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High flat vacancy rates put rentals under pressure

16-04-2019

Investing in flats used to have the advantage that vacancies were as a rule extremely low. Not anymore.

Investing in the flat market is currently risky due to rising vacancies and resultant slow rental growth, according to Kobus Lamprecht, Head of Research at Rode & Associates.

Lamprecht says the latest national flat vacancy rate based on Rode’s surveys was 7% in the first quarter of 2019, up from 5,5% in the first quarter of 2018, as shown in the accompanying chart. In comparison, flat rentals grew by roughly 4,5% over the same period, according to Rode’s estimates based on Stats SA data. This was the fourth consecutive quarter of slower rental growth after rentals grew by 5,7% in the first quarter of 2018.

Worryingly, this is a structural adjustment in the market. To illustrate, vacancy rates in Johannesburg and Cape Town were between 1% and 3% ten years ago but are now in the high single digits, as shown in the table. On a provincial level, the highest vacancy rate was recorded in Gauteng (9,3%), according to TPN’s fourth quarter 2018 data. The vacancy rates of KwaZulu-Natal (6,5%) and the Western Cape (5,7%) were also high. This bodes ill for the prospects for flat-rental growth.

The question is, what has caused this structural increase in vacancies? Lamprecht explains that households continue to be under significant financial pressure, now also from higher fuel and electricity prices, impacting negatively on demand, while the stock of new housing for rent has also increased notably, thereby pushing the rental market into oversupply. Many a residential developer has perforce become a landlord as the sales of new houses stalled.

Nationally, flats and townhouses completed, measured in square metres, were up by an enormous 58% year on year in the 12 months to January 2019, according to Stats SA. On a provincial level, flats and townhouses completed more than doubled in Gauteng and rose by 21% in the Western Cape, partly explaining why vacancy rates are so high. As the development opportunities in the commercial and industrial segment began to evaporate over the past few years, residential developments were the last resort – until now. Developers are facing tough times.

In sum, investing in the flat market is currently risky, especially in the high-end market where vacancy rates are also the highest. A positive factor that will eventually again drive demand for flats is that South Africans continue to downsize in a weak economic environment. Owing to high crime levels, these flats and townhouses are often located in complexes or secure estates. This suggests that there will still be opportunities, but investors will just have to be more careful about the timing, price segment and location.