Prudent investments keep rental market stable as vacancies drop to 5.07%

Source: Supplied. Waldo Marcus, marketing director at TPN from MRI Software.

Average residential rental vacancies for the first three quarters of 2024 were 5.4%, the lowest since the TPN Vacancy Survey was first published in 2016. TPN expects the overall positive performance to remain in the mid 5% mark for the remainder of 2024, with rental growth accelerating in the fourth quarter.

“The residential rental market continues to perform strongly with rental properties still in high demand as new supply is slower to come online,” says Waldo Marcus, marketing director at TPN from MRI Software.

“Post-election economic sentiment is positive, with improved confidence and economic indicators. The second interest rate cut in November 2024 adds to the positive outlook, offering relief to tenants and property owners.

"S&P Global's upgraded outlook for South Africa and potential structural reforms could lead to lower government borrowing costs, stimulating economic growth and addressing unemployment. While unemployment decreased slightly in the third quarter of 2024, the number of discouraged workers increased, highlighting the need for a strong job market to support the residential rental market.”

He explains that stable employment is essential in order to maintain low vacancy rates. High interest rates are also not ideal. “Although high interest rates discourage consumers from purchasing property, they also have a negative impact on property owners who may need to compromise on high rental growth to ensure that tenants stay in their properties and pay their rent promptly.”

As an interest-rate cutting cycle commences, some tenants may migrate to property ownership which could, says Marcus, cause residential
vacancies in the higher rental value bands to increase.

“We expect that consumers will need time to recover adequately from the recent volatile economic landscape. Added to that, as property investors start to raise rentals, it could act as an obstacle to tenants saving to enter the property market as owners.”

Demand outweighs supply

One of the reasons for lower residential rental vacancies is higher demand compared to supply. TPN’s Rental Market Strength Index measures the market's perceived demand and supply of residential rental stock across various property types, values, investors and portfolio sizes. The index declined from 60.36 points in the second quarter to 58.97 points in the third quarter of 2024.

The market is in equilibrium at 50 points while an index above 50 points means that demand is stronger than supply.

“Although demand continues to outweigh available supply in the rental market, the index reveals a slight decrease in demand and an increase in supply,” says Marcus, adding that demand has decreased for three consecutive quarters. Supply showed a downward trend until the third quarter, when the supply rating increased from 54.51 to 55.5 points.

“Well-located, appropriately priced properties will consistently attract tenants and yield good returns. While rental increases haven't kept pace with inflation, property investors who actively engage with tenants can maintain occupancy rates,” says Marcus.

Affordable rentals strengthen

The TPN Vacancy Survey Report for the third quarter of 2024 reveals that rental stock with a rental value of less than R12,000 a month all decreased in vacancies in the third quarter. In the R3,000 or less a month rental value band, vacancies dropped from 10.97% in the second quarter to 6.89% in the third quarter while its market strength improved to 60.11 points, up from 59.95% in the previous quarter.

Similarly, the R3,000 to R7,000 rental value band decreased in vacancies from 6.75% to 5.8% in the third quarter with a marginal decline in its Market Strength Index driven by an increase in the supply rating and a small drop in the demand rating.

The report reveals that demand remains strong, even though more rental units are now available in this rental value band. The R7,000 to R12,000 rental value band recorded the lowest vacancies at 3.4% in the third quarter, down from 5.51% in the previous quarter.

Overall demand decreased slightly while supply increased, resulting in an overall Market Strength Index of 56.13 points, slightly below the overall national average of 58.97 points.

Luxury market struggles

The luxury rental market, on the other hand, is under pressure with higher vacancies. Vacancies in rental properties priced between R12,000 to R25,000 increased from 4.52% to 5.93% due to declining demand but consistent supply.

Although this sector continues to show strong demand, increased vacancies could be early signs of market migration. At the top end of the market, residential units with a price tag of R25,000 or more a month saw an even bigger vacancy increase from 7.16% in the second quarter to 12.03% in the third quarter, despite less luxury stock being available.

The Western Cape continues to record the lowest vacancy rate of all provinces, attributed to a very low supply rating (38.37 points) and a high demand rating (88.12 points). Rental increases are highest in the Western Cape. While this is positive for property investors, it could ultimately price lower-income households out of the market. The vacancy rate declined in all the other provinces in the third quarter.

“Despite strong demand for residential rental property, investors have been cautious about increasing supply due to economic uncertainty and high-interest rates.

"While a lack of supply has prevented a potential rental bubble, it may lead to lower rental increases, higher vacancy rates and increased tenant defaults. The downward trend in completed residential buildings suggests that supply will continue to be limited,” says Marcus.