How buy-to-let landlords are being squeezed

The PayProp Rental Index for Q2 reveals that South Africa has “now seen 18 months – or six quarters – of subdued, mostly sub-inflationary rental growth.”

It says “while that is not the best news for landlords, at least it is not trending downward.” And it is quick to add, matter-of-factly, that “there are no signs it will increase soon either”.


Source: PayProp Rental Index Q2, 2019

The picture diverges greatly in various markets and in the different segments within those markets. In greater Johannesburg, one estate agent points out that the rental market remains robust in the sub-R1 million value range, with demand and yields for properties valued north of R2 million nearly non-existent. PayProp’s index shows that there has been deceleration in rental growth in Gauteng and the Western Cape this year.

Read: Joburg’s prepaid electricity tariff shock


Source: PayProp Rental Index Q2, 2019

While this broadly remains a ‘tenant’s market’, the rental income side of the equation only tells half the story. Flat economic growth and a property market that has been in decline in real terms since the 2007 peak means that residential property investors can’t even count on capital growth.

Worse, landlords are caught in a vice-like grip of below-inflation rent increases (if at all) and sharp increases in administered tariffs.

Read: Government is enslaving citizens with hefty price increases


Source: Stats SA, Eskom (via GreenCape)

While much of the electricity price increases are able to be passed on directly to tenants (either through recovery or via a prepaid installation), there are certain charges that may not be. These include fixed monthly charges such as City Power’s network charge and capacity charge (which total R631.16) in Johannesburg, or Cape Town’s R163.32 Home User tariff charged to rates accounts. Even in a prepaid scenario, this cost is billed through to the owner and it is complicated to then recover from a tenant.

In a report last year, FNB Commercial Property Finance property sector strategist John Loos highlighted that “sharply rising electricity costs (along with municipal rates and other utilities tariffs) have long since been a housing-related affordability challenge.

“We use the consumer price index for electricity to compile an electricity/per capita income ratio index starting in 2008. It shows that electricity tariff increases applied to consumers have far outstripped per capita income growth, with this index increasing by a massive 82.71% from 2008 to date.


Source: FNB

“This provides a strong incentive for households to lower electricity consumption or to cut broader operating costs on the home to compensate for the sharp electricity cost increases, and one way of doing it is to purchase a smaller home with [fewer] ‘frills’ such as swimming pools, which can add to operating costs significantly,” says Loos in his report. “The other way is to cut electricity costs, either through more energy efficient homes of alternative energy sources.”

For landlords, increases in the price of electricity have impacted far less than increases in the prices of other municipal services. These include rates, water, sewerage and refuse removal, whether billed directly or indirectly through sectional title scheme levies.

Over a five-year period, annual increases of, say, 11% for these services mean an increase of 70%. This is not a made-up number! And this doesn’t take into account the revaluation of properties that various municipalities have undertaken in recent years.

These exercises have had significant impacts on the prices of these ‘services’, as most municipalities have shifted away from fixed charges to ones based on the value of the property.

With these price increases, it’s hard to find scenarios where rental yields have actually increased materially over the last five years. Again, various segments (especially entry-level properties) will show dramatically different results from, for example, a four-bedroom cluster in Johannesburg’s northern suburbs.

And with structurally higher property prices, a market like Cape Town (especially the City Bowl and Atlantic Seaboard) will have lower overall yields than one like Gauteng.

But the overall picture is this: house prices are effectively flat, rental income is marginally positive (or flat) but fixed expenses are sharply higher. Not a great situation at all.

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