Flow Findings# The market is in for a rough ride ahead

Blood on the streets

We’ve had a fascinating week at Flow, analysing the data that came out of our first rental survey that we sent to over 80,000 tenants. The much awaited FlowFindings report was released by Flow on May 20, 2020. The report is full of staggering statistics that paint a dismal picture of the South African residential rental market in the aftermath of the hard lockdown that the country enforced as a reaction to the global covid-19 pandemic.

Only 37% of tenants responded saying that they are able to pay their rent in full currently and 22% cannot pay their rent at all.

No part of the market is escaping the affects

Both the high end (rentals of R12 000+ per month) and low end (rentals R2 000 — R3 999 per month) of the market are affected — indicating that no part of the rental market has escaped rental affordability damage. The survey was sent to our entire base of tenants across South Africa and is representative of a cross section of South Africa’s rental population. The affordability issues that have been highlighted is of course a major risk to landlords, who are used to high risk tenants representing just a fraction of their portfolio rather than the majority of their tenant base.

Tenants finding creative ways to pay their rent

Speaking on the FlowFindings expert panel webinar, Pam Golding Properties CEO Andrew Golding said that “We’re currently seeing a situation where 20% of our tenants are not able to pay their rent. People are having to find creative ways to pay what they can — borrowing from friends or family or extending the terms of personal loans,” he says. The FlowFindings results indicated that lock down forced 88.47% of tenants to stay in their rental homes during lock down, with 17% had intentions of moving from their current residence before lock down started. Having faced a variety of challenges during lock down, 32% of tenants have indicated that they’re likely to move out after lock down — 12.63% of those due to their lease ending, 50.93% due to lock down-related affordability issues and 15.11% of them, due to general affordability issues.

See the full FlowFindings report at https://findings.flow.rent

Tenants are getting ready to move

In a typical month, the rental market sees on average 5–10% of tenants looking to move at any given time. With 32% of the tenants surveyed indicating that they’re looking to move after lockdown, we can now expect 3 times the amount of people moving once the laws are relaxed and they are able to sign new leases. Due to lock down restrictions, there’s been a huge spike in tenants staying in their current rental homes for much longer than usual — but this is going to be followed by a far higher than average number of tenants moving, post-lock down — which will cause an unprecedented volume in relocations leaving many landlords with vacant properties while at the same time creating an opportunity for other landlords who are willing to offer attractive deals like first month rent free, discounted deposits, discounted electricity and free WiFi.

A shift to renting

With the sales market taking a major dip due to uncertainty and lack of affordability, many more people will be entering the rental market .

Andrew Golding says ”the market is in for a significant reset. Signs are that the volume of sales is set to drop by 50%, with owners who aren’t forced to sell, not putting their properties on the market. It’s definitely going to be a buyers’ market, with plenty of opportunities for those who are placed to be opportunistic”.

Golding says that the few sales they have pushed through under lock down have been on aggressive offers by as much as 25% below the pre-lock down listing price. “Our best guess is that prices will contract by 15–20%. We’re going to see more people looking at renting than buying” . While would- be sellers sit back and wait for the market to recover, they will look to rent their properties instead as a way to generate revenue. This will substantially increase supply onto the market thereby putting downward pressure on rental pricing.

Rental reversions and credits coming

If there’s one thing we know about over supplied markets, it’s that it results in major pricing pressure as tenants have more to choose from and landlords fight for the limited demand in the market. Just Property CEO Paul Stevens concurs, with rentals down as far back as the end of 2019: “Annual escalations are stagnant and we’re looking at a possible reversion of rental amounts” he says. “It’s not only the middle class being affected — it’s hitting everywhere. Business owners are amongst the hardest hit, with responsibilities to keep their staff paid and pay rentals at the top end of the market”. Trafalgar Property Management MD Andrew Schaefer shared these views and says “the rental market was already under pressure before lock down, and things have only gotten worse: How do landlords plan ahead when tenants aren’t able to make payments if their income has been affected? They won’t be able to catch up with their arrears any time soon, so we need to consider how this all clears through the system. We believe that rental credits are the only way forward” .

Time for landlords and agents to add value

Dexter Leite, head of Rentals at Pam Golding Properties says “it’s difficult for landlords to perform during lockdown as they can’t visit the properties for inspections, making it tough to attend to maintenance issues. Landlords may also be in a financially weak position now and this could continue to affect their ability to perform”. In a market with so many obstacles in its way, landlords and agents have to start thinking differently if they want to compete and survive. Paul Schaefer, CEO of Ithemba Property Management, says “a new world is coming and there will be a big shift in how landlords, agents and tenants engage. Typically, things have been very transactional, but now we are likely going to see a shift towards relationship business — and rewards systems like Flow’s can be a part of that. It’s a way for landlords, agents and tenants to participate in a value exchange, which is going to be essential, going forward”.

There could be a Silver Lining

Despite the many challenges ahead, there is hope that in the mid to long term things may change for the better. The property market is one that has not changed significantly over the last few decades. It’s typically a market where the two sides are diametrically opposed with landlords and tenants rarely wanting the same out of the transaction. Now may be a time for a new type of shared value to emerge where all parties recognise the common ground that they share and a positive sentiment can start to develop. Paul Stevens summed it up best where he said that “now is the time for ubuntu”, the uniquely South African quality that encourages compassion and humanity between fellow citizens.

Flow Findings Flow Findings - The Webinar