The aftermath of the national lockdown, which has seen the income of many tenants decline sharply, and in some cases even drop to zero, will be felt long after the restriction of movement is lifted.
It could take years for tenant payment performance to recover fully, says FNB property economist John Loos. South Africa has been in recession from the second half of 2019 and with the arrival of the coronavirus, household finances have weakened.
The full magnitude of the current recession is “near impossible” to predict, and so it is tough to tell how long the tenant payment decline will last. Much will depend on how successfully the Covid-19 pandemic is contained both locally and globally, which will then determine how fast the country’s economic life can return to 100% normal.
“However, there is enough evidence to suggest that we are in a deep recession this year, looking likely to be significantly more severe than the 1.5% GDP contraction in the 2009 global financial crisis.”
FNB forecasts a 4.5% GDP contraction this year, while certain other forecasters are more pessimistic, Loos says. There appears to be a “good link” between economic performance and residential tenant payment performance, as one would expect, given the economy’s influence on employment and income.
Taking the 2008/9 recession period as a benchmark, and using TPN tenant performance data, he says a sharp dip in the percentage of tenants in good standing with their landlords coincided with that recession early in 2009. From around 85% early in 2008, the percentage of tenants in good standing dropped sharply to 71% by the first quarter of 2009, while the percentage who paid on time dropped from 70% early in 2008 to 54% by the end of 2008.
Loos notes that the tenants “in good standing” percentage is significantly higher than the “paid on time” percentage at any time due to the former number including the group of tenants that received a grace period for payment from their landlords.
“It would thus appear that the rental market is highly sensitive to economic cycles and sharp shocks.” Although there appears to be very little time lag between an economic shock and the decline in the percentage of tenants in good standing, Loos says there is a considerable time lag involved in the tenant recovery process thereafter.
Furthermore, he expects to see average rental deflation of 3% this year and 4% in 2021. Still, the demand for rental property is expected to boom once the national lockdown is lifted.
Landlords, however, will not be reaping financial rewards. Many landlords have offered a reduction of rent at a percentage equivalent to the loss of earning or a deferment of the rent, and in some cases have used tenants’ deposits to provide immediate cash flow solutions, says TPN managing director Michelle Dickens.
“The challenge post lockdown, when tenants are back at work, will be the collection of the additional monthly instalments of the deferred rent or deposit repayment as tenants will have to pay the monthly rent plus these catch-up payments.”
Another likely scenario for the rental market post lockdown will be higher vacancies especially in the higher rental brackets, as many tenants who have deferred payments of rent and other credit agreements will look to downscale or find shared accommodation.
The high vacancies will in all likelihood limit rent increases. Furthermore, the South African rental market is predominantly serviced by micro- landlords, many of whom will have faced their own full or partial loss of income.
“This, coupled with non-paying tenants and the burden of property expenses such as levies, rates and taxes and mortgages, could result in many rental properties finding their way back on to the sales market as landlords are forced to sell,” Dickens says.