Rental Growth - Rent And Inflation

Residential rental growth in South Africa entered a period of sustained year-on-year decreases in recent months – slowing to 4.2% (January), 3.8% (February) and 3.6% (March). That has produced a quarterly average of 3.8% – the lowest quarterly increase since Q4 2022, suggesting that the post-pandemic rental growth recovery is well and truly over.

Falling tenant affordability could be part of the issue. Central banks around the world, including the SA Reserve Bank, have struggled to rein in inflation. In South Africa, the Consumer Price Index shows inflation within the 3-6% target range, but remains stubbornly at the top end despite a prolonged period of high interest rates. It has also consistently outpaced rental growth.

That creates a dilemma for the SARB: an interest rate cut would make borrowing cheaper and reduce downward pressure on economic growth, but it could also boost consumer demand and fuel higher rises in inflation. It now looks as though the Bank will not make previously anticipated reductions this year, and could even raise interest rates further. The SARB will also continue to keep an eye on other central banks, especially the US Federal Reserve – and the signs are that the Fed won’t make near-term interest rate cuts either.

The key is for landlords and estate agents is not to panic. SA have dealt with much lower rental growth in recent years. The quarterly rent inflation figure of 3.8% is below that of any comparable period last year, but still higher than 2021 or 2022.

Provincial Rent And Rental Growth - Slow Growth Better Than No Growth

Gauteng – nearing R9 000

Gauteng’s rental growth of 3.5% was below the national average, but still enough to stay ahead of KwaZulu-Natal after taking third place in Q3 2023. Growth slowed down slightly from last quarter’s 3.6%. The average rent in Gauteng was R8 943 in Q1 2024. If rental growth can be sustained in the country’s economic powerhouse this year, it could soon be the third province to pass an average rent of R9 000.

Western Cape – looking up

The Western Cape recorded below-average rental growth for most of 2023, but in Q1 2024 rents grew 4.3% year-on-year – above the national average of 3.8% and the fifth highest in the country.

KwaZulu-Natal – going backwards

 KZN set an unenviable record in Q1 2024, becoming the first province to experience negative rental growth since the Free State in Q1 2023. Rents shrank by 0.4%, going from a quarterly average of R8 801 in Q1 2023 to R8 770 in Q1 2024. Having been the third most expensive province for renters until Q3 2023, the gap between KZN and the top three is widening.

Rent Distribution : Movement Beneath The Surface

Recording average national and provincial rents tells us a lot about how South Africa’s rental markets are performing, but they’re just the tip of the iceberg. A lot more becomes evident when we track how properties are distributed across different rental brackets.

National distribution Nationally, rental distribution has not changed dramatically over the past year. The slight shrinkage in the R2 500 - R5 000 and R5 000 - R7 500 brackets, as well as growth in the upper brackets, is most likely due to rental growth pushing properties into those brackets.

Gauteng

Rental distribution in Gauteng has changed in the same way as the national distribution over the past year: the lower and middle brackets have shrunk slightly, while the rental brackets starting at R7 500 have all grown. Gauteng has the smallest share of properties between R1 000 and R2 500 at just 1.4%, compared to 2.9% nationally. Meanwhile, the R5 000 - R7 500 bracket is larger than the national average at 33.3%.

Western Cape

Average rents in the Western Cape are the highest in South Africa, and that’s reflected in the province’s rental distribution. The three most expensive brackets contain a greater share of rental properties here than in any other province, while the R2 500 - R5 000 bracket is much smaller than the national average at just 5.1% (compared to 16.2% nationally). Rental distribution also shifted further towards the upper brackets over the past year. The R5 000 - R7 500 bracket fell from 29.8% of properties to 22.7%, while the R7 500 - R10 000 bracket became the largest in the province at 26.7% of all rentals. 16.5% of properties now fall within the R15 000+ bracket, compared to 10.1% nationally.

KwaZulu-Natal

KwaZulu-Natal’s rental distribution has barely changed over the past year, which is unsurprising as average rents only increased by 0.4% since Q1 2024. However, the share of properties in the R15 000+ bracket shrank slightly, from 10.8% to 10.5%. Rental distribution is almost exactly in line with national averages, just as it was a year earlier.

National Arrears Update

After declining in the second half of last year, the percentage of tenants in arrears leapt to 18.3% from 17.0% in Q1 2024 – undoing almost all of the progress made last year. That could be due to tenants overspending during the December holidays, but the increase in arrears is significantly larger than the one measured in Q1 2023.

Alternatively, it could be a sign that the same affordability pressures that are suppressing rent increases are also causing more tenants to miss payments.

The average arrears percentage also grew from 74.0% in Q4 2023 to 77.5% in Q1 2024. That’s still below where it was a year previously (and well below pandemic levels), but the rise may be a cause for concern.

Provincial Rental Arrears - Year-on-year changes

The share of tenants in arrears grew in all but two provinces.

In Limpopo, 17.5% of tenants owe rent, down from 18.8% a year earlier. Meanwhile, the share in the Free State fell from 26.7% to 22.0%. This means the Free State no longer has the highest percentage of tenants in arrears. That unfortunate title now belongs to the North West, which also experienced the biggest rise in the share of tenants in arrears. 25.7% of the province’s tenants now owe rent, compared to 22.8% in Q1 2023. The other big rises took place in Mpumalanga (18.1% to 19.3%) and KwaZulu-Natal (20.4% to 21.4%).

In the Eastern Cape, it fell from 77.2% to 69.6% – the second lowest in the country. The Free State also saw a fall, from 97.6% to 91.9%, while in Gauteng there was a small drop from 80.9% to 78.7%. Most other provinces saw small rises in their average arrears percentage. In the Western Cape, it rose from 65.0% to 67.0%, but is still the lowest in the country despite the province’s nation-leading average rent.

Meanwhile, the North West still has higher average arrears than any other province despite having the lowest rents. The rise from 99.0% to 102.5% also means that it is the only province with average arrears of more than one month’s rent.

Which provinces have the riskiest tenants?

RISK CATEGORIES : The riskiness of a tenant is measured by their credit score, which takes many factors into account. Different credit bureaus have different scoring mechanisms and bands.

Payprop categorised tenants into the following predefined credit score ranges:

High risk : 500 – 610 (Credit Score)

Medium risk : 611 - 628

Low risk : 629 - 659

Minimum risk : 660 - 750

Despite an increase in the share of tenants in arrears, overall tenant risk improved between Q1 2023 and Q1 2024. The share of minimum-risk tenants increased from 38.5% to 39.2%. Meanwhile, 25.0% of tenants were classed as high-risk, compared to 25.2% in Q1 2023.

The Western Cape continues to have the least risky tenants: 46.9% were classed as minimum-risk, well ahead of runner-up Gauteng with 37.6%. Meanwhile, just 18.3% of Western Cape tenants were judged to be high-risk. Rounding out the top three provinces with the least risky tenants was the North West, with 34.3% of tenants classed as minimum-risk – potentially due to lease signatories of student rentals being typically students’ parents.

Tenant Spending : Metrics improve, but are tenants financially healthier?

Tenant spending metrics look slightly healthier than they did a year ago. The percentage of income spent on debt repayments has fallen across all tenant risk brackets compared to a year earlier. Except for the minimum[1]risk group, tenants are also spending less on rent as a percentage of their income, and the rise in rent spending for the minimum risk group was just 0.3%. All that adds up to growing disposable incomes across all brackets, with those in the worst financial positions gaining the most in percentage terms.

But that raises an obvious question: if spending on rent and debt repayments is down, even among high-risk tenants, why are more of them falling behind on their rent?

It’s important to note that the debt-to-income ratio only includes contractual, recurring expenses like car loans, mobile phone bills and so on, so disposable income must cover most everyday expenses like food and transportation. According to the South African Reserve Bank, the prices of these necessities have risen faster than inflation as a whole.

In fact, the fall in debt-to-income ratios (despite persistently high interest rates) may indicate that tenants are cutting unnecessary expenses (and avoiding taking on new debts) to pay for food, fuel, rent and other essentials. Even after these measures, a growing number may not have enough disposable income left to cover their rapidly increasing costs.

There’s one factor we can rule out. It’s clear from the fall in rent-to-income ratios that rent increases are not to blame for the increase in arrears. Apart from minimum-risk tenants, all groups are spending less on rent than they did in Q1 2023, when the percentage of tenants in arrears was slightly lower at 18.0%.