Landlords Perplexed as Rental Market Supply & Demand Skews
September 2020 – The rental market has now generously swung in favour of tenants after year upon year of promising & occasionally over inflated rental escalations, making living in the city areas of Cape Town disproportionately expensive. Living in the City Bowl of Cape Town had become so expensive, that many city dwellers were spending a massive chunk of their earnings mainly on accommodation, for the privilege of living and working in the city areas, with rent being one of the biggest expense items in any city dwellers budget.
As a letting specialist at RE/MAX Living, in the City Bowl of Cape Town, I have recently seen this current rental market confound and frustrate landlords, as properties they have previously rented with absolute ease, now stand vacant for extended periods of time, with no upturn in sight. So how does one try to make sense of this absolute craziness?
In my podcast, Renting Smart (@rentingsmartsa), we try unpack some of the influencing factors causing this complete “about-turn” in the market, where tenants not only wield negotiation power, but have more choice and selection than they have had for many years.
The Airbnb phenomenon that grew exponentially from when it arrived on our shores, is probably one of the most significant factors to have influenced the rental market’s supply & demand woes. Many a long-term letting landlord was attracted to promises of greater rental returns but by late 2015, Airbnb had noticeably started changing the rental landscape, as more and more units were being listed as shorter-term rentals, more of the long-term supply started to dissipate. Furthermore, with Cape Town’s popularity as a truly Global Cosmopolitan city, investors were making purchases of properties in the city areas, specifically for the purpose of listing them on Airbnb. You may recall many a property listing highlighting the words ‘’Airbnb Friendly”. This resulted in a massive lack of available long-term rental stock, subsequently driving up the rental prices of longer-term rental units with escalations of beyond 10%. There was also a marked increase in demand as Cape Town was simply the coolest city in the country to see and be seen, both for leisure and business pursuits.
This “Airbnb bubble’’, however, was short-lived as multiple factors suddenly culminated, commencing a sharp decline in long term rental income. Amongst these, a significantly noticeable slowing of semi-gration to Cape Town from other city centres around South Africa, as the overwhelming rental cost & high cost of living in Cape Town made moving here less attractive. The earning potential in Cape Town across key vocations was arguably much lower and this, together with the overall cost of living in the Mother City, made the prospect of moving here seem less attractive. This all occurred over the time we faced a drought and were running out of water. A very bleak notion to visitors from abroad. This resulted in a retreat from the stampede to live under Table Mountain. Cape Town’s socio-economic crisis, joblessness, homelessness and chasm in segregation also started to grow, with many visitors starting to feel slightly less safe in the City, as reports of muggings and petty crimes escalated. Much negative press in foreign publications and on foreign websites, painted the Mother City in less of a safe light than was justified. I have always made a point of engaging with businesses that rely on the tourism over the various seasons in Cape Town and many of them were beginning to report dwindling turnover and lower numbers, with the average spend from visitors declining from 2018. It soon became obvious that the, once number 1 destination for visitors to Africa, had lost her lustre.
I noticed a tangible change around late 2017 and well into 2018 as it became harder for landlords to rent out long term apartments and homes in the city. There were fewer online & print advertising responses and this commenced an ever steadily growing trickle of more units to rent long term. The boom of the previous years and spectacular growth had encouraged significant residential development of Urban Lifestyle buildings, the majority of which all came on line from late 2017, this cascade of modern living spaces further began to sway the delicate supply and demand within the long term rental landscaped. One could certainly call it a very zealous over development, bringing simply too many units into the pool of available rental spaces. 2018 also brought with it a few more concerned Airbnb hosts contacting us with concerns of dwindling shorter term booking numbers, who were now noticing their own supply and demand problems as the number of units available to book on Airbnb surged beyond the number of hotel rooms available and the competition becoming more fierce as hosts competed for the dwindling number of guests.
Fast forward to March 2020 & worldwide pandemic and the wheels have come off entirely in the rental market. The ban on travel meant every conceivable future income for the Airbnb hosts was obliterated and an ocean of short-term letting stock flooded on to the already oversupplied long term market. Listings surged on the various property portals and the decline in rental returns began to dwindle in earnest and at the time of writing this, still seems to be in freefall. A record number of rental vacancies were being reported and experienced across our rental portfolio. Significant drops in rentals of beyond 15% are being experienced and reported. Long-term rental tenants, have wisely taken this opportunity to leverage all in their favour, as they continue to wield all the power and muscle in on this market. Exacerbating the problem is a mass exodus out of the city areas, as many businesses adopt the remote working concept with open arms & many employers unilaterally making decisions that this ‘’new normal’’ will be continuing indefinitely. It means there is less of a demand to live in or close to the city and many are now seeking better value accommodation, together with suburb life and greener pastures.
So where does that leave you as a landlord, well, the first decision you have to make is one of accepting that you may have to ride out a lengthy storm and that rental prices of the past may be a long forgotten memory. The main objective, if you are in it for the long haul, is to minimise the bleed and avoid vacancies. It is a bitter pill to swallow, but ensuring you bring your rental price in line with current demand may mean accepting a rental amount you last received in 2015. I believe it is a long road ahead of us, before the market recovers to bring back sensible rental returns. I recommend wholeheartedly that you consider the current rental to value ratio or yield of your property. A trusted agent can assist you in establishing this. If you have some equity in your property, based on these estimates, then you may be able to hang on and ride out this rollercoaster, by accepting a lower rental amount just to protect yourself from costly vacancies.
Another consideration in this chaos is the lack of motivation from casually browsing tenants. The lockdown has given landlords another severe blow and that is the result of massive uncertainty in the rental market, from the legality of moving to fears of infection & financial uncertainty as incomes are threatened. What this means is that the vast majority of leases due to expire from March through to August were being negotiated into month-to-month lease circumstances. Many landlords have been and continue to accept this arrangement with open arms, as it means a reprieve from facing vacancies. This has resulted in far less urgency to conclude on a new home and many tenants are now browsing endlessly in the hope of the ultimate bargain emerging, as opposed to the once rather motivated tenants seeking an immediate new home. This all culminates in landlords & agents having to show properties to many more tenants than ever before, if you hope to receive an application at some point. The secondary problem to this is that the moment a landlord is aware of their tenant wanting to move or that they are shopping, a negotiation usually ensues where the landlord is offering a rent abatement merely to keep a tenant. A scenario that tenants are leveraging extensively.
Daily I am called by concerned landlords who have now been vacant for multiple months with them reportedly having multiple agents on board to try assist. It is usually almost a given that it has very little to do with the agents (provided the agent is experienced, reputable & has a fair online reach), but rather a frustrated landlord not being willing to budge on price. Granted, not all agents are equal and some will have a greater exposure ability in getting the property in front of a motivated tenant audience, but inevitably it will be price. The massive oversupply is evident on Facebook for example, as every community Facebook page and Rental page, is inundated with private landlords trying to expose their unit to their social media sphere.
It is by no means a complicated consideration to get the price right and as I explain to many landlords, pricing your property at an average rental amount as it compares to other units is utterly futile, as there are just too many of these priced at an average price. For example; with there being in excess of a thousand 1 bedroom units to let across the city areas, it is not prudent to price your unit at the average of let’s say R9000 pm as you’ll become lost in an ocean of similarly priced units. The only time you or your agent will get results is if your unit is priced significantly below the average as to garner the attention of savvy and active tenants in the current potential pool of tenants.
By way of an anecdote, I describe to landlords that securing a tenant means winning a “price war” (to get the response and feet through the door) then winning a “beauty pageant” with your property being favoured in it’s finish, accommodation and offering.
It cannot be overstated, PRICE IS EVERYTHING!!!
If you are not experiencing a response from the market on your price after exposing it to a large number of destinations and portals, then you have but 2 choices, remain vacant or reduce the rent to achieve the desired result.