With the prime rate at its lowest level in decades (7%), it’s understandable that more South African renters are considering homeownership. Johette Smuts of PayProp says that while real estate is a hotly sought-after asset, it’s important to remember that homeownership is a long-term commitment, often paired with a 20-year mortgage bond that must be repaid, while It is safe to assume that interest rates will not stay at current low levels.
Good tenants are scarce
“Good tenants are hard to come by in this economy, and those who meet banks’ lending criteria are now enjoying the opportunity to purchase properties at a lower price, due to an oversupply of available selling inventory and a lower effective loan rate. », Explains Smuts.
She says further interest rate cuts are unlikely in 2020, given that the base rate has already been cut by 300 basis points in total to support an economy reeling from the pandemic. “Consumers who buy properties are probably aware of the likelihood of rate increases for the foreseeable future, but they are moving ahead regardless with the lower purchase prices in mind. “
Weigh the greatest risk
“With a few good tenants leaving the rental business, the biggest challenge for rental agents will be finding the right remaining tenants,” says Smuts. “By this we mean those who have acceptable credit scores, sufficient funds for a one-time security deposit and sufficient monthly disposable income to pay the rent. The tenants who remain also have much more bargaining power when it comes to rental prices, as the excess supply of inventory also affects the rental market.
Smuts says realtors and property owners may need to debate where the greatest risk lies: a potential tenant with a low credit score and a double deposit versus a tenant with a good credit score. credit but without the full deposit – or no tenant at all.
Residential rent arrears peak
Smuts says the most recent arrears figures look slightly more positive than those at the height of the lockdown period. “The average amount of arrears over rents increased significantly from March to June of this year, but then stabilized in recent months. From June to August, the average amount of arrears for late tenants was 105% of the rent, or just over a month’s rent. Before the lockdown, this figure was less than 80%, ”explains Smuts.
She adds that the number of tenants in arrears also increased significantly from March (19%) to May (26%). The increase in that figure means that tenants who previously had no arrears started falling behind during the foreclosure – either because they couldn’t afford rent or because they couldn’t afford to pay rent. could pay only partially. “Lots of people returned to work in June, so we’re seeing that number slowly declined from June to August – but there are still more tenants late than before the foreclosure. “
“The higher a tenant’s outstanding balance, the less likely it is that the money will be collected in full. It is therefore imperative that agents and owners handle the arrears carefully. All repayment agreements must include specific due dates and amounts, and must be set out in writing in a formal addendum to the original rental agreement.
Change of circumstances
Smuts says some tenants’ requirements have also changed significantly since before the foreclosure period, and some of those changes appear to be long-term. “We have seen that with the work-from-home situation imposed by the foreclosure, tenants are now less likely to visit an office even after the foreclosure. This means that they may consider renting in suburban areas, further away from the city, where rental housing is often more affordable. Plus, their new telecommuting status means they’ll likely need an extra office or bedroom for a home office.
The rental real estate landscape has changed dramatically over the past six months, and Smuts says that – like many other industries – some of those changes are here to stay. Real estate professionals can win the race to attract the safest remaining tenants by adapting to their changing needs and understanding their risk profiles.