There's greater demand for rental properties as interest rates rise
Category Newsletter: Article
When the Reserve Bank raised interest rates by 50 basis points in May, it's unlikely the Monetary Policy Committee (MPC) could predict the far-reaching consequences the half-a-percentage point hike could have on the South African real estate market.
That increase placed the cost of borrowing at 175 basis points more than pre-pandemic levels.
It also meant that one of the far-reaching consequences was that it scared off many first-time buyers, who decided to delay their plans to enter the property market until the hiking cycle ended.
While the overall concern was that this meant doom and gloom for the real estate market, that isn't the entire story. Instead, it's fantastic news for property investors.
Essentially, these far-reaching consequences have caused demand for rentals to soar, even among higher-end rentals and homes.
Inflation Will Keep This Trend Going
Consumers are facing a significant increase in financial pressure due to inflation, an additional interest rate hike, and the cost of mitigating the effects of load shedding.
According to a recent survey conducted by the TPN Credit Bureau, a noticeable increase in demand for residential rental properties arose in the first quarter of 2023.
The survey revealed that the national vacancy rate has decreased, reaching levels last seen in 2017.
As a result, rental pricing has accelerated alongside higher demand. At the other end of the spectrum, property purchases have slowed, battered by high-interest rates and decreased consumer confidence.
Semigrants Are Driving Demand in the Western Cape
The term semigration became popular during the pandemic and was used to describe permanently relocating to another province, typically for the reasons one would move abroad.
Semigrants wanted a better quality of life, improved service delivery, greater security, and more economic opportunities. Naturally, they chose the Western Cape to fulfil these needs.
Annually, approximately 100,000 up-country migrants relocate to the Western Cape. This migration is what's driving Cape Town's housing shortage - primarily its rental stock.
Rental stock has always been in short supply in Cape Town. However, the migration from the city's up-north neighbours, who find it challenging to offload their property - because of less demand - has caused that already short supply to plummet.
Many of these individuals can only afford to buy with a successful sale of their former residence, therefore, are compelled to rent when they choose to relocate.
Data Confirms that Rental Demand Won't Slow in the Coming Months
According to the TPN survey, there has been a 37.61 per cent drop in rental vacancies from 2021 to 2022. The decrease was adjusted to allow for fluctuations following the hard lockdown in 2020.
In the first quarter of 2023, the residential rental market showed promising growth, with the national vacancy rate reaching 6.19 per cent, an improvement from 8.13 per cent compared to the preceding quarter.
Experts noted that the demand for residential rental properties had replaced the previous trend of high demand for property ownership among South Africans of all ages and income brackets.
The Western Cape has maintained the lowest vacancy rate for the third consecutive quarter, at 1.66 per cent, 4.5 percentage points lower than the national average, correlating to exponential demand from semigrants.
This trend shows no signs of slowing.
Instead, in the coming months, vacancy rates could decrease further and put residential rental stock in a critically short supply.
Potential buyers can delay a home purchase but can't wait out the need for a home or flat when they move.
Vacancy Rates Differ in Various Pricing Brackets
According to the report, rental properties priced between R7,000 and R12,000 per month have the lowest vacancy rates at 5.07 per cent, while most rental brackets have similar vacancy rates.
The vacancy rate for properties priced between R12,000 and R25,000 per month is 7.16 per cent, and for those priced over R25,000, it's 7.84 per cent.
The report highlights that the increasing cost of living in South Africa is a significant factor, compelling many South Africans to reconsider their spending priorities. With inflation and other expenses remaining stubbornly high and salaries failing to keep pace, the problem will only be exacerbated.
What Does This Mean for Investors?
Property investors are at the greatest advantage in these market conditions. Essentially, there's an opportunity to commit to buy-to-let properties with the benefit that they'll be occupied in no time.
Before these market conditions, which are predicted to worsen in 2024, there was some risk when investing in rental property.
The risk that, as an investor, you wouldn't achieve the yield necessary to justify the expense and could be stuck with an asset that could be unoccupied for months.
That's not the case anymore.
While data for days on the market isn't tracked for rental property, anecdotally, Cape Town properties are typically let within one week after being advertised. In some cases, move-out day for the previous tenants coincides with move-in day for the incoming tenant.
Author: Coastal Property Group
