Rental Market Rallies, Bringing Good News for Agents

A sudden surge in rental growth during Q2 2024 has brought a much needed and welcome surprise for South African rental agents and landlords, especially after experiencing a decline in the first quarter.

According to the PayProp Rental Index, year-on-year rental growth showed a significant rebound, climbing from 3.6% in March to 4.9% in April. Although it dipped slightly to 4.5% in May, it surged again to 5.2% in June. This marks a new post-pandemic high and represents the fastest year-on-year rental growth seen in any month since December 2017.

June 2024 also marked the first time in nearly five years that rental growth has outpaced inflation.

This is encouraging news for estate agents and landlords, as it signals higher real-term returns. A sustained rebound will help agents build more profitable and resilient businesses, even in an otherwise challenging economic environment.

With inflation continuing to decline in July, economists predict that interest rate cuts could begin as early as September.

By the end of the quarter, the average national rent in South Africa reached R8,785, which is R410 higher than in Q2 2023. Encouragingly, all provinces experienced positive rental growth in Q2, following a year-on-year decrease in KwaZulu-Natal's average rent in the previous quarter.

The Western Cape has consistently held the highest rents in South Africa since 2016, with the average rent standing at R10,673 in Q2 2024. Despite its status as a hot rental market, the province had seen average or below-average rental growth in recent years. However, the Q2 growth rate of 9.7% comes as a real surprise. Year-on-year growth appears to be accelerating, reaching 11.7% in June, the fastest recorded in the Western Cape since December 2017.

On the other end of the spectrum, KwaZulu-Natal recorded just 1.5% in rental growth, the lowest of any province. Nevertheless, this marks an improvement from the negative growth recorded in Q1. Year-on-year, rents in KwaZulu-Natal grew by R128, reaching R8,945. The province has been one of the net losers from South Africa's semigration trend, which has decreased local demand for rental properties.

Gauteng experienced its third consecutive quarter of below-average rental growth, with a 3.8% increase in Q2 2024, showing an improvement over the previous two quarters. The average rent in Gauteng has now surpassed the R9,000 mark, reaching R9,018, making it South Africa's third highest rent.

In Q2 2024, the average tenant in South Africa spent 46.7% of their income on debt repayments and 30.3% on rent, leaving just 23.0% of their income for other expenses-down from 27.2% in Q2 2023. While average incomes have risen, expenses, driven by high interest rates, have outpaced them. Rent as a percentage of income remained relatively stable year-on-year, but debt repayments unfortunately increased, jumping from 43% of income a year earlier.

However, these averages conceal significant differences across income brackets. Tenants earning R40,000 a month or less are more heavily burdened by debt compared to those with higher incomes. According to the Rental Index data, tenants in lower income brackets spend more than half of their net income on debt repayments. In contrast, for those earning above R40,000 per month, debt spending decreases sharply as a proportion of income, resulting in a substantial increase in disposable income. Tenants earning R80,000 and above have 54.1% of their net income remaining after rent and debt expenses.

While the pressure of debt repayments has increased year-on-year, it hasn't prevented tenants from paying their rent. Only 18.1% of tenants were in rent arrears in Q2 2024, compared to 18.4% a year earlier, and they also owed slightly less on average.

Agents and landlords shoul avoid placing tenants under too heavy a financial burden but also believes there is still room for rental growth. A common rule of thumb for rental affordability is that tenants shouldn't spend more than 30% of their income on rent. However, with smart budgeting, a higher rental share of wallet can be sustainable. Tenants in hot rental markets are often accustomed to paying more, and some estate agents have already set more generous affordability ceilings when vetting applicants for their rental properties.