Deteriorating rental payments hurts landlords

25 May 2017

The percentage of residential tenants who paid their rental on time has deteriorated by six percentage points to 66.08 percent in the first quarter of this year from 72.52 percent in the third quarter of 2015.

The city centre of Cape Town. Timeous rental payment has declined countrywide by 6 percentage points.

The latest residential rental quarterly rental monitor by TPN credit bureau released on Friday attributed this deterioration to interest rate hiking, the slowdown in disposable income growth in the household sector and the indebtedness of households.

It said the year-on-year growth in real household disposable income had dwindled from a high of 5.9 percent in the first quarter of 2011 to 0.9 percent in the fourth quarter of last year on the back of weak economic growth and a rising personal tax burden.

However, TPN said that there was a possibility that tenant payment performance could improve mildly in the short term from a decline in food price inflation, because of the alleviation of the domestic drought, which could see the Reserve Bank holding interest rates at current levels.

"Of course such expectations of tenant payment performance improvement can be blown out of the water should the current climate of social tensions and political uncertainty translate into any major deterioration in investor sentiment, capital outflows and a rand depreciation," it said.

The report said that there had been a gradual deterioration in tenant performance nationally since 2014, with the percentage of tenants "in good standing" with their landlords reaching a multi-year peak of 85.95 percent in the third quarter of 2014.

It said this percentage had declined since by more than three percentage points to 82.77 percent in the first quarter of this year.

TPN said the most recent level of the tenants "in good standing" was by historic standards not too bad, given that it dipped to as low at 71 percent during the recessionary period in 2008.

However, TPN said the current situation was perhaps "a little worse" than indicated by the most recent percentage of "tenants in good standing".

It said this was because tenants "in good standing" was made up of all tenants who had paid on time, those who paid late and those who received a grace period in which to pay.

"Mounting financial pressure was often a gradual process. Certain tenants will initially go from paying on time to paying late, or obtaining a grace period from the landlord.

"This is the first sign of financial pressure building, even though they would still be in good standing with the landlord, and only later in many instances will some stop paying altogether or only pay partial payments," it said.

TPN said the percentage of tenants who "paid late or had a grace period" started rising broadly from late 2012 and by early 2013 there was a gradual rise in the percentage of partial payments.

"Only significantly later in late 2014, did the percentage who 'did not pay' begin to rise gradually," it said. It attributed this to the most recent interest rate hiking cycle to date having been more moderate than the previous hiking cycle from 2006 to 2008, the economic growth rate and growth in household disposable income not contracting as sharply as in 2008/09 and the decline in the level of household sector indebtedness since 2008 from the all-time high of 87.8 percent in the first quarter of 2008 to 73.4 percent at the end of last year.

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