Improved rental returns expected for well-positioned properties. After property values rose in 2020 and 2021 due to the low interest rates, there are already signs that higher interest rates, inflation and the higher cost of living are combining to negatively impact on property values. Rental yields, on the other hand are showing improved growth as rental income and property value move closer into sync. Sectional title properties offered the highest rental yields at 10.18% in the fourth quarter of 2022 compared to just under 7% for freehold properties.
The rising interest rates act as a deterrent to home ownership with more households rather choosing to rent. Increased demand for rental stock is expected to drive rental escalations – rent escalated from 3.02% in the third quarter of 2022 to 3.56% in the fourth quarter. The number of tenants in good standing decreased marginally between the third and fourth quarters, with KwaZulu-Natal and Gauteng experiencing the most tenants who did not make rental payments in the fourth quarter. The Western Cape was the only province that saw a slight increase in the number of tenant accounts in good standing.
The worst performing rental bracket was tenants paying less than R3 000 per month. In a changing economic landscape, understanding tenant risk has become even more critical in the current environment. In addition to staying abreast of market trends, property investors need to consider providing value-added services such as alternative power and water supply solutions to ensure properties are more attractive to tenants.
