04 Jun Cape Town’s Rental Property Bubble Burst
As the heavens finally unleash the winter rains in Cape Town at the time of writing this on 1 June 2018, the same is not true for landlords and the residential rental market in Cape Town! This is the first time in 7 years that the shift to an oversupplied and under demand market has occurred. Managing a large rental portfolio, I have noticed a shift occurring significantly from around October 2017 with landlords facing vacancies for the first time in years. My rental team & I have not had to face vacancies as the demand was always significant enough to ensure each property found a great tenant. Some landlords may now for the first-time face vacancies. There is no reason to panic at this stage as Cape Town is a resilient market. I recommend that landlords who face vacancies take the opportunity to critically assess their property and make necessary repairs and or upgrades that don’t break the bank and to simply reassess the anticipated returns. Waiting it out to the more buoyant summer months may mean an increase in demand. Everything rents at the right price, as everyone needs a home. There is no question that there are still rentals being concluding monthly provided the rental is competitive.
I have not experienced a rental market like this in 9 years of doing rentals! It is a harsh reality for landlords, who have been used to a Cape Town’s average gross yield per annum of around 6% to now have to be staring down the barrel of 4.5% to 5.5% yields. It has meant many folks have started to consider selling, this in turn fueling an oversupplied sales market. In many instances, landlords are having to reduce rentals to levels last seen in 2016. Many of my properties that are coming up for renewal are not securing any increase and many folks are giving notice, even prematurely as they have found a cheaper option. Gone are the days when we had clients queuing outside a rental unit and potentially a bidding war resulted, as tenants offered more than the asking rental or the entire year’s rental upfront to secure the space.
In a search online for a combined number of total rental offerings available on one of SA’s largest property portals indicated across the City Bowl and some of the more affordable Atlantic Seaboard suburbs, a total of a staggering 4000 or more rentals are available. The number excludes a significant number of private landlords that I have noticed are offering their spaces privately across social media platforms and on Community Facebook pages. Agents and Landlords will need to do just a little more to expose properties to a wide audience and this includes video and exposure on some of the more popular social media platforms. More creative wording for ads may be required to highlight the best features and consequent benefits for a potential tenant. You may want to entice tenants by including extras like Wi-Fi, utilities, and services like cleaning.
The main reasons for the shift in the rental market include;
- A significant number of new developments coming online and thus more available rental stock. Developers have taken advantage of the incredible growth in recent years and every conceivable space that was available to develop was snapped up. As these buildings come to completion, most of the units go into the rental market rather than being occupied by the purchasers. The problem will persist as new developments are coming online now with as many as 35 approved development and blocks completing in the next 2 years.
- Airbnb hit it’s tipping point during the winter of 2017 when the number of units available to let in the City Bowl and Atlantic Seaboard alone shot beyond 10 000. Excited investors saw the great opportunity of achieving extraordinary yields using the platform (even with winter vacancies) and without much effort were securing returns on their investment like never before. Economics and ‘supply and demand’ eventually meant that more units flooded on to the short term letting market and owners had to price their units more competitively to compete, this together with the cost of furnishing and running a self-catering option and hustling to ensure you achieved good reviews by guests, eventually meant landlords became disgruntled and have returned to letting long term again. This has flooded the rental market with even more stock. Many property owners realised, making a good return on short term letting meant a lot of hard work.
- Semigration from other cities has ground to a halt as the lifestyle in Cape Town started to look less attractive with water shortages and restrictions. The media and reports of the impending disaster in Cape Town resulted in those planning a move to the Mother City quickly changing their minds. Earning potential in Cape Town was also significantly lower by as much as 22% in certain sectors as reported by Career Junction in its salary review in the last quarter of 2017.
- Probably one of the biggest factors influencing this rental market is ‘’Affordability’’. With most rental agencies only qualifying tenants who earn at least 3 times the rental amount and asking at least 2 months rental as a deposit, this has placed huge pressure on tenants and their income. Many tenants have simply decided to move away from more expensive areas and rent elsewhere and face the commute or have opted for sharing rent with friends and families. The growth in income has been disappointing in relation to general living costs and with rental being almost the biggest cost for most living near the city this has put any disposal income they have under immense pressure.
If you want to ensure you do not face long, drawn out vacancies and frustration trying to achieve a rental which you perceive as landlord to be fair, then it may be prudent to speak to a realistic agent or take a long hard look at the market and ensure your rent is set at a competitive rate to attract the meagre number of available tenants in the market place. Remember they will be quite aware of the situation and seeking the best value possible.